Where did the time go?
Just yesterday your financial life was all about scrambling to make rent, learning what a 401(k) was and lobbying to get out of the cubicle and into an office. Now you're pushing 45 or 50, you've got a mortgage and college tuition bills, and you're the boss of a crop of ambitious 22-year-olds.
Face it, you've reached middle age.
Sure, you have a long road ahead - three or four decades or more. But when it comes to your finances, you're not a kid anymore.
"Back in your twenties, you probably thought turning 50 was far in the future," says Mari Adam, a financial adviser in Boca Raton, Fla. "Guess what? Your future is starting now."
Will that future work out the way you want? Hard to say, but you'd be wise to see how you're doing so far. That means conducting a head-to-toe money checkup that covers everything from investing to insurance.
Once you know the state of your financial health, you should find it easier to get in shape and then stay on track toward your goals, whether they include early retirement, career changes or starting a business.
How do you take this test? Ask yourself the same questions that a financial planner would pose. Your answers will lead you to your diagnosis and, if you find ills, a cure. Get started.
1. Are you saving enough for retirement?
When you're just starting to save and invest, this question is hard to answer with any precision. Who knows how much money you'll need in retirement when those days are eons away? Now that you're in your forties or fifties, it's easier to make an educated guess.
You have a 401(k) balance or other plans you can check on (if you can bear to look today). And you probably know how long you want to keep working and have an idea of what you want to do afterward - travel, launch a second career, kick back. You still have time to refine your goals. But as retirement draws closer, you can't put off creating a concrete savings target and measuring your progress.
One way to look at this is to come up with the Big Number. As a rule of thumb, figure you'll live on 80% of your pre-retirement income when you stop working. So if you make $100,000, that's a retirement income of $80,000. If you assume you have no pension and that you'll collect $20,000 a year from Social Security (get an actual estimate at ssa.gov), the remaining $60,000 will come out of your savings.
The standard financial planning advice is that you can safely withdraw up to 4% of your assets in the first year of retirement. You then increase that amount each year to match inflation. So in this example you'll need to amass $1.5 million by the time you quit ($60,000 divided by 0.04, if you're keeping track at home).
Work up your own Big Number and an annual savings goal with our retirement calculators. You can also use the worksheet to the right to see where you should be by now. Whether you're on target or behind, remember to keep saving. It may seem hard to buy when the market is stumbling, but think of it as a 10%-off sale on stocks you have to buy anyway.
2. Is your portfolio properly diversified?
In just the first weeks of this year, the stock market has slid some 8% and recession talk has reached fever pitch. That's especially worrisome for midlife investors. You've lived through bear markets before - 1987, 1990, 2000-02 - but now you have more money on the line and a tighter portfolio-building schedule to meet.
At times like this, you want to make sure you have a mix you can live with. So check on your investments but don't chicken out. As long as you are properly diversified, you can ride out this market downturn too. Retirement may seem close, but your investing time horizon is still decades long.
While boomers should have a sizable stake in bonds and cash to cushion risk, stocks should continue to be the linchpin of your portfolio. Yes, stocks can often deliver sharp losses, but they remain your best bet for outpacing inflation.
By your late forties, a sound asset mix, according to planners at T. Rowe Price, is 83% stocks and 17% bonds. Gradually shift so that by age 65 you have a 60/40 mix. For maximum diversification, your equity stake should include large-caps, small-caps and foreign stocks. To create your own allocation, use the tools at morningstar.com.
3. Are your investments in the right accounts?
If you've been stashing away money for 15 or 20 years or more, you've probably built up savings in both tax-deferred plans, such as a 401(k) or an IRA, and taxable accounts. Now you need to consider what's called asset location - that is, putting investments that trigger a high annual tax bill in tax-deferred accounts and keeping more tax-efficient ones outside your plans.
A study by Vanguard found that effective asset location can improve your after-tax returns by as much as 10% over 10 years. Investments that throw off a lot of income are tax-inefficient. Prime examples: bond, real estate or high-dividend stock funds. If the payouts are in the form of interest or short-term capital gains, you'll owe taxes at a rate as high as 35% on the money.
