Developing a Financial Plan: Frequently Asked Questions

• How do I determine my long-term financial goals?
• Is there any validity to financial planning "rules of thumb"--such as "saving 10% of your gross income" or "needing 80% of your pre-retirement to retire comfortably"?
• What do women in particular need to keep in mind with regard to financial planning?
• What special problems do unmarried couples have to be concerned with in financial and estate planning?

Together with your spouse or other family members, decide ñ realistically ñ what you want to achieve financially. These will vary from family to family. Goals might include: early retirement, travel, a vacation home, securing your familyís financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

The following rules of thumb may work for some people. But they do not make financial sense for everyone. Whatís important is to be able to know whether a rule suits your situation. Here are some of those rules, and some considerations that should not be overlooked.

"Your life insurance should equal five times your yearly salary." This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you in particular need to buy. The amount you need will depend on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.

Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in lifeóin their 40sóneed to save at least 15 or 20% per year.

Contribute as much as you can to retirement plans. This makes sense for most people, but if youíve accumulated a large amount of money in a retirement planóclose to a million dollarsóyou may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.

You need 80% of your pre-retirement income to retire comfortably. Although people may need 80% of your salary during the first few years of retirement, later on they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.

Subtract your age from 100, and invest that percentage in stocks. This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating your investments among various types of investments depends on your investment goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.

Maintain an emergency fund of six monthsí worth of expenses. Depending on your familyís situation, three monthsí worth of expenses might be enough of an emergency fund; or six monthsí worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.

Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what youíll need to do to fulfill them.

A recent survey done by a Midwestern bank of 208 women revealed the following about the survey participants, who were all age 30 or older, and all or whom had incomes of at least $40,000.

• The median amount of monthly savings the women in the survey said was adequate was $475 ñ much less than what is needed to live out a comfortable retirement.

• 79% of the women said their investment style was moderate or conservative, as opposed to aggressiveóyet some aggressiveness in investing is necessary to stay ahead of inflation.

• 31% of the women do not have a will, yet 49% believe their finances will be in order if they die unexpectedly.

• 26% said they have a poor or only fair understanding of their parents' wishesómaking them ill-prepared to deal with the death of a parent.

Because the law grants certain benefits and favors to married couples and not to unmarried couples, the latter must take certain steps in precautions in taking care of their financial planning needs.

Here is an overview of the special considerations and problems that apply to unmarried couples, and what can be done about them. It is a good idea to seek out the aid of legal and financial professionals who are familiar with the issues faced by family units in which there is no legal marriage.

They do not automatically inherit each otherís property. Married couples who do not have a will have the state intestacy laws to back them up: unmarried couples must have a will to see that their wishes are met.

They do not have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, such as a living will, you may not have the right to do so.

They do not have the right to manage each otherís finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple. Unmarried couples can also mitigate this problem by owning some property jointly.