Reason #1: To Protect Yourself and Your Family Against Financial Risks

Notice the word financial. As a financial planner, I cannot protect you from the risks you face in life — no planner can — but I can protect you from suffering the financial loss that may result when any of those risks become reality. What are those risks? The major ones are injury, illness, and death.

Reason #2: To Eliminate Personal Debt

You must move from owing money to owning money.  It’s not funny to run out of money before the end of your life! You must make sure you don’t outlive your income, and that means you’ve got to accumulate assets so you can support yourself for a lifetime. That’s impossible to do if you have debts, so you must eliminate them.

Reason #3: Because You’re Going to Live a Long, Long Time

At the time of the American Revolution, life expectancy at birth was 23 years. By 1900, Americans were expected to live only to age 47. Thus, throughout most of our nation’s history, almost everyone worked; there was no such thing as retirement.

Today, though, life expectancy tables from such diverse groups as the IRS, life insurers, the National Institutes of Health and the Centers for Disease Control and Prevention all say roughly the same thing: A child born in 2004 has a life expectancy of 77 years (up from 47 in 1900); a 77-year-old today is expected to live to 88; an 88-year-old to 94; and people who reach 100 are expected to live to 103. Soon, half of all deaths in the U.S. will occur after age 80. These life expectancies are a big part of why we need to plan.

How Old Will You Be in 2100?

The ridiculous part of all those life expectancy tables is that they all assume that life expectancies will remain at current levels. But that is not likely to be the case. Indeed, research suggests that people will continue to live longer and longer. In fact, even those as old as 45 today might be alive in the 22nd Century.

Why are these figures important? Well, to determine how much money you’ll need in retirement, you need to project how long that retirement might be. Based on the actuarial data provided by various government agencies, most financial planners assume their clients will live to age 90, and conservative planners (my firm included) use age 95 (because the longer you live, the more money you’ll need).

However, even “conservative” figures like age 95 could be too low. Based on the relatively new fields of gerontology, microbiology, and biotechnology, some believe that in the year 2050, people could be expected to live to age 140. No typo there: That’s one hundred forty years of age.

This is not science-fiction. In 2050, your kids could still be having kids. For example, in 2050, I’ll be 92. Will I make it? Well, that’s still nine years younger than the age my Grandmom Fannie reached — and she was born in 1899. Let’s face it: For many of us, 2050 is a done deal.

If that’s not startling enough, try this: It’s now being suggested that lots of us who are here today could see the year 2100. The implications for society boggle the mind. Let’s look closer at what such long life spans could mean.

You’ll Extend Your Rites of Passage

As our lifetimes become extended, so too will our rites of passage. As recently as 1960, marrying in your late teens was common; the phrase “old maid” applied to women who failed to marry by age 20. You were expected to have children (plural) before you were 25, Jerry Rubin told us not to trust anyone over 30, middle age and mid-life crises hit at 45, and the “elderly” were 65.

As I bet yours does, my own life provides examples of this brave new world: My former college roommate is no closer to marriage now than when we were in school; my oldest brother will be 72 when his youngest daughter graduates from medical school; one of my nieces has three daddies (one biological, one marital, and one legal); my 77-year-old father has renounced retirement (for the fourth time); and my grandmother defied the actuaries when she passed at 101.

If today’s trends continue unabated, the year 2050 will find people marrying (for the first time) at age 50, having kids in their 60s (in France, they already are), facing middle age in their 80s, retiring in their 120s, and dying in their 140s.

These prognostications remind us that financial planning is a process, not a product. A financial plan must be periodically reviewed, with its assumptions challenged and altered based on changes in the economy and in your circumstances. One key circumstance is the fact that you may live much longer than you envision. If you plan to retire at 65 and are assuming a life expectancy of age 90, you’re assuming a 25-year retirement. But what if you live to 140? Will you have enough income for a 75-year retirement?

Finally, who’s going to pay for it all?

This question suggests that the most politically explosive social issue in America today — the right to life — will evolve into a new debate. In the 21st Century, with people living for so many years beyond their resources, with society forced to pay the tab, some will argue that those who cannot take care of themselves in old age, those who are living in pain or discomfort, those who do not have a family or support group on whom to rely, and those who cannot afford to pay for their care should have the right to choose death. To some, Dr. Kevorkian is evil, deserving of the 10-to-25-year prison sentence he received in 1999. To others he was a godsend, and to the remainder, he was a mere curiosity. Whatever you think of him, one thing is certain: Dr. Kevorkian is a prelude to the future. In the year 2050, his cause will be center stage as the nation deals with the next great social debate: euthanasia.

Welcome to the 22nd Century. I hope you’ll be ready.

Reason #4: To Pay for the Costs of Raising Children

You’re earning — and you’ll continue to earn — a huge income. Take a 35-year-old making just $3,000 a month. Even without salary increases, that’s more than $1 million in career earnings!

