I can almost hear your thoughts. “I have goals: family security, educate the kids, a comfortable retirement, and being faithful along the way.” Great, but my first question back to you is how much does each goal cost?
Next I could ask how you are planning to meet each goal? Do you have other goals that will require diversion of assets? Do you have a budget to manage your monthly income and generate savings for investment? Congratulations if you are comfortable with each answer. Few people obtain their potential without specific goals, a working budget, and a financial plan. As U.S. Army General Crosbie “Butch” Saint used to say, “Hope is not a method.”
A great many people are working hard to save and invest, but do not have a plan, or at least not one sufficiently specific to assess progress. I’ve counseled a number of people who were on track to meet their goals, but didn’t actually know it and had anxiety about it. Some people are spending more than they can afford without compromising their goals, but they don’t know it. Both groups are uneasy because there is something in us which says, “I need to be responsible, to save, and to invest.” That means having, and following, a plan.
A plan starts with specific goals and clear priorities, then allows you to set savings and rate-of-return requirements. How do you do this? There are a number of options, but only three good ones: learn enough to do it yourself, get help, or use an appropriate combination of both.
What about professional financial planners? I don’t have any statistics, but anecdotal data suggest a few problems. Hundreds of people have told me they don’t have much confidence in plans prepared by “advisors” who are also sales people, paid commissions by certain investment companies for enlisting investors.
However, few people go to independent (fee-only) planners. So most plans are prepared by people who have a bias either because they have an interest in selling a product or they are more informed about the particular products their firms sell. They may be honest and objective, but their solution may not fit your needs, or profit you as much as it profits their firms.
This article is interested only in teaching you “how to fish,” so you will be skilled enough to access, accept, modify or reject outside advice. You are the steward appointed by our Lord and you are responsible for planning for your family. It is my prayer that you add whatever this article can teach you to your investment data base, that you seek Christian counsel and that you pray. I’m sure your plan will be pleasing to the Lord.
Your plan should bring your specific goals into balance with risk/return/time. Sounds reasonable enough, but only your goals and time can be easily quantified. There is no actual risk/return ratio, so you will have to make a number of judgments. The last article focused on your priorities and philosophy. In this and the following articles we will show you how to build on that foundation. “Commit to the Lord whatever you do, and your plans will succeed” (Proverbs 16:3).
Goals are the “pacing items” of financial plans.
Goals can be short, intermediate, or long term. They should be based on your financial philosophy or concept (see example family plan below) and need to be measured in specific dollar amounts. “. . . will he not first sit down and estimate the cost to see if he has enough money to complete it” (Luke 14:28). For example, you believe in education, so sending the children to good colleges is a high priority, but you have set limits on total college costs so that these expenses do not threaten other priorities such as tithing, support of missions, and a set retirement point. It is very important to do this thinking, and realize that you can modify it as your world view evolves, and as opportunities present themselves.
I want to introduce you now to an example family and share their investment plan. The Stewards are both twenty-eight years old with children six and four years of age. She is a stay-at-home mom while he is a captain (03) with six years of service (YOS). His base pay (Jan 01) is $43,876.80 plus BAS and BAH. They have $350,000 in life insurance and $56,000 in savings. (The Lincoln Rule of what the average family should have in savings: decade of age X age X 1000, or 2 X 28 X 1000.) In my seminars, I have to pause while people figure out how they compare.
There are many ways to visualize or chart your needs over time. Requirements grow with the birth of children, peak during their college years and reach an option point based on retirement decisions. Other major financial decisions float in the future along with common major expenses that could be charted to include homes, weddings, vehicles, vacations, or second homes. These “other” major decisions could be included, or they could be left in a pot that ultimately depends on the growth of the regular budget and savings plans.
The Stewards have prayed and decided on their major priorities and where to accept risk. “Many are the plans in a man’s heart, but it is the Lord’s purpose that prevails” (Proverbs 19:21). A number of firms, including Army and Air Force Mutual Aid Association have systems to determine family security needs. Using such a system, CAPT Steward has determined that he needs $500,000 for family security. Going to the College Board of NY website, he determines the four-year cost of the average public university to be $76,574 and $82,920 for his children (Present Value, the amount he needs today to grow @ 8%, is $68,677). There are many ways to do this–I chose 2015 as a point at which all money is available, used 4% inflation in school cost from 00-01, and 6% rate of return.
