Unless you plan to buy a castle or private jet in your lifetime, retirement is pretty much everyone’s largest financial goal. Surprisingly, the majority of people have not run even a basic retirement needs analysis.

In order to find out by what age you can retire and whether you are on track, you need to know several pieces of information and make some assumptions.

Here are the questions for you to answer:

1. How much do you currently have saved for retirement?

2. What is your current age?

3. When do you want to retire? Some people say tomorrow and others cannot imagine not working. For our generation, the social security retirement age is 67.

4. How long do you think you will live? This is a tough one. Most likely, we will live longer than our parents and grandparents. I like to plan on at least 92 for my clients, depending on their family history.

5. What do you think your monthly expenses will be in retirement? Ideally, your mortgage will be paid off and your kids financially independent. But, you may also want to travel and really enjoy retirement.

The Assumptions (there are a lot, but her are a few of the big ones):

1. Your retirement investments will grow between 6-8%.

2. Inflation will average 3% per year.

3. You will consistently contribute $34,000 per year for retirement. The maximum pre-tax contribution to a 401(k) or 403(b) is $17,000 for 2012 for each employee.

Here is an example for you to consider. A couple in their early forties has approximately $400,000 already saved for retirement between their 401k’s and IRA’s. They contribute $17,000 each to their 401k’s and have a diversified investment portfolio they expect to earn 8% until they retire. They plan to have their house paid off by the time they retire, so they estimate their monthly income need at $8,000 in retirement. They have great longevity and expect to live until 95 years old.

Can they retire by age 62?  Unfortunately, NO they cannot. They would need to save $62,000 per year to retire by age 62, not $34,000. However, they are on track to retire by age 66.

For those of you fortunate enough to expect an inheritance some day, how much would this couple need to inherit today to fully fund their retirement and retire at 62? They would need a cool $1million to add to their retirement savings today and know that they can retire at 62 without saving another penny for retirement.

There are a lot of numbers to consider when calculating your retirement need, but the most important number is how much you are saving each year for this enormous financial goal. This is fully within your control! If the answer is “not enough”, then you need to look at your cash flow and see if you can increase your annual savings goal or know that you will be working much longer. Making positive changes today will significantly impact your ability to retire.

How to find out When you can Retire

If you would like help finding out when you can retire, there are some good online calculators to help you (CNN Money http://bit.ly/lQzsY  or AARP http://aarp.us/bCILