PART 5: LIFE CYCLE ISSUES Chapter 18 Fitting the Pieces Together

18-2 The Ingredients of Success It is impossible to succeed financially unless you: It is impossible to succeed financially unless you: Evaluate your financial health. Evaluate your financial health. Plan and budget. Plan and budget. Manage your cash and credit. Manage your cash and credit. Control your debt. Control your debt. Make knowledgeable consumer decisions. Make knowledgeable consumer decisions.

18-3 The Ingredients of Success It is impossible to succeed financially unless you: It is impossible to succeed financially unless you: Have adequate health, life, property, and liability insurance. Have adequate health, life, property, and liability insurance. Understand investing principles. Understand investing principles. Make investment decisions that reflect your goals. Make investment decisions that reflect your goals. Plan for retirement. Plan for retirement. Plan for what happens to your accumulated wealth and your dependents after your die. Plan for what happens to your accumulated wealth and your dependents after your die.

18-4 The Financial Life Cycle Recent graduates make many financial decisions after leaving college. They: Recent graduates make many financial decisions after leaving college. They: May purchase a car and possibly a home. May purchase a car and possibly a home. Will establish credit and pay taxes. Will establish credit and pay taxes. May get married and begin a family. May get married and begin a family. Set up an emergency fund, start saving for your goals, and begin a retirement account. Set up an emergency fund, start saving for your goals, and begin a retirement account.

18-5 The Financial Life Cycle At age 19, put away $2000 at the end of each year for 7 years in an IRA that earns 11%, and then nothing thereafter; at age 65 you will have more than $1.2 million. At age 19, put away $2000 at the end of each year for 7 years in an IRA that earns 11%, and then nothing thereafter; at age 65 you will have more than $1.2 million. If you wait until you are 25 to start that IRA and make payments every year for 40 years, you still won’t catch up (you’ll have $1.164 million). If you wait until you are 25 to start that IRA and make payments every year for 40 years, you still won’t catch up (you’ll have $1.164 million). Start at 30, make 35 payments, and end up with less than $700,000. Start at 30, make 35 payments, and end up with less than $700,000.

18-6 Women and Personal Finance While the basic principles of personal finance don’t change whether you’re a man or a woman, it is tougher for women to achieve financial security. While the basic principles of personal finance don’t change whether you’re a man or a woman, it is tougher for women to achieve financial security. Women: Women: Generally earn less Generally earn less Are less likely to have pensions Are less likely to have pensions Qualify for less Social Security Qualify for less Social Security Live longer than men Live longer than men

18-7 Women and Personal Finance Consider these facts: Consider these facts: Over 90% of all women take sole responsibility for their financial decisions at some point. Over 90% of all women take sole responsibility for their financial decisions at some point. Nearly half of all women over 65 get 90% of their income from Social Security, compared to 35% of comparable men. Nearly half of all women over 65 get 90% of their income from Social Security, compared to 35% of comparable men. 75% of women don’t know how much they need to save for retirement. 75% of women don’t know how much they need to save for retirement. Women tend to be more conservative in their investments, so they earn less. Women tend to be more conservative in their investments, so they earn less.

18-8 Women and Personal Finance Consider these facts: Consider these facts: Only 28% of women over 65 receive pension benefits, compared to 45% of men, and the average men’s pension was twice that of women. Only 28% of women over 65 receive pension benefits, compared to 45% of men, and the average men’s pension was twice that of women. At age 65, women outnumber men 3 to 2, by 85 they outnumber them 5 to 2. At age 65, women outnumber men 3 to 2, by 85 they outnumber them 5 to 2. While 12% of the elderly live in poverty, 75% of them are women. While 12% of the elderly live in poverty, 75% of them are women. In 2001, median personal income for 65 year-old women was $11,313, while for 65 year-old men it was $19,668. In 2001, median personal income for 65 year-old women was $11,313, while for 65 year-old men it was $19,668.

18-9 Women and Personal Finance How does a woman start to take charge? How does a woman start to take charge? Acquire knowledge. Acquire knowledge. Make things happen – create a plan. Make things happen – create a plan. See a financial planner about specific concerns. See a financial planner about specific concerns.