He does not plan to buy a house during his service, (but he’ll have savings to allow it if necessary). He will save for automobiles with dedicated mutual money markets, and wants to have great flexibility at a 30-year retirement point. For planning purposes, he assumes that an 0-6 salary over 26 YOS would give him that flexibility so he establishes an objective of having investments to replace the difference between his final active and initial retirement pay.
NOTE: This is a very reasonable approach, but fewer than 5 out of every 100 of my contemporaries have been able to retire without seeking some type of regular employment.
Captain Steward wants to be able to go into ministry or community work with his wife and not need much, if any, salary. To do this, he figures the difference between active and retired pay to be $82,980 in 2025 or $12,243 in PV (Present Value @ 8% and 24 years). Therefore–now stay with me, the principle needed to generate $12,243 a year is $153,045 @ 8% return.
To summarize, he needs $500K for security on an ongoing basis, $68,677 PV for college, and $153,045 PV for retirement savings. We won’t compute the cost of other major expenses, but he realizes the value of buying good cars for 8-12 years, staying in quarters when possible, and maintaining these financial priorities despite the consumerism of our society. He also plans to add all longevity and half of each promotion pay raise to his saving and investment program. Yes, this is a challenging concept. Lets see what it looks like.
Family Security is provided by income, investments and insurance (including survivor programs). If he lives to retirement eligibility he’ll have SBP (Survivor Benefits Plan) plus their investments. If they need more security, they will select ten-, fifteen-, or twenty-year-level term life insurance to cheaply cover any risk they do not want to assume. While on duty he carries the max $250K SGLI and has opted for an additional term policy. They could cover the $94K of risk with more term life insurance, but opt to accept that risk and focus on filling it with investments. (This is for illustration: I would actually counsel this young family to carry $100-200K additional term life insurance.)
Many people insure non wage-earning spouses and that may make sense. A basic rule of insurance is to only insure against risk you cannot accept. Her early death would not cause loss of income, but would generate child care costs. A couple of years ago he selected a $100K fifteen-year-level term policy which covers her until the youngest child is seventeen years old. He doesn’t think he needs more than about twelve years’ coverage, but he can cancel if that holds true. (This is cheap flexibility). If they had planned on her returning to work to help fund college, he might have taken 200K for twenty years. Again, the basic rule, “Only insure against risk you cannot afford.”
Insurance and investments can both provide for the family’s future financial security, but it is important to note that investments are the more desirable and more flexible option. If our example father lives, then insurance is not an option (not available) to meet college costs or help in retirement. The good news is that as he lives and earns, he continues to invest and those investments grow to meet the family’s future financial needs. He sees term insurance as an excellent vehicle to cover short-term risk without the expense of whole life (cash value insurance). He accepts that there is no “investment component” as the cash value insurance sales force always reminds us. He plans on actual investments (vice whole life insurance) to give him future return. As a contingency, he could cover future periods of vulnerability (such as under-funded college accounts) when the family would need his full income, with five- to ten-year term policies.
College costs are based on the College Board of NY AY2000-01 national average costs ($11,115 public and $24,801 private) inflated into the future at 4%. Always use the most reasonable cost estimate you can find, such as home state or “family school.” You don’t have to be exact, nor do you have to reach your goal. Ask anyone who has partially financed college from family income–the more you have set aside the easier those years will be. Captain Steward used 2015 as the target year and thus needs to invest $604 per month assuming a six-percent return and no tax to reach that goal.
His desire for college tuition is to try to save the entire amount. Since saving $604 a month is too limiting, he’s allocated $10K of the existing family savings towards his goal and upped his desired rate of return to 8%. This reduces to $322 the amount he needs to save per month. He could accept coming up short of the total amount desired, since he knows that during the last two years of the second child’s college he could pay most costs from the family budget.
In general, financial planners warn middle class Americans to not reduce retirement savings during the middle-age years to pay for tuition; if necessary, let kids work or borrow money. Kids learn about overall family responsibilities and more willingly accept responsibility when they carry part of the load! Still, much of the middle class digs into family assets for college and pays a price in retirement options.