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Financial Planning 101

Alabama experts offer tips for managing your money at each stage of your career.

David Foreman

 

Forrest Gump’s adage comparing life to a box of chocolates is equally apropos for your financial future: You never know what you’ll get. But smart planning and investing can mitigate the surprises along the way. Financial planners can help investors avoid bumps on the road to success.

The salad days

David Foreman, director of financial planning at Warren Averett Asset Management in Birmingham, suggests a big picture approach from the beginning.

“When you’re young and starting out, go ahead and focus on the long term for retirement savings,” Foreman says. “Young people get tempted to buy the new vehicle or might be itching to get into a house. It’s important to start on the right foot. If you have student loans, knock those out and start your retirement savings early.”

Bragg Van Antwerp, managing director of Mitchell McLeod Pugh and Williams in Mobile, agrees that if student loan debt is an issue, eliminating it should be a priority, along with saving early and often.

“If given an opportunity to participate in a 401K, put your money into that or a similar retirement vehicle,” Van Antwerp says. “That can seem like a real sacrifice when you’re on a tight budget. As one of my partners likes to say, you should save until it hurts.”

Van Antwerp says there’s no right answer about how much you should save. It’s personal and individual, but he advocates saving until it starts to stretch the budget.

“The younger you start, the better you are in the long run,” Van Antwerp says. “I have doubts about whether Social Security will be there for younger folks, so a 401K is more important than ever. It’s a means to supplement what may come to us in Social Security.”

C. Crenshaw Pritchett IV, a principal with Jackson Thornton Asset Management in Montgomery, is equally adamant about taking advantage of any matching opportunities within your company.

“More than anything, just start saving,” he advises. “You can get paralyzed looking at so many different plans. But starting is the thing to do. In a company account, savings is automated. You decide how much to put in, and you never miss the money. I’m an investment advisor, and it’s still hard for me to save money once it’s in my bank account. Maximizing your company’s 401K is what we call ‘free money.’”

Pritchett says he recently heard advice that would appear counter-intuitive but it actually makes sense. An investment that’s not performing is better than no investment at all.

“The worst thing to do is not participate in the market,” he says. “You have to be in the sun to get a suntan. You have to have exposure to the market and let it work.”

He encourages young people to educate themselves about finances. Invest in the 401K but also investigate other opportunities.

C. Crenshaw Pritchett IV

 

“When you’re young, you can tolerate more equity exposure,” Pritchett says.

Pritchett recommends automating savings and putting away as much as possible for a college fund and for retirement. You can’t afford a top-of-the-line SUV or a trip to Maui at the expense of retirement savings, no matter how alluring that seems at the time.

Tommy Boyd, president and senior financial advisor of the Boyd Financial Group, with offices in Selma and Fairhope, says for someone just out of college, “There is a sense of freedom from the obligations and responsibilities of the future. It is the best time to put a spending and saving discipline in place. We counsel young adults to build a basic savings or money market account equal to a few months’ expenses and then deposit a check every month into a growth mutual fund. It should be done religiously, just like paying the electric bill. The compounding effect in money growth is powerful when started early.”

Boyd says the basic outline doesn’t change much from early adulthood to mid-life.

“Keep debt, especially credit cards, under control and budget spending. Keep a modest amount of emergency cash,” Boyd says. “Consider working with a financial advisor to help you develop a more diversified and well-allocated investment plan, as well a general financial roadmap. For those with access to an employer sponsored retirement plan, take full advantage and ask your advisor to help with the investment choices. It is essential to write that check for your investment account every month, just like one of the bills.”

Never speculate on aggressive stock tips you hear from friends, Boyd cautions, adding that lifetime successful investors use diversified investment plans, invest regularly and ignore current market levels.

“Let time work on your side while you’re young,” Foreman says. “It’s also a good opportunity to invest in your career and education.”

“If you can do it, 15 percent would be a great goal,” Foreman said. “Take advantage of whatever the minimum is to get to your employer match.”

Van Antwerp says the next step is to buy a home.

“Over time, it’s a great investment for most people,” Van Antwerp says. “It’s the transition to the next stage of adulthood. When you’re married, it’s a good time for you and your spouse to start saving money aggressively, since you’re making money collectively.”

Foreman says in their early 30s, most rising executives are married with young children and several years of work under their belts.

“You see trips families around you are taking, houses they’re buying, vehicles they’re driving,” Foreman says. “It’s a lot more tempting to be lured into consumer debt, but I encourage people to buy within their means. Don’t forgo the retirement for that house payment.”

Bragg Van Antwerp

 

Mapping your route

If you maximize your retirement planning contributions, under the age of 50 you can contribute $18,500 in a standard 401K, but over the age of 50 you get an additional $6,000, says Van Antwerp. Profit sharing and employer match will maximize your tax-free retirement portfolio.

Then, Van Antwerp says, augment your savings with contributions with after-tax dollars.

“My firm’s philosophy about investing is something applicable to everybody from a single person starting out to a CEO deciding how to exit a company,” Van Antwerp says. “We believe in a long-term discipline and consistent approach to investment.”

In your 30s, it’s also important to begin estate planning — ensuring that wills and estate documents are in place.

“Fast forward several years, and now the kids are in college or finishing college,” Foreman says. “You’re in the final 10 years of your career, and it’s time to focus on retiring. You have the most savings potential you’ve ever had and should keep socking it away for retirement.”