18-10 Financial Life Events Life Event 1: Getting Started Lay the groundwork – understand investments and personal finance and assess current finances with planning for the future: Lay the groundwork – understand investments and personal finance and assess current finances with planning for the future: Expenses and a budget Expenses and a budget Control debt Control debt Establish an emergency fund Establish an emergency fund Insure yourself Insure yourself Control your credit score Control your credit score Keep current on personal finance Keep current on personal finance

18-11 Financial Life Events Life Event 1: Getting Started Identify your goals: Identify your goals: Identify and prioritize financial goals. Identify and prioritize financial goals. Set a time frame. Set a time frame. Identify the costs of your goals. Identify the costs of your goals.

18-12 Financial Life Events Life Event 1: Getting Started Begin saving for your goals: Begin saving for your goals: Save more than you think you can. Save more than you think you can. Make savings automatic. Make savings automatic. Don’t procrastinate. Don’t procrastinate. Catch your matches. Catch your matches. ROTH. ROTH. How much risk can you tolerate? How much risk can you tolerate? Put together a strategy. Put together a strategy. Control your spending. Control your spending.

18-13 Financial Life Events Life Event 2: Marriage Get Organized – review and reorganize finances. Get Organized – review and reorganize finances. Work together – discuss approaches to handling money. Work together – discuss approaches to handling money. Update financial records. Update financial records. Gain control of your debt and your credit score – clear up debt issues to work towards getting a mortgage. Gain control of your debt and your credit score – clear up debt issues to work towards getting a mortgage. Merge finances to make good decisions. Merge finances to make good decisions.

18-14 Financial Life Events Life Event 2: Marriage Revisit Your Financial Goals – revisit both long- and short-term goals Revisit Your Financial Goals – revisit both long- and short-term goals Reexamine your financial goals. Reexamine your financial goals. Begin saving for new goals. Begin saving for new goals. Make saving automatic. Make saving automatic. Make sure you have an emergency fund. Make sure you have an emergency fund. Begin working towards retirement. Begin working towards retirement.

18-15 Financial Life Events Life Event 2: Marriage Reexamine your insurance and benefits: may change beneficiaries, buy additional insurance, and coordinate benefits. Reexamine your insurance and benefits: may change beneficiaries, buy additional insurance, and coordinate benefits. Review your beneficiaries. Review your beneficiaries. Include all family members. Include all family members. Review your insurance. Review your insurance. Coordinate your benefits. Coordinate your benefits.

18-16 Financial Life Events Life Event 2: Marriage Reexamine your taxes: your tax status and the tax- advantaged benefits from your employer may change. Reexamine your taxes: your tax status and the tax- advantaged benefits from your employer may change. Update W-4 form. Update W-4 form. Take advantage of tax breaks. Take advantage of tax breaks. Make a will. Make a will. Review your beneficiaries. Review your beneficiaries.

18-17 Financial Life Events Life Event 3: Buying a Home Does the purchase fit your financial plan? Does the purchase fit your financial plan? Keep track of your credit score. Keep track of your credit score. Consider the tax implications. Consider the tax implications. Take advantage of tax benefits. Take advantage of tax benefits. Build tax benefits into your budget. Build tax benefits into your budget. Reexamine your investments. Reexamine your investments. Update your employer records. Update your employer records. Know your state. Know your state.

18-18 Financial Life Events Life Event 4: Having a Child Survey your finances. Survey your finances. Assess your current financial situation. Assess your current financial situation. Reexamine your financial goals. Reexamine your financial goals. Revise your budget. Revise your budget. Plan for college. Plan for college. Estimate costs. Estimate costs. Automate your savings. Automate your savings.

18-19 Financial Life Events Life Event 4: Having a Child Reconsider your insurance needs. Reconsider your insurance needs. Review and update insurance. Review and update insurance. Update wills and trusts. Update wills and trusts. Update or make a will. Update or make a will. Update your retirement account beneficiary. Update your retirement account beneficiary. Take advantage of tax savings. Take advantage of tax savings. Apply for Social Security number. Apply for Social Security number. Update W-4. Update W-4.

