May 20, 2010 in Retirement

Financial planning at 5 stages of life

Financial planning at five stages of life

Life is full of changes, and with each new set of circumstances come new financial needs.

These transitions “spark a need to look closely at your finances,” says Howard Levine, an independent financial planner and owner of Hanover Financial Group in Stowe, Vt. Such occasions call for assistance by a financial planning professional.

A recent study reveals that investor households that regularly get professional advice before making major financial decisions fare significantly better than those that do not seek advice. Over 10 years, the bottom line for families with investable assets of at least $100,000 who always receive advice is $106,000 greater on average in inflation-adjusted dollars. That compares to $29,000 for families who navigate their own finances without help, according to a study sponsored by the Retirement Income Industry Association.

Financial planners can be especially helpful at these five points during life.

First real job

You’re young and you’re broke, thanks to student loans or credit card debt. So when a financial planner broaches the topic of retirement, you may wonder if the planner lives on a different planet.

But now is the best time to start saving for that big event. “Time is your biggest ally,” says Bruce Stroup, a financial planner with Retirement Solutions in San Antonio. “The earlier you start, the better off you’ll be.”

At this stage, most financial planners will advise you to participate in your employer’s 401(k) plan and help you plan to gradually increase your contributions.

“A critical problem for young people is cash flow,” says Dominick Paoloni, founder and president of Investment Protection Service in Lakewood, Colo. “Ask the planner to analyze your cash flow before determining whether to invest in nonliquid investment vehicles like tax-deferred IRAs, where you are penalized if you need to withdraw the money. Also look into Roth IRAs, which are beneficial for those starting out in a career who have low tax rates and may need access to the funds in case of an emergency.”

Tying the knot

Married couples have a reputation for fighting mainly about one of two things. For newlyweds, it’s likely to be money.

With a financial planner, you get an objective professional to help you think through budgeting, setting financial goals and determining who will pay for what. He or she can also help you study employee benefits and make sure you’re not duplicating your efforts.

Whatever your goals are, talking through them with a professional and getting a plan down on paper will help you and your partner work together to reach them. “Tensions always arise because of money,” Levine says. “It’s a planner’s job to put everybody at ease and help them determine the best way to divide roles.”

Building a family

Your beautiful children will surely be brilliant and want to pursue a higher education.

The costs of college continue to rise, however, and “it’s quite difficult for anybody to save the total amount needed for college these days,” Levine says. But the earlier you start saving for college, the better off you’ll be.

Levine says he often sets up college savings accounts for clients with infants. He likes 529 plans, which can grow tax free and, as long as funds are used for college expenses, their withdrawal will not trigger taxes. A financial planner can help you navigate through 529 plan options.

“The key is to have a discussion and to get started saving because college costs are far and away exceeding inflation,” Stroup says.

Single again

Nobody plans to get divorced, but if you do, your financial situation can change dramatically.

“It’s traumatic enough to go through a divorce. But afterward, most people need help putting themselves back together, mentally and financially,” Levine says. “If you wait until years after your divorce to look at your investments, estate planning and asset protection, sometimes it’s too late.”

Post-divorce planning may involve re-establishing credit, especially if most of the marital assets were in your spouse’s name. A financial planner can also help you rethink your budget and retirement plans, and change the beneficiary of your accounts so that your savings won’t revert to your ex-spouse.

“There’s really a lot of busywork that needs to be done,” Levine says.

Nearing retirement

Whether or not you’ve started saving early for retirement, it’s crucial at this juncture to determine your retirement readiness.

“Statistically, the most critical time to meet with an adviser is in your late 40s and early 50s, when the average American is in his or her peak earning years and accumulating the most retirement assets,” Paoloni says. “Those assets must be properly managed in order to meet retirement goals, which are typically 12 to 15 years out. A mistake at this stage of one’s life will make retirement very unpleasant.” Think global financial crisis.

A planner can help you eliminate risk in your portfolio and consider investment vehicles such as immediate annuities that offer a guaranteed income for the rest of your life. Some insurance products enable you to participate in the market’s upward moves, but avoid its declines, Levine says.

“A planner can help you determine the best strategy for you. It’s not about age; it’s about what you want to accomplish,” he adds.

Financial planning resources

Read these stories to help you fine-tune your personal finances, whether you’re just beginning your career or winding it down.