Goal Setting

We at Paragon Financial Advisors don’t believe that “any direction” is acceptable. The financial well-being of you and your loved ones is too important to be left to chance. That’s why we encourage our clients to develop their personal financial goals.

Goals are basically a result or achievement toward which you are willing to expend time and effort. Goals vary with the individual’s wishes; hence, you set your own. Defining effective goals requires developing characteristics for those goals. For example, “I want to retire comfortably” is not a well-defined goal. Additional information is required.

Goal Characteristics

A well-defined goal requires the following characteristics:

1. Specific- An effective goal is specific in nature. It clearly defines the desired result or achievement in an unambiguous manner.
2. Measurable- Goals must be measurable, i.e. you must have a way to determine the attainment of the goal and monitor the process toward goal attainment. Financial goals would be measured in dollars.
3. Achievable- Effective goals must be achievable. For example, a goal of playing quarterback for an NFL football team would not be achievable for me given my size and athletic ability. Achievable does not necessarily mean easy. “Stretch” goals requiring significant effort are permissible if it is possible to achieve the final goal.
4. Relevant- Goals must be relevant; a relevant goal provides incentive for expending the effort required for goal attainment.
5. Priority- Most individuals will have multiple goals as they go through the goal setting process. Some goals will be more important to the individual than others. Therefore, goals should be ranked by priority. Which goals are most important and which goals have lesser importance? Identify and rank according to priority.
6. Time frames- An effective goal has associated time frames for completion and “mile posts” to monitor progress toward goal achievement.
7. Action Items- Action items outline the actions necessary to attain the goal. What needs to be done to successfully reach the goal?

Let’s restate our retirement goal according to these parameters.

“My first priority is to retire in 30 years at an income level equal to 85% of my current income adjusted for inflation at 3% per year. To accomplish this goal, I need to save X dollars per year and my investment portfolio needs to grow at Y % per year.”

This restatement clearly provides better definition with the characteristics discussed above.

• Specific/Measurable- “…retire… at an income level equal to 85% of my current income adjusted for inflation at 3% per year.”
• Achievable- certainly.
• Relevant/Priority- “…first…”
• Time frame- “… in 30 years…” with measurable mile posts—the value of the portfolio each year based on an assumed savings rate and portfolio appreciation rate can be identified and monitored.
• Action Items- “… save X dollars per year.” 

         Please contact us at Paragon Financial Advisors. We’ll assist you in developing your personal financial goals. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX.  We offer financial planning and investment management services to our clients

Retirement-The Big Picture

In early May, we attended an “Inside Retirement” conference sponsored by Financial Advisors magazine; the topics were centered on “income and longevity.” Various nationally known speakers discussed pertinent items related to those themes. We found some of the presentations worthy of discussing here.

 Alicia H Munnell (Peter F. Drucker Professor of Management Sciences at Boston College, and director of the Center for Retirement Research at Boston College) gave a presentation with the title of this blog: The Big Picture. She has written extensively on income in retirement. Some of her major points include the following:

• More than one-half of today’s workers will not be able to maintain their current lifestyle in retirement. Why not?
• People will live longer.
• In spite of this increasing life span, people will work only a “little” longer before retiring—thus increasing their retirement life span.
• Health care costs are increasing. The increasing cost of care will be coupled with increased cost of health insurance—both private insurance through the Affordable Health Care Act and through Medicare Part B increases. In 1980, Part B Medicare premium was 6.8% of the Social Security benefit; in 2030 it is estimated to be 19.4%.
• Interest rates are at historic lows; lower rates reduce the amount of income generated from personal savings.\
• Retirement income has historically come from a combination of a) Social Security benefits, b) pension plans (either defined benefit or defined contribution), and c) individual savings. Let’s examine each separately.
• In 1985, Social Security benefits represented 42% of pre-retirement earnings. After Part B Medicare costs, the proportion decreased to 40%. Benefits were not taxable at that time so there was no further erosion due to income taxes. By 2030, those proportions are estimated to be 36% replacement before Medicare and income taxes; 32% after Part B Medicare expense, and 30% after Medicare and income taxes. Note that these percentages represent current replacement rates and do not include any potential changes to remedy the Medicare shortages currently under discussion.
• We live in a DC (defined contribution) or 401(k) world. The older DB (defined benefit) or pension plan is fast disappearing.  401(k)s limit the employer obligation only to offer contribution of funds to a retirement plan. The acceptance—and performance—of the plan is shifted to the employee from the employer. Here’s where we stand:
• Employees who don’t join the plan—21%
• Employees who contribute less than 6% of their pay—53%
• Plans with high asset fees—54%
• Plans losing assets through “leakage” (i.e. cash outs, hardship withdrawals, post 59 ½ penalty free withdrawals, loans, etc.)—25%Note: This leakage impact over the life of the plan can reduce the ending amount at retirement by as much as 25%.
• Retirees who don’t have a systematic plan for withdrawing assets in retirement—99%  How much (and when) should withdrawals be made from a retirement plan? Too much too soon and the retiree can run out of money; too little too late and IRS required minimum distributions can have significant income tax and Medicare Part B premium impact.
• Individual savings (or the lack thereof) are a topic for a separate writing; they warrant a much greater discussion which we will examine later.
• So what should a pre-retiree do?
• Work longer. A longer working career has the dual advantage of allowing retirement savings to grow and reducing the time during which retirement assets are needed.
• Save more. Savings should be increased preferably through a systematic plan (such as a 401(k)) or a periodic contribution to a savings account.
• Consider non-traditional sources of retirement income. There are two primary assets for most employees today: their 401(k), and their home. Tapping the home asset is a complex topic—another one that will be addressed in a separate writing. Home assets should be used only after careful analysis and with a full understanding of all their ramifications.