Growth stock and index funds are tax-efficient. They tend to generate few short-term payouts, while any long-term gains would typically be taxed at a 15% rate. Municipal bond funds are also low (or no) tax, and the case for owning them is quite strong now.
4. Have you taken on too much debt?
You've become an expert juggler - what with the mortgage, college tuition and monthly bills. But in that financial scramble, you may have lost track of just how much you owe, especially if you keep tapping your home equity for spending money.
Sure, some debt makes sense - taking out a loan to buy that house in the first place, for one. But too much debt can cripple your finances, especially if you carry credit-card balances. The worst scenario would be to head into retirement with mushrooming interest payments and only a fixed income to pay them off.
Use these four guidelines to see if you're in over your head:
* 28%: Devote no more than this amount of your monthly pretax income to your mortgage.
* 75%: By age 45, limit your home loans to this portion of your home's value, says Phil Dyer, a financial adviser in Towson, Md.
* 36%: Spend no more than this much of your pretax income on all debts, including your mortgage and credit cards.
* 3 months: Set aside three months' worth of living expenses for emergencies. In tough times, six is even better.
5. Is your estate plan in order?
For better or for worse, life has grown more complicated, what with a spouse, kids, a former spouse, free-spending kids, health worries. You've worked hard to protect your family. But if you die or become incapacitated, what will happen? That depends on how well you've handled estate planning.
You probably have a will - by age 50, two out of three Americans do. But that's only a start. When did you last update it? And did you complete other essential paperwork? Probably not.
"You want to be sure your kids and spouse will be taken care of," says Robert Armstrong, president of the American Academy of Estate Planning Attorneys in San Diego. "And you don't want all your money going to your ex-spouse or, worse, her no-good second husband, which all too often is what ends up happening."
Here's what you need:
* A will: In it you need to designate a guardian for your children if they're younger than 18, as well as a financial guardian for the money they'll inherit (or a trustee if you set up a trust). "You may want to choose different people for these tasks, since they call for different skills," says Bill Knox, a financial adviser with Regent Atlantic in Chatham, N.J. "A guardian must be willing and able to raise your child, while the trustee should be good with money management."
* Beneficiaries: Name them for your 401(k), IRA and investment accounts. Your will may state that all your money goes to your spouse, but that won't override the beneficiary documents if you've listed someone else.
* Durable power of attorney: With this document, you give a trusted friend or family member the legal right to manage your affairs if you are disabled.
* Health-care proxy: Also known as a living will, this document enables a family member to direct your medical care if you can't do so yourself.
* Living trust: Consider this alternative to a will if you live in a state with slow-moving or costly probate courts. With a living trust, your estate can bypass probate.
* Trusts for your children: In most states, your kids will control any money put in their name at age 18 or 21. Putting their assets in a trust allows you to dictate when they collect or make sure they use the funds for college, not a convertible.
6. Are you expecting an inheritance?
A quarter of households have received at least one inheritance, according to AARP. The median amount: $49,000. As a boomer, you may see even more. The most affluent boomers (the top 40% by income) get two-thirds of all inheritance dollars, the AARP study found.
"If you are in line to receive a sizable inheritance, consider the impact on your financial plan," says Ross Levin, a financial adviser in Edina, Minn. First talk to your parents. If they say they hope to leave you money and you feel confident that they've accounted for long-term health-care costs, work this sum into your own plans.
"The amount may be enough to live on while transitioning to a more flexible career or you may be able to help your own kids with a down payment," says Levin. Or suggest that your parents look ahead to the next generation and help your children with college. If they pay tuition bills directly, that doesn't count against the annual gift-tax-exemption limits.
7. Do you have enough insurance?
You're pushing 50 (or more), but hey, you still feel like you're 40. There's no denying statistics, though, and the numbers show that the odds of developing serious medical conditions rise as you get older. If you delay purchasing or updating certain policies, you may find that coverage has become unaffordable or impossible to get.
