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Understanding Your Goals

Regardless of your age, you will have financial goals that are both short and long-term. When creating these goals it is important that they be tangible and realistic. You must be able to follow them and track their progress on an ongoing basis. If you are married, it is absolutely essential that you and your spouse create your financial plans together, review their progress together and make sure both are contributing to the same goals.

Below you will find examples of goals that may be part of your plan.

1) Get Out of Debt – Completely

To get the most out of your finances, it's a requirement that you get out of debt. For the moment, let’s ignore the good-debt-versus-bad-debt debate. At some point in your life, all debt is bad debt and needs to be paid off. That includes the mortgage on your home. Creating a plan to pay down your debt is a vital first step in any financial plan.

Develop an emergency savings account (3-6 Months worth of expenses). 
Financial experts agree everyone needs an emergency fund, a savings account with readily accessible cash to be prepared for any contingency. The question is: How much should you keep in a rainy-day fund?

With more than 5.5 million Americans unemployed for 27 weeks or longer, according to the Bureau of Labor Statistics, the rule of thumb of three to six months' worth of expenses is considered a minimum allotment to set as your goal.
"A lot of experts now recommend that everyone keep nine months to one year of income in an emergency account in case of job loss," says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling in Washington, D.C. "People are often out of work now for as long as nine months, and if they don't have savings, they live on credit. So when they replace their job, they are behind because now they have debt to repay."
Cunningham says the important message for all consumers is that "you can't afford not to save." According to Bankrate's February Financial Security Index, just more than half, or 54 percent, of Americans said they have more money in emergency savings than in credit card debt. One in 4 Americans have more credit card debt than emergency savings.

2) Retirement Age

Determining your retirement age doesn’t need to be difficult. With managing your goals, enough time and a detailed plan, your retirement date can be as early as you can dream. The earlier you start the easier your plan is to pursue.

To determine your total retirement needs, you can't just estimate how much annual income you need. You also have to estimate how long you'll be retired. Why? The longer your retirement, the more years of income you'll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it's great to have the flexibility to choose when you'll retire, it's important to remember that retiring at 50 will end up costing you a lot more than retiring at 60.

3) Retire with the assets/income to live the lifestyle you’ve become accustomed to for the remainder of your life.

You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you'll need to fund your retirement. That's not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors.

Use your current income as a starting point.
It's common to discuss desired annual retirement income as a percentage of your current income. Depending on who you're talking to, that percentage could be anywhere from 80 to 100 percent, or even more. Your current income sustains your present lifestyle, so planning to use the same amount should be your primary goal in this area. There aren’t too many people who want to retire with less take-home pay than they make now.

Don't forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2.5 percent. (Source: Consumer price index (CPI-U) data published by the U.S. Department of Labor, 2013.) And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children's education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your estimates (it's good to consider to be conservative).

4) Paying off your mortgage

5) Putting a child or grandchild through college

  1. Section 529 College Savings Plan
    A Section 529 Plan is a tax-advantaged investment plan, issued and operated by a state or educational institution which helps families save for college. Section 529 Plans are named after the tax code that governs them. Almost all 50 states offer these plans, and rules vary by state. In many cases, you don’t have to be a state resident to take advantage of them; in fact, you can invest in multiple 529 Plans in multiple states, if desired.
  2. Coverdell Education Savings
    With a Coverdell Education Savings Account (formerly known as Educational IRAs), you can make contributions for each child, until he or she is 18.
    There are contribution limitations and income eligibility requirements. Money contributed to a Coverdell Education Savings Account may grow, tax-deferred, and may be withdrawn—(free from federal income tax)—for any qualified higher educational expense incurred by the child before age 30. After that time, the balance remaining must be distributed to the beneficiary. Any gains will be taxed as ordinary income and will incur a 10% penalty tax. State taxes may also apply. The account owner can retain control of the money in the account, if desired. The beneficiary can even be renamed in some cases. Check the IRS website for current contribution limits.
  3. Uniform Transfer to Minors Act (UTMA)/ Uniform Gift to Minors Act (UGMA)
    These custodial accounts allow you to set up an account in the child’s name. You can make transfers to an UTMA/UGMA account on a per-child, per-year basis. Check the IRS website for current contribution limits. Check with your tax advisor prior to making any decisions.
  4. Loans
    These days, many people borrow at least a portion of the money needed to cover college expenses. You may want your children to look for student loans with special rates and repayment terms. For details on all these options, check out the U.S. Department of Education’s site at www.ed.gov or www.college.gov.
  5. Investments    
    You can invest money in an account earmarked for your child’s education costs. Generally, it is better to invest when the child is young (less than 5 years old).
    Many people buy zero-coupon Treasuries—known as STRIPS (Separate Trading of Registered Interest and Principal of Securities)—as they are backed by the U.S. government and are non-callable, which means they can’t be called, or redeemed, before the maturity date. STRIPS are not issued or sold directly to investors; they can be purchased and held only through financial institutions and government securities brokers and dealers. Interest earned on STRIPS is taxable in the year it is earned. There are also savings bonds, including the Series EE Savings Bonds, or education bonds.
  6. Grants
    The U.S. Department of Education has the following Student Financial Assistance Programs:
    1)A Federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded only to undergraduate students who have not earned a bachelor’s or professional degree.
    2)There are also Federal Supplemental Educational Opportunity Grants, or FSEOGs, for $100-$4,000 a year. These grants are awarded to students in need of financial aid. All U.S. students are eligible. Priority is given to Pell Grant recipients. These grants do not need to be paid back.
    For more information, visit the U.S. Department of Education’s Web site at www.ed.gov.
  7. Tax Credits
    Tax credits are better than tax deductions, as you subtract the credit from your total taxes due. Check the IRS website for the current credits amounts, and more details regarding credits.
    1)The Hope Credit is a tax credit to help with the first two years of tuition of post-secondary education. It is available to tax payers and their dependents. The maximum credit is $1,800.
    2)The Lifetime Learning Credit is for post-secondary education students. The maximum credit is $2,000 per tax return.
    With both programs, your income must not exceed a certain amount to qualify. Also, note that these two credits can’t be claimed if you use an IRA to pay expenses in the same tax year.
  8. Financial Aid
    There are billions of dollars available each year in scholarships, grants, and work-study programs. Financial aid to middle income families may be tough to come by, but some universities may be more willing to offer generous financial aid packages.
    There are thousands of financial aid programs available. They fall into three general categories:
    1)Federal, state and campus-based grants (grants are free money generally offered on a financial-need basis) 
     2)Student loan programs (from special rate guarantees to special repayment schedules)
     3)"Special situation" scholarships (given for achievement without regard to income or assets).
           It’s certainly worth contacting your child’s high school and prospective college financial aid office to see if you’re eligible.

6) Caring for elderly parents, siblings or children

7) Rate of return

It’s nearly impossible to predict the future so more often than not we use past performance to try and create some assumptions for the future.  Below is a breakdown of the S&P 500 during some of the worst periods in history.

1871-2010: 8.92%
1929-2010: 9.18%
1946-2010: 10.66%
1987-2008: 8.67%

*S&P 500 is an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

Despite that history, the worst return is only 8.67%, which is why we typically use 8% to 10% for projections when looking at a full market allocation. The problem with using historical returns is you can come up with whatever number you want depending on what time frames you use.  
The real problem with investing for retirement is the stock markets can do really unpredictable things when you may not want them to happen.  The stock market is not predictable or controllable so the variability can be really destructive to the timing of people’s retirement.

*Returns running Jan 1st-Dec 31st through quoted through MorningStar