Our belief is that partnering with a Financial Planner in your 30s & 40s can help with some of the planning shortfalls that we sometimes find in clients that get started at a much later age. In Part I of this article, we looked at three areas that the right financial planner can help with – lifestyle creep, investment diversification and tax diversification. In Part II, we point out three other planning areas that are best initiated right away, rather than waiting until you approach your retirement date or are facing the first college bill.
1. College Funding
This is an area that spouses frequently disagree about. Often one spouse wants to fund the entire amount for college while the other wants the student to earn scholarships and pay for college themselves. The answer usually lies somewhere in between, and an objective third-party planner can help bridge the gap and get the savings started in the right investment vehicles. For most folks, a 529 is the best choice, but picking the right state plan and figuring out the target savings goal is important. It is also essential for FSOs to really understand the methods used to determine eligibility for financial aid—both the Free Application for Federal Student Aid (FAFSA) and the CSS Profile (used by about 400 competitive institutions) and to realize that income is by far, the largest determining factor of your Expected Family Contribution (EFC). This means that for senior FSOs, even if you do not save for college at all, your need-based financial aid for the FAFSA schools is going to be very limited. Some CSS schools could be more generous based on income alone, but you will not know until the financial aid letter arrives in the spring of your child’s senior year. This could leave you in a tough dilemma, earning too much to get much need-based financial aid but not being able to afford the school your son or daughter really wants to attend without expensive parent loans. A financial planner can look at the whole financial picture to help parents and their children save on the cost of college and help find the best school fit financially.
2. FEGLI (Federal Employees’ Group Life Insurance)
FEGI is a no-brainer for most FSOs when they are new hires in the Department. For those with families, 5X their salary on Option B is a popular, and more often than not, reasonable choice. What most do not realize is that FEGLI gets increasingly more expensive as you enter into middle age and beyond. For example, by the time a FS 2/ Step 10 FSO reaches the age of 60 with 5X salary, the FEGLI yearly premium peaks at an exorbitant $9,146 a year!
Working with a Financial Planner can identify the right time to shop for more reasonable private coverage. There are even newer types of hybrid insurance policies that have both a death benefit and can be used for long-term care, if needed. These are not appropriate for all, but your financial planner should be able to provide more choices and identify any holes in your risk protection plan, such as liability coverage.
3. Mortgage Debt
More and more Americans are carrying a mortgage well into retirement. While unavoidable for many Americans, FSOs with a long planning horizon should try to eliminate the mortgage on their primary residence before retirement. Is this contrary to the way most advisors and the media typically advise? Yes, but once you start running precise cash flow scenarios and individualized market return simulations with a financial planner, you soon realize that the mortgage payment out of your annuity or TSP withdrawals have some definite drawbacks—significantly reducing your cash flow or increasing the withdrawal rate of your TSP portfolio (and you still need to pay deferred federal and state taxes which increases the amount.) Keep in mind that the standard deduction has doubled in 2018, eliminating the tax incentive to carry a mortgage for the majority of FSOs. And finally, realize that when you have your own home, there will always be required property taxes, maintenance and capital improvements to cover (and often left out of pre-retirement budgets). Those will be expensive enough in retirement without having the extra burden of a mortgage.
4. Shop Wisely
Repeating some advice from last month. We recommend that you start your Financial Planner search with Registered Investment Advisor (RIA) firms that are members of the XY Planning Network, National Association of Personal Financial Advisors (NAPFA) or the Garett Planning Network. All of the members of these networks have committed to putting their clients’ interest firsts, which makes them a very rare breed of financial advisor. The salespeople of the financial services world try to portray themselves as fiduciaries (and do a great job with their advertisements), but they are not legally bound to serve as your fiduciary as is a RIA firm is required to be. Shop wisely!
In summary, we believe partnering with the right Financial Planner early on, rather than waiting until you think you have enough money to invest later in your career, can help you avoid many common financial pitfalls. Good luck!