Check your protection against this list:
* Life: Back in the '80s and '90s, you did the right thing by taking out life insurance to protect your family. They'll still depend on you for another 10 years or more, but is your old coverage generous enough to replace the fatter paycheck you're bringing home today? (Conversely, if you've built up enough assets, you might not need it.) To calculate how much insurance is right for you now, fill out the online worksheet from the Life and Health Insurance Foundation for Education. If you need to buy more, term is almost always your best choice. Compared with a whole life policy, you can purchase more coverage for fewer dollars, and rates have been dropping steadily in recent years. Compare premiums at insure.com or accuquote.com.
* Disability: You are far more likely to have a temporary disability than to die prematurely. But few people purchase disability coverage on their own, since annual premiums are typically 1% to 3% of your income. Still, if you don't have a group policy at work - or if you think your next job might not provide it - talk to two or three independent insurance agents to compare policies (the Web isn't much help here).
* Homeowners: You've expanded the family room, redesigned the kitchen and turned the basement into a home theater, all while home prices have been skyrocketing around you (at least they were). When is the last time you compared the value of your home with your homeowners coverage? You may need a bigger policy.
* Liability: You could be sued for millions if someone slips on your sidewalk or gets rear-ended by your car. As a highly paid professional, you're a more alluring lawsuit target than you were as a penniless 25-year-old. And you have more to lose. That's why in your peak earning years you need umbrella liability coverage, which provides added protection on top of your auto and homeowners insurance. Most people buy a $1 million policy.
8. What do you want to do next?
Call it a midlife crisis or call it sensible planning. But after 20-plus years in the work force, you may be a little restless. In a recent Money Magazine survey, 43% of boomers said the idea of a new job was appealing. Among young boomers, 50% said so.
"Now's the time to ask yourself," says financial planner Sheryl Garrett of Shawnee Mission, Kans., "do you want to keep doing what you're doing for the rest of your life?" You still have plenty of time to build a new career or launch a business, but you don't want to jeopardize your family's security by trying out random ventures.
Your first step should be a career assessment, says Mike Haubrich, a financial adviser in Racine, Wis. Ask yourself: Am I happy? Have I advanced as far as I hoped? What are the prospects for my industry? Maybe you'll decide you're satisfied where you are. If so, keep acquiring new skills and network regularly to stay competitive.
Or you may decide you want to switch jobs. Trouble is, an economic slowdown might be the worst time to look for work. So use this time to lay the financial groundwork:
* Save more. It takes cash to cultivate your career: for training and college courses, for networking events and to pay expenses during a transition. Says Haubrich: "You have to invest in your career just as you do with your portfolio."
* Budget. If you're leaving a corporate job to go solo, price individual health insurance before you leap. Or see if you can switch to your spouse's coverage. Figure out your monthly expenses so you know how much you need to earn. Trim your debt while you still have a steady paycheck.
* Do research. Know the value of the retirement benefits you're giving up, including a 401(k) match and a pension. A traditional pension is worth 20% to 30% in higher pay.
9. Are you staying healthy?
Your health isn't something you'd expect to review in a financial checkup. But what could have a greater impact on your retirement security? Your physical condition will dictate everything from your medical bills to how long you can work - in a recent McKinsey & Co. survey, 40% of retirees said they'd left the job earlier than planned largely because of health problems.
Unfortunately, the health outlook for boomers is far from bright. Despite a youth that spanned Jane Fonda workouts, spin classes and yoga, many are in poorer health than their parents, says Olivia Mitchell, head of the Pension Research Council at the Wharton School of Business. In a recent national health survey, many early boomers (those who are now in their mid-fifties to mid-sixties) reported difficulty walking one block or climbing a flight of stairs.
So what does it take to stay in shape? Just four healthy habits can help you live 14 years longer on average, according to a recent Cambridge University study: eating plenty of fruits and vegetables, regular exercise, moderate drinking and not smoking.
As longevity expert Laura Carstensen points out, if you maintain your health, you have nothing to fear from getting older. You'll actually leader a richer and more satisfying life.