Going back to realistic financial planning; How it looks. March 25, 2009Posted by shaferfinancial in Finance, Uncategorized.
Tags: A financial plan for young families, Realistic Financial Planning, When should you be in the stock market?
For a minute let’s forget all the propaganda about investing for retirement we have had pounded into our heads our entire adult life. Let’s start from scratch and build a strategy that takes into consideration as many of the future possibilities as we can. Here is how I think it should look [I will of course use my favorite financial instruments for this example]:
Jane and Joe are early 30s with two young children. They have $60,000 in income with Joe working full-time and Jane part-time. A couple of years ago they bought a house with 10% down. They are responsible financially keeping debt limited to their mortgage and a little left on their cars. Joe puts $400/month into his companies 401K plan, which his company use to match, but now doesn’t. They just made their last car payment on his car, it was around $400/month. They have $5,000 in savings.
Without changing anything they have $800/month they can save/invest. The goal for them is to establish a solid financial base over the next 10 years. Then, hopefully, they will have moved up in salary and have more to invest.
I suggest a 50/50 split over the next 5 years with half their savings money [$400] going into an equity indexed universal life policy and the other half into their savings account at the local credit union. I will assume they get 2% on their money over this 5 years. After five years, they will begin to buy shares in an REIT [HCN] which is highly liquid and has historically paid 7% in dividends instead of sending the money to the savings account. I assume $0 transaction costs for this as they will buy the shares through the companies dividend reinvestment program which actually allows them to buy shares at 2% below market. This stage I call the financial backbone stage as all the rest of their investing will be connected to this stage. After ten years, with no increase in amount of investing it will look like this:
In the savings account they would have approximately $34,000.
The cash surrender value of their life insurance would be around $45,000 at year 10.
The family would have had $500,000 insurance on Joe.
Not taking into account any possible REIT appreciation [or depreciation], just the 7% dividend payment the REIT will be worth $28,800.
So after 10 years, the family has $34,000 [savings account] + $45,000 in available cash value [EIUL], + $28,800 in HCN REIT for a total of $107,800 of liquid reserves. This is the financial backbone for the family. Remember, I never upped the amount of the monthly investments, while presumably the family income has risen as Joe progressed in his career, so there is some wiggle room for another car payment or emergencies without fundamentally changing the plan. The kids are now almost teenagers.
So where do they go from here? Now they have options, perhaps Joe wants to buy or start his own business. Or perhaps they want to start investing in real estate. Or perhaps Joe has taken the time to learn how to be a stock investor and wants to invest in the stock market. There are really no limits at this point. Notice how I haven’t tapped into the families other savings account, their home. Since they bought at the height of the market, it might take a few years going forward for their home to get back to that initial value. But they are paying down their mortgage, gaining equity. Perhaps they want to move up to another home now, or they had to transfer for his job and had to get out of the house. Regardless, their financial backbone isn’t dependant upon the value of their home at any given time.
Bottom line is that they are in position to get much more aggressive with their investing. They should continue with the EIUL premiums, move their investment totals up as far as they can, and decide what type of investment is best for them. Whatever they choose, they should be able to ride out a market downturn, job layoffs, sickness, family emergency, etc. In their 40s they have 20-30 years to accumulate real wealth.
Now, all my assumptions are fairly conservative. They could be in much better position or slightly worse depending on the future. But at no time in the ten years is the majority of their wealth riding in the stock market. The stock markets’ ups and downs don’t effect them either psychologically or materially. They can concentrate on their careers, family, etc. with confidence. If they need some money, they don’t have to take penalties or pay huge taxes to get it.
Now, back to reality. How many folks in their 40s have panicked when the stock market dropped over 40%? How many made bad decisions because of their emotions? Well when you have almost all of your wealth riding in some 401K/IRA and it goes down significantly, what do you expect to happen?
Contact me for some realistic financial planning no matter what your age. You owe it to yourself and your family to get back to basics.
*******Any specific stock or REIT mentioned in this post should not be invested in by my recomendation. I do not have a license to sell stocks, not does the SEC consider me an expert in stock selection. Do your own research before investing in any stock/REIT. Don’t make investment decisions based on what you read in a blog or a magazine or on cable TV or what a relative mentions.******************