18-20 Financial Life Events Life Event 5: Inheritances, Bonuses, or Unexpected Money Examine the priorities of your goals. Examine the priorities of your goals. Reexamine your goals. Reexamine your goals. Consider estate planning. Consider estate planning. Examine the tax implications. Examine the tax implications. Plan for tax implications. Plan for tax implications. Consider estate taxes. Consider estate taxes.

18-21 Financial Life Events Life Event 6: A Major Illness Reexamine your finances. Reexamine your finances. Assess current financial situation. Assess current financial situation. Emergency fund – adequate liquidity. Emergency fund – adequate liquidity. Reexamine financial goals. Reexamine financial goals. Reexamine investment strategy. Reexamine investment strategy. Revise budget. Revise budget. Take advantage of tax breaks. Take advantage of tax breaks. Understand the tax implications. Understand the tax implications. Explore flexible spending accounts (FSAs). Explore flexible spending accounts (FSAs).

18-22 Financial Life Events Life Event 6: A Major Illness Alternatives to Finance Your Illness. Alternatives to Finance Your Illness. Reverse mortgage Reverse mortgage Life insurance Life insurance Disability insurance Disability insurance

18-23 Financial Life Events Life Event 7: Caring for an Elderly Parent Health care and estate planning concerns. Health care and estate planning concerns. Talk to your parents. Talk to your parents. Oversee your parents’ financial affairs. Oversee your parents’ financial affairs. Understand their goals and budget. Understand their goals and budget. Discuss long-term health care options. Discuss long-term health care options. Long-term health care insurance. Long-term health care insurance. Estate planning. Estate planning. Discuss estate planning. Discuss estate planning.

18-24 Financial Life Events Life Event 8: Retiring Develop a retirement income plan. Develop a retirement income plan. Mental and financial preparation. Mental and financial preparation. Plan how to use your retirement savings. Plan how to use your retirement savings. Manage your income in retirement. Manage your income in retirement. Withdrawal strategy. Withdrawal strategy. Monitor your investments. Monitor your investments. Emergency fund. Emergency fund.

18-25 Financial Life Events Life Event 8: Retiring Review your insurance coverage and your will. Review your insurance coverage and your will. Employer retiree health care. Employer retiree health care. Medicare and Medicare supplemental insurance. Medicare and Medicare supplemental insurance. Long-term health care insurance. Long-term health care insurance. Homeowner’s insurance. Homeowner’s insurance. Review your will. Review your will. Keep track of important retirement planning dates. Keep track of important retirement planning dates.

18-26 Financial Life Events Life Event 9: Death of a Spouse Organize financial material. Organize financial material. Contact sources of survivor benefits. Contact sources of survivor benefits. Insurers. Insurers. Social Security. Social Security. Past Employers. Past Employers. If you are the executor, carry out your responsibilities. If you are the executor, carry out your responsibilities. Distribution of assets. Distribution of assets.

18-27 Financial Life Events Life Event 9: Death of a Spouse Change ownership or title to assets. Change ownership or title to assets. Insurance policies. Insurance policies. Automobiles. Automobiles. Bank accounts, stocks, bonds, and safe deposit boxes. Bank accounts, stocks, bonds, and safe deposit boxes. Credit cards. Credit cards. Determine if your benefits change. Determine if your benefits change. Review your insurance. Review your insurance.

18-28 Financial Life Events Life Event 10: Divorce Nearly ½ of all marriages end in divorce and money problems are a main cause. Nearly ½ of all marriages end in divorce and money problems are a main cause. Prepare for divorce. Prepare for divorce. Pay down debt. Pay down debt. Keep the costs down. Keep the costs down. Protect yourself with the help of a financial planner. Protect yourself with the help of a financial planner. Consider a prenuptial agreement. Consider a prenuptial agreement.

