Financial Advice: Plan For A Life You Can Actually Afford

By Nancy K. Crevier

Ken Harper, a financial advisor for Edwards Jones, has not only ten years of experience guiding people through the rocky waters of financial planning, but is in the same boat as many of his clients now. “My daughter is now 10 years old, so in a few years, I’ll be facing what a lot of my clients are facing: education costs,” said Mr Harper, Friday, April 29.

Planning the financial future is never easy, he said, but the economic drag of recent years has added another layer to people’s reticence to save for the future. “Prior to 2008, the presumption was that it was possible to live beyond what our true means were,” said Mr Harper. “We’ve had a disturbing reckoning now, and realize we can’t have it all,” he said.

People may have inadvertently slowed their financial recovery from that time period, Mr Harper said, by reacting to the 2008 stock market debacle by withdrawing from mutual funds and equities, and putting their money into bonds. “That flow continues even now,” he said, “and the downside is that they are now sacrificing the recovery they may have had. If it was a good investment to begin with, it should still be a good investment.” Ups and downs in the financial world, even huge ups and downs, are historically normal, he believes.

But not having it all does not mean not having anything to put aside for planned costs. Education for children is one priority many parents in Fairfield County want to include in their financial picture, as is putting aside for a comfortable retirement.

“People now are reassessing their needs from their wants more realistically,” Mr Harper said, “and setting priorities. We always need to have goals, but we have to meet our needs — shelter and food — first, and we have to have employment.”

Setting a blueprint for a life that one can actually afford, and making a list of what to plan for, is a first step in managing finances, he said. What is more difficult is when life deals a bad hand, and unemployment cripples set plans. “People don’t tend to plan for loss of income, and it can be devastating. And it is not realistic to think that it is possible to build a large enough safety net to accommodate that kind of disaster,” Mr Harper said.

The effects of inflation or bad mortgages can also find families struggling to meet life’s needs and wondering why they should bother with a savings plan. “Working with a financial advisor can help you see why that should be,” said Mr Harper. “With the assistance of an advisor, you can step back and look at your options. He or she can explain how planning and savings work,” he said.

Even in the worst of times, parents must plan for their children’s post-high school education, even if that plan means scaling back a child’s ambitions, supporting the child financially only to a certain point, declining to be the major loan holder, or asking children to pay their own way. “Prepare your children, but be realistic. Don’t feel badly if you ask your child to take on some of the cost of college. Take advantage of what loan programs are out there,” he said.

At Edward Jones, Mr Harper is able to access financial information about nearly any college or university, and can help parents develop an education savings plan that suits the family. “It is very personal, and very individual. We can look at what it will cost to send a child to a particular college and then we can determine where that money can come from. Some people are willing to tighten their belts; others will cut back on what they contribute to a retirement fund. But it is better to do something than nothing, just because you are afraid of the scope of the issue,” he suggested.

“The point is,” he said, “not to ruin your daily life for the future. Don’t punish yourself, or compare yourself to others in an entirely different situation.”

Financial planning is never a static thing, Mr Harper cautioned, and that is why building a professional relationship with someone skilled in finances is important. “It helps the average person to deal with the ‘landmines’ out there of tax codes, loans, and savings opportunities. My job is not just investing, but helping people to manage their finances, top to bottom,” stressed Mr Harper. The financial landscape is constantly changing for every person, he pointed out. “A plan is only as good as the information you have at the time you make the plan,” Mr Harper said.

While higher education can be viewed as somewhat optional, or not even needed in some cases, retirement is something everyone will face. “Most employed people actually do a better job preparing for retirement than they do for educational costs,” he said.

Planning For Retirement

There are seven common vehicles for saving for retirement, and at least one of them should be part of every working person’s financial plan, Mr Harper said.

The 403(b) is a tax-sheltered annuity, usually used by teachers, government employees, or not-for-profits, he said. A 457 is a deferred compensation plan frequently offered to municipal, state, county, and federal employees.

Most familiar is the 401(k) plan. “In this, contributions on the employee side are tax deferred, meaning you pay no taxes on them until you take them out of savings. Usually this is when you are at a stage in life when your tax bracket is lower. A 401(k) can possibly be matched by the employer,” Mr Harper explained. If a 401(k) plan is matched, it is definitely advantageous to take part, he said. “You are throwing away free money if you don’t,” he warned.

Two kinds of IRAs are available for saving. The traditional IRA is a tax-deferred individual plan, and distributions are taken out tax-free. A Roth IRA is not tax deferred. “What you need to ask is, do you think you’ll pay higher taxes now, or later? Do you need the tax deduction now, or later?” Mr Harper asked.

A SEP is a self-employment pension, designed for someone with a DBA or corporation, or an LLC, he said. The defined benefit plan or pension was once popular for business owners and employees, but is rarely seen in private business today, he said.

“The choice will vary from individual to individual,” Mr Harper stressed, and reiterated the benefit of working with a financial advisor. “Talk to friends and family about who they have used and who they are pleased with,” he urged.

Fear of saving is understandable now, said the financial advisor, but people must force themselves past that. “We are in a cycle now where everything bad that happens seems magnified. I think we are somewhat in a time of rational pessimism. But the reality is, unexpected things always happen. Planning for what you can plan for is essential, always,” he said.

What Mr Harper hates to see is for people to continue to repeat financial mistakes. “Buy and hold your investments. Investments in companies with global presence should always be good. And people do not take full advantage of the tax codes, because they are so complex,” he said. At the very least, have a CPA handle taxes. “The average person really needs that breadth of knowledge,” he said.

Take advantage of any savings plan offered through work, or some combination of plans.

Make a budget. “Even just looking at your checkbook and taking the average over three months of what you are spending can be helpful. It’s a reflection of where your are and gives you a point to compare,” he said. A budget, however, has to be flexible and take into account how much money is currently coming in. “It is a tracking device of where your money is going and identifies places where it is easy to save some money.”

“I think there are an awful lot of people doing nothing because it’s intimidating and confusing. But you are not wasting your time by doing something to save for the future,” Mr Harper said, “even if it is putting something into a low yield bank savings account.”

 There is no cookie cutter answer for financial planning. “There are way too many factors involved,” he said, “and it has to be an individual thing. Sit down, talk to a professional, and most of all, be open and honest with that advisor,” he said.

“I am more than happy to have a free 15-minute conversation with someone if they bring in their 401(k) form to me and ask what they should do. They will walk out with a better idea of what they have, and what the options might be, and have a better sense of what they are trying to save for,” Mr Harper said.

There is no time like the present to begin saving if one has not yet begun to do so, stressed Mr Harper. “It’s not going to get any easier,” he said, “so take advantage of the opportunities out there.”

Ken Harper is a financial advisor of Edward Jones Investment and Services, located at 19 Church Hill Road, Suite 2, in Newtown. For information on services, call 203-426-7826.