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Money and Your Goals
Three Key Financial Planning Questions and How to Answer Them
July 20, 2020
Financial planning is a path to greater things – like realizing the achievements that define your needs and priorities. Our financial professionals often hear three key questions from our clients, as they move through financial journey. Here's how to start answering them – and building a more secure and enjoyable life for you and your loved ones:
1. Starting Out: Is buying a home the right move – even if I have the means to do it?
The answer depends on more than just your ability to carry the costs of home ownership. For example, what are your short- and long-term financial goals, and can buying stand in their way? Below are some starter thoughts, but also speaking with a financial professional will ensure that a purchase aligns with your greater financial plan.
If you decide to buy, you might decide what you can afford based on what you've saved. For example, if a couple has $70,000 put aside for a 20% down payment, that could cover a $350,000 house, right? But have they considered these mortgage-lending criteria and home ownership expenses?
- Income/debt ratio: Lenders typically look for a ratio at or below 36%. (However exceptions apply). To determine your ratio, divide your debt by your monthly gross income.
- Mortgage term and interest rate: The average 30-year rate was 3.56% in May 2020.
- Property tax rate: U.S. rates range from Louisiana's average of .18% to New Jersey's 1.89%.
- Homeowner's insurance costs: The U.S. average annual premium is $2,305. This amount varies according to geography and home value.
Once that couple considers these criteria and talks with their financial professional, they may adjust their price range accordingly.
2. Moving on Up: How can I pay for my child's college education?
Latest government statistics show that a U.S. four-year college education costs an average of $125,000. How should you start saving for this major life expense – especially if your child will be in school when retirement funding is becoming a higher priority for you?
If you're like some parents, your first college-funding consideration could be maintaining your own financial stability. For example, setting up three-month emergency fund and a retirement plan that reflects your desired post-career lifestyle, could make you feel more secure supporting your children's higher education.
A 529 account is a common tool to consider. Much like a Roth IRA, a 529 lets you contribute after-tax dollars into an investment account, which can gain (or lose) value. When your son or daughter goes to college, you, as the donor, can pay for tuition, housing, and other related expenses with 529 funds – and the IRS will not tax any gains.
How much you contribute monthly depends on questions including: Are you saving for a state or private school, and will you assist with all or some of the total? Depending on your answers, you could plan to contribute from $100 to more than $1,000 per child per month to your 529 plan. Run some possible scenarios with our College Savings Calculator.
3. Focusing on the Future: Am I saving enough for retirement?
The answer depends on what you want from your post-work life. Some investors anticipate living a more modest lifestyle, or maybe they have a pension plan to supplement their retirement savings. Others plan to keep on living similarly. (And many haven't considered these options at all.) Our IncomeMatch™ tool evaluates your risk-tolerance level – an important step in choosing plan investments. Then, using the Retirement Planning Calculator, you can run different scenarios to determine If your planned contributions can sustain your retirement vision.
Keep in mind that "saving for retirement" doesn't always mean spending all of what you save. Some retirees choose to live below their means, so they can preserve their financial legacy and pass it along to their family and/or their preferred charities. Recent tax-code revisions, including the Secure Act, enacted on Jan. 1, 2020, have changed many longstanding provisions for transferring IRAs and other assets. Consult with your financial professional, accountant, and attorney to make sure your estate plan reflects your needs and wishes.
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Need guidance on how to realize these and other life goals? Thrivent financial professionals can help with putting your dreams into action. Speak with a financial professional today.
Citylab.com; Who Owns a Home in America, in 12 Charts: https://www.citylab.com/life/2018/08/who-rents-their-home-heres-what-the-data-says/566933/
Bankrate.com; Current Interest Rates: https://www.bankrate.com/mortgages/current-interest-rates/
Zillow Home Affordability Calculator: https://www.zillow.com/mortgage-calculator/house-affordability/
WorldPopulationReview.com; Property Taxes by State: https://worldpopulationreview.com/states/property-taxes-by-state/
Neuvoo.com; Wisconsin tax calculator: https://neuvoo.com/tax-calculator/Wisconsin-150000
Sources (Education and Retirement):
National Center for Education Statistics: https://nces.ed.gov/fastfacts/display.asp?id=76
The New York Times, "The Age That Women Have Babies: How a Gap Divides America": https://www.nytimes.com/interactive/2018/08/04/upshot/up-birth-age-gap.html
TheCollegeInvestor.com; 529 balance recommendations: https://thecollegeinvestor.com/16964/how-much-you-should-have-in-a-529-plan-by-age/
Thrivent.com; How to Save for College: https://www.thrivent.com/what-we-offer/college-planning/
Harvard Business Review 03/18: https://hbr.org/2018/03/americans-havent-saved-enough-for-retirement-what-are-we-going-to-do-about-it