18-29 Financial Life Events Life Event 10: Divorce Avoid Credit Damage. Avoid Credit Damage. Late payments and your credit report. Late payments and your credit report. Have your account re-aged. Have your account re-aged. Revisit your financial goals. Revisit your financial goals. Insurance coverage. Insurance coverage. Child support and alimony. Child support and alimony. Rework your budget. Rework your budget. Retirement savings. Retirement savings. Reexamine your expenses. Reexamine your expenses.

18-30 Making Financial Success Happen Wealthy Americans: Wealthy Americans: Net worth from $1 million-$5 million, not inherited. Net worth from $1 million-$5 million, not inherited. Most have incomes less than $100,000. Most have incomes less than $100,000. They own a home valued at $278,000. They own a home valued at $278,000. They are self-employed or a partner. They are self-employed or a partner. In their original marriage, have 3 kids. In their original marriage, have 3 kids. They are frugal – clip coupons, buy on sale or do without. They are frugal – clip coupons, buy on sale or do without.

18-31 The Keys to Success: A Dozen Decisions Number 1: Become Knowledgeable – avoid financial pitfalls and bad advice, handle unwanted financial surprises. Number 1: Become Knowledgeable – avoid financial pitfalls and bad advice, handle unwanted financial surprises. Number 2: Don’t Procrastinate - your financial future starts now. Number 2: Don’t Procrastinate - your financial future starts now. Number 3: Live below your means – don’t spend at your level or earning. Number 3: Live below your means – don’t spend at your level or earning.

18-32 The Keys to Success: A Dozen Decisions Number 4: Realize You Aren’t Indestructible - consider life and health insurance, stay healthy. Number 4: Realize You Aren’t Indestructible - consider life and health insurance, stay healthy. Number 5: Protect Your Stuff – have insurance to protect you from financial ruin. Number 5: Protect Your Stuff – have insurance to protect you from financial ruin. Number 6: Embrace the “B” Word (Budget) – the budget is a means to reach your goals. Number 6: Embrace the “B” Word (Budget) – the budget is a means to reach your goals.

18-33 The Keys to Success: A Dozen Decisions Number 7: Reinvent and Upgrade Your Skills – prepare for job insecurity by having the right skills. Number 7: Reinvent and Upgrade Your Skills – prepare for job insecurity by having the right skills. Number 8: Hide Your Plastic – credit cards are a dangerous threat to your financial well-being. Number 8: Hide Your Plastic – credit cards are a dangerous threat to your financial well-being. Number 9: Stocks Are Risky, But Not as Risky as Not Investing in Them – invest long-term in stocks and keep up with inflation. Number 9: Stocks Are Risky, But Not as Risky as Not Investing in Them – invest long-term in stocks and keep up with inflation.

18-34 The Keys to Success: A Dozen Decisions Number 10: Exploit Tax-Favored Retirement Plans to the Fullest. Number 10: Exploit Tax-Favored Retirement Plans to the Fullest. Number 11: Plan for the Number of Children You Want. Number 11: Plan for the Number of Children You Want. Number 12: Stay Married. Number 12: Stay Married.

18-35 Successful Debt Management Key #1: The Obvious: Spend less than you earn and budget your money. Key #1: The Obvious: Spend less than you earn and budget your money. Key #2: Know the costs. Key #2: Know the costs. Key #3: Understand the difference between good and bad debt. Key #3: Understand the difference between good and bad debt.

18-36 Successful Debt Management Key #4: Make sure you can repay what you borrow – set your own standards. Key #4: Make sure you can repay what you borrow – set your own standards. Key #5: Keep your credit score strong – it keeps costs down and is a source of emergency money. Key #5: Keep your credit score strong – it keeps costs down and is a source of emergency money. Key #6: Don’t live with bad (and expensive) debt. Key #6: Don’t live with bad (and expensive) debt.

18-37 Getting Started: Just Do It Start today – don’t procrastinate. Start today – don’t procrastinate. Begin with budgeting and planning. Begin with budgeting and planning. Pay attention to managing your cash. Pay attention to managing your cash. Rid yourself of bad debt. Rid yourself of bad debt. Your safety net should be in order. Your safety net should be in order. Start investing. Start investing.