While that might sound like good news, it actually works against us. When making a lot of money, people often develop an attitude that says, “Gee, with this good income, life will take care of itself. It did for my parents. It did for my grandparents. It certainly will for me.”

The issue, however, is not how much money you earn, but how much you keep. Look at the money your parents and grandparents earned over their careers. How much do they have left?

You easily could have little left from a lifetime of work, because you don’t get to keep all the money you earn. You have expenses — lots of expenses. Can you name your biggest expense?

Children!

According to the USDA, a baby born in 2001 will cost highest income families $337,690. As shown in Figure 1-4, lowest income families will still spend $169,920, while those in between will rack up expenses of $231,470. That’s per child — and only for the first 17 years! To explore the financial issues of raising young children, click here.

Reason #5: To Pay for College

Guess what happens when the kids turn 18? They go to college!

It’s estimated that, for a baby born in 2002, the cost of college in 2020 will be $100,000 for an in-state school and $265,000 for private and out-of-state schools. To learn the proper way to approach the cost of college, browse these articles.

Reason #6: To Pay for a Daughter’s Wedding

And if you made the foolish decision to have daughters instead of sons, get ready for another major expense: The wedding! According to Conde Nast Bridal Group, the average cost is $22,360; Washingtonian magazine puts it at $28,000.

Reason #7: To Buy a Car

The average price of a new car is $26,670, according to the National Automobile Dealers Association. Thus, that purchase is one of your biggest — and most confusing — financial decisions. Should you pay cash, accept dealer financing, or use home equity? Is leasing right for you? To learn the answer, click here.

Reason #8: To Buy a Home

Americans devote the largest portion of their incomes to housing. Consequently, how you handle the purchase of your home will have far-reaching implications on virtually every facet of your financial life, including your ability to save, pay for college and plan for your retirement. Click here for articles on home ownership.

Reason #9: To Be Able to Retire When — and in the Style — You Want

Consider food. Assuming you and your spouse retire at 65 and live to your normal life expectancy of 85, you’re going to eat 43,800 meals in retirement! (That’s three meals a day, 365 days a year over 20 years for two people.) If each of those meals costs five dollars, you’ll spend $219,000 on food. Where will that money come from?

Most people are ignorant of this message. Of today’s retirees 65 and older, 39% have incomes below $15,000 a year, according to the Social Security Administration. I’m not saying these people never earned more than $15,000 a year while they were working. Rather, their income dropped below $15,000 when they retired. 

Only 15% of retirees earn more than $50,000 a year. Yet the masses didn’t plan to fail. They simply failed to plan, because under the old rules, planning wasn’t necessary. It used to be that a worker and his family could be comfortable if he retired at 62 on a pension and Social Security. That doesn’t happen anymore. Today, you don’t retire as young as 62 — unless you’ve been downsized out of work. And you’re going to live much longer than your parents and grandparents did, aren’t you? Therefore, your money must last much longer. And that is the dilemma: If you fail to plan, you face the possibility of a retirement filled with poverty, welfare, and charity.

A Gallup survey showed that 75% of workers want to retire before age 60, yet only 25% think they will. That suggests people don’t know how they are going to achieve their goals. One thing is sure, it’s not going to happen by itself. It’s going to require effort and attention.

Reason #10: To Pay for the Costs of Long-Term Care

Prior generations did not have to deal with the costs of long-term care, but we must: Of those who reach age 65, according to the U.S. Department of Health & Human Services and Americans for Long-Term Care Security, 40% will spend time in a nursing home and 5% will require long-term care at some point. The average annual cost of a nursing home now exceeds $61,000; neither your health insurance nor Medicare will pay for it. The result: A growing number of senior citizens today are supported by others because they don’t have the money to care for themselves.

Reason #11: To Pass Wealth to the Next Generation

This is more difficult than ever before, because living longer means it is increasingly likely that you will spend your money before you have the chance to bequeath it.

Economists call this transference of wealth. Historically, money was passed from father to son. It started with our immigrant ancestors, who built homes and had children. When the children married, they moved into the house with Mom and Dad. Then the kids had kids, making it three generations in one house. As the family grew larger, each generation built new rooms, increasing the size — and the value — of the family’s wealth.

When the first generation died, the second generation inherited the house, later passing it to the next generation, with each growing more affluent than the previous one.

That doesn’t happen today. We don’t have three generations living in one house as often as we once did. Today, when our grandparents die, we’re more likely to sell their house because we have our own home and we don’t need theirs.

Furthermore, we find that our grandparents live so much longer than before — longer than they expected — that they often run out of assets and have nothing to leave to their children. Therefore, instead of passing wealth down to the children, the kids send money up to the parents. Thus, in many cases, the transfer of wealth is going backwards, and economists worry that most Americans are not prepared for this reality. 

It is for all these reasons — to protect against risk; to eliminate debt; you’re going to live a long time; to handle such major expenses as children, college costs and weddings; to buy cars and homes; to afford a comfortable retirement; to protect against long-term care costs; and to pass wealth to your heirs — that you need to create a financial plan.