I am very pleased to announce my first guest post on the Generation YRA blog featuring the writings of Steven A. Branson.
To learn about Steven, check out this quick introduction right here:
Steven A. Branson, Esq. – founder/contributor for http://22.214.171.124/blog.html (blog for www.millennials-money.com), founder/owner/contributor for www.sab-esq.com and its newsletter, and leader/tenor/composer for www.stevebransonbands.com
For nearly 30 years, I have been creating financial plans for my clients and I love it! When I noticed that planning services have been out of reach for many Millennials, I saw a chance to help. The world is changing and the financial services industry needs to change with it.
I am Steven A. Branson, financial planner, photographer and musician (Education: Harvard Law School, UMass/Boston, Berklee College of Music and University of CO.; founder of law Steven A. Branson, Esq. dba Financial Strategies in Dedham, MA, leader & tenor sax in Steve Branson Bands and contributor at www.500px.com/Steven_Branson)
So without further ado, I present Steven A. Branson’s guest post: “You can Ignore Most Financial Planning Rules – here is why.” A huge thank you to Steven for providing his content!
You can Ignore Most Financial Planning Rules – here is why:
General rules of thumb for financial planning rarely work. As with any set of rules, adjustments need to be made for specific situations, in this case, your own finances.
Here are some typical rules with my critiques:
“Save 10% of income annually” – Decent rule; 15% is better – however, some may need to save even more and others may have no savings need. As with the life insurance rule above, your goal should address your lifestyle. For retirement, you want to save enough to add to investments so that the total portfolio at retirement funds your lifestyle for the remainder of your life expectancy. The sooner you start saving, the less you have set aside:
Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you’ll have around $560,000, assuming earnings grow at 8 percent annually. Now, let’s say you wait until you’re 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8 percent a year. When you’re 65 you’ll wind up with around $245,000 — less than half the money. Read more: http://www.bankrate.com/finance/financial-literacy/retirement-planning-for-20-somethings-1.aspx#ixzz3PPCzwJH5
Put another way, the 35-year-old would need to boost her contribution rate to 9 percent to achieve the same result as the 25-year-old starter who was saving 6 percent. Read more: http://blog.taxact.com/retirement-saving-for-young-people/
“Stocks minus your age should equal 100” – Bad rule – your investment allocation depends on your risk tolerance, the rate of return required to achieve your goals, how much and when you add your savings to investments, along with inheritance or other sources, and when you remove investments to fund lifestyle needs. Here are two examples: Frist, if you have a very long horizon and are not bothered by the volatility of the stock market, you could have a 100% allocation to stocks. Most likely, you would have a larger portfolio at retirement for having taken this risk. Second, if you have a short time horizon, no matter how young you are, you cannot risk a high stock allocation, as you may need to withdraw funds when the market is down.
“Hold six months after-tax income for a rainy day” – Decent rule – however, this depends on liquidity, borrowing ability (e.g., home equity line of credit) and cash flow. If your annual income permits substantial savings, such that you could pay for a new roof without affecting lifestyle, your “rainy day” reserve can be much less. On the other hand, if your income is uncertain and you are concerned about unforeseen cash needs, then you need to set aside more.
“Delete collision coverage on a car more than 7 years old” – Decent rule – as with the “rainy day” reserve, this depends on cash flow and other resources. It also depends on whether the car is an “antique.”
“Monthly payments on debt should not exceed 20% of income” – Decent rule – in fact, most lenders apply rules like this to limit mortgage payments plus home insurance and property taxes to a percentage of income. As with the savings rule, your level of debt may be more or less depending on cash flow, investment assets, risk tolerance and lifestyle costs. A related matter: do not rush to pay off a mortgage if you can afford the payments, as doing so may leave less invested for other goals.
“Do not refinance until rates drop 2%”– Bad rule – the test is simple: how soon will the cost of refinancing be recouped by lower payments? With no points/no closing cost loans, this can occur in a year or less. “Buying down” the mortgage rate by paying points will make sense if the pay-off is in 12 to 24 months and if you plan to stay in the residence for seven years or more. (If you plan to move, then a variable mortgage may make sense, as the rate will be lower, and total interest paid will be less even if rates go up.)
“Life insurance must equal six times compensation” – Bad rule – your spouse or partner will use all of your resources, including insurance, to fund lifestyle needs after you die. If you review these sources and see a short-fall, then that is the amount to be funded by insurance. It could be more or less than the six-fold multiple, depending on what you spend, your lifestyle, and on how much you have already saved.
“You only need 70% of income in retirement” – Bad rule – in fact, many people spend more in the first years of retirement as they travel more while spending far less in their 70’s and 80’s as their needs become fewer. The retirement goal is to fund lifestyle, which may not directly relate to earned income. If you have created a company and later sell it, your income could be modest, while your lifestyle cost is much higher, and you would fund those costs from the after-tax proceeds on sale of your company.
“Do not spend more than 7% of income on long-term care insurance” – Uncertain rule – some people may have sufficient assets to self-insure (ear-mark a portion of their own resources as being dedicate to long-term care). Some people will not risk nursing care due to bad family health history; they will want to pay for full insurance. Like other insurance decisions, purchase of long-term care insurance depends on your comfort with perceived risks more than on some percentage of your income.
Thank you so much for checking out the writings of Steven A. Branson! Make sure to check out his blog: Millennials-Money. The more places to learn about personal finances, the better. You’ve got this.
Providing you with different sources of content to strengthen your financial game plan one post at a time…