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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.
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.
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.
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).
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