This is a time for closer scrutiny of your portfolio to make sure you’ve invested wisely, something you should have been doing along the way.

“You need to be properly diversified,” Foreman said. “You want to be sure you’ve made the allocations that fit your long-term needs. You can be too conservative or too aggressive. In this final space, you need to make sure you are well positioned. Are you 100 percent allocated to stocks? This may be a time to dial back.”

Looking ahead to the exit ramp

When professionals enter the retirement phase, they’re thinking of what legacy they will leave and what type of lifestyle they will maintain during retirement. Allocation is key, and each goal will have a different impact on that allocation, Foreman says. Make sure you update your retirement plan to match your changing circumstances, whether expenses of an aging parent or other unplanned occurrences.

“People fear being a burden on their children,” Foreman says. “That’s why estate planning is so important. Communication with family is important here. These are hard conversations, and people are hesitant to have them.”

Van Antwerp says life insurance, a will and general estate planning are important regardless of your assets. And Boyd says the pre-retirement and retirement stage of life is easily the most complex period.

“During this time, it is imperative to minimize or eliminate debt, as well as to develop a written spending plan to use as roadmap for when there won’t be a check or a W-2,” he advises. “Hopefully, years of compounded interest and profits will allow your personal investments, matched with monthly distributions from your employer plan, to provide a predictable monthly income.”

Boyd says there are a few options specific to Alabama investors. First, there’s a wide availability of high quality, tax-exempt municipal bonds issued in Alabama.

“Alabama’s low tax structure, while a negative in many ways, works as a positive factor in the credit quality of our municipal debt, unlike high tax states where the tax demands already place such a burden on the public that there is no margin for error,” Boyd says. “Alabama taxpayers can own Alabama municipal bonds with interest earned free of both federal and Alabama income tax.”

Anticipating high cost of higher education

Tommy Boyd

 

College can be a tremendous drain on the finances. Foreman says there’s an old chestnut that all should heed. “You can take a loan for college savings, but you can’t take a loan for retirement. People want the best for their children, but it should not be at the expense of finding near retirement age that you haven’t saved enough.”

Van Antwerp recommends preparing for children’s future with a 529, a qualified tuition plan.

“It provides a way for you to put money into an account designed to help fund your child’s college education,” Van Antwerp says. “A 529 is like a 401K, a tax-free growth for life account. When you take out money for tuition, those distributions are not taxed as long as the money is used for qualified educational expenses.”

The tax benefits of proper college preparation are clear.

“The 529 plan is really important for Alabama residents. It allows 5 percent tax credit, $10,000 investment and $500 tax reduction,” Pritchett says. “That’s an additional way to get a return outside the typical investment returns.”

Staying the course

“There’s an old term, ‘Buy and hold,’” Van Antwerp says. “It doesn’t sound very exciting, but our experience shows a buy-and-hold approach serves investors best. You establish a plan at the outset and stick to it.”

Van Antwerp says it’s tempting in the face of shifts in the economy to change the plan. The 2008 financial crisis is a prime example.

“If you watch the value of your account decline in a rapid and significant way, you’ll be worried about what to do,” Van Antwerp says. “Our advice, barring mitigating circumstances, is to stay the course. On March 9, 2009, the market hit bottom. Our clients who stayed the course were in a great position to watch their accounts rebound.”

While ultimately no one can know the right thing, having an established plan is the best insurance.

“If you’re nervous and losing sleep about it, the time to make a change in your portfolio is before the market downturn begins,” he says.

Fees are an important issue to consider, Pritchett adds, when you’re studying where to invest. “If you’re trying to keep the cost of your investment low, fees are a big key in your investment plan. Lots of times, active mutual funds have a higher fee than passive funds. Passive are more low cost.”

Making informed decisions about Social Security will help maximize that income source also, says Boyd. “We often see parents gifting to their children at a level that jeopardizes their own security. It is one of the difficult jobs of an advisor to inform a parent that those gifts may not be a good idea.”

Succession planning paves the way

“To me, financial planning is like a puzzle,” says Foreman. “You can’t just focus on retirement and ignore estate planning. A puzzle is not complete without all the pieces.”

For someone who has spent years building a business, protecting that for future generations is vital, says Foreman.

“In a scenario where you want to preserve a business and putting those pieces in place, you often see people so focused on building the company they lose sight that one day they will have to walk away,” Foreman says. “Succession planning is important. If you’ve spent a lifetime building something from scratch, you have to acknowledge you’re going to stop doing it one day.”

A withdrawal strategy is important for business assets. “As a business owner,” says Van Antwerp, “you want to ensure the future prosperity and success of your company.”

A written financial plan gives a tangible design for planning business succession, says Pritchett. “Should you have your kids be part of the business or should you sell to someone else?” Pritchett asks. “That decision can have a huge impact on a lot of lives. Early on, it’s important to assess whether that company will be able to provide for all family members who want to work in that company.”

A master plan will allow a more painless transition when that time comes, as it inevitably will, regardless of your level of assets or stage in life’s journey. Having a roadmap in place is essential.

“You don’t just get in your car for a trip and hope you end up there,” Pritchett says. “If you have a great plan to follow, then you get where you want to go.”

Cara Clark is a freelance contributor to Business Alabama. She is based in Birmingham.

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