We at Paragon Financial Advisors strive to assist our clients in formulating a “big picture” for retirement. Please call us and we can discuss your individual circumstances.   Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

The Student Debt "Bubble"?

About 25 years ago, federal government policies were implemented to encourage students to get a higher education—including borrowing the funds for that education if necessary. It was assumed that college graduates could afford the debt because they would be earning more from better paying jobs. However, the law of unintended consequences reared its ugly head. College expenses have been increasing much faster than the general rate of inflation. In addition, especially since the 2008 recession, jobs created have not been ones that paid exceptionally well.

 

An Associated Press article, written by Josh Boah in early October of 2015, gave some statistics about the student debt incurred for a higher education—and how it can have a multi-generational affect. Student debt in America now totals approximately $1.2 trillion. An Associated Press analysis of that data provided the following statistics:

1. Americans over age 40 account for approximately 35% of the education debt. Extended loan repayment schedules, mid-career changes, and signing for children’s educational borrowing have driven the increase from its 25% proportion in 2004.
2. Adults in the age 35-50 year old bracket owe about the same amount (an average of $20,000) as those students in the age 34 and younger bracket.
3. Parents who still have college debt and teenage children have more difficulties in providing education assistance for their children. Such parents have an average of $4,000 for children’s education savings vs. the $20,000 average for children whose parents have no student debt.
4. Student debt repayments are surpassing the cost of food for the average college educated head of household under age 40 (who has student debt outstanding)--$404 for debt repayment vs. what the family spends per month at the grocery store.

Student debt levels are causing potential problems in an already weak economy. Older graduates are delaying or foregoing some spending which would benefit the economy (such as housing and related purchases). Some graduates are accepting employment (usually at lower paying jobs) which would qualify them for student loan forgiveness.  Second generation student debtors will be looking at greater debt levels to continue their education.

There are some planning opportunities for pre-college students on how to handle the costs of continuing education. We, at Paragon Financial Advisors, can assist parents (and grandparents) in the best way to proceed on college funding. However, stay tuned—we haven’t heard the last of the student debt “bubble."  Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.

5/29: National 529 College Savings Plan Awareness Day

School Yourself Before You Invest


May 29^th is National College Savings Plan Awareness Day. This annual day celebrates the importance of preparing for future college expenses and the advantages of 529 College Savings Plans. Did you know that an alarming 70% of students who graduated from college in 2013 left college with an average of $28,400 in debt per borrower¹? It’s shocking how quickly tuition rates have risen and how expensive the price tag of a college degree has become.  Planning for future expenses has become a crucial necessity. See: Shocking Trends in College Expenses and College Debt Necessitate Earlier Planning for Families


College Savings 529 accounts have been getting a lot of exposure nationally and are starting to get the positive recognition they deserve. 529 plans offer a simple, affordable way to save for rising higher education expenses. These investment accounts allow tax-deferred growth, high contribution limits, and unique ownership features. See: School “Daze”


Characteristics of 529 College Savings Accounts:

• Anyone, regardless of income, can open a 529 account to save for their dependents or even their own educational expenses.
• Individuals can contribute annually up to the federal gift-tax exclusion ($14,000 for 2015 or $28,000 if married) per beneficiary. Keep in mind these contributions are made with after tax dollars.
• Under a special election you can combine up to five years’ worth of contributions into one contribution of up to $70,000 ($140,000 for married couples).
• Anyone (i.e. family) can also contribute until the account value reaches $350,000.
• Money from a 529 plan can be used for tuition, fees, books, supplies, and equipment required to study at any accredited college, university, or vocational school here in the United States.
• The money can also be used for room and board, as long as the beneficiary is enrolled as at least a half-time student.
• A distribution from a 529 account that is not used for the above qualified educational expenses is subject to ordinary income tax and maybe an additional 10% distribution penalty on the gains unless other conditions are met.
• Accounts are transferable: unused amounts are able to transfer to other qualified members of the beneficiary’s family without incurring any tax penalty.

Do you know how much do you need to save to send your child to college? Will your children need to take out student loans? See: Student Loan repayment and Forgiveness Programs

 

* Numbers are rounded for illustrative purposes and are not intended to portray an actual investment. Values are in today’s dollars and are not adjusted for inflation

 

May 29^th is recognized as ‘National 529 College Savings Day’ and we invite you to celebrate with us the importance of setting aside money for higher education. A little preparation to put money aside today could mean a lower financial burden for your children down the road and greater freedom for those of the next generation to pursue their own financial goals.

 

Do you have a child attending college this fall? Do you have questions about saving for future college expenses and how that fits into your overall financial picture? Contact us today and schedule a consultation. We, at Paragon Financial Advisors, are happy to have a more in-depth conversation with you about your personal circumstances.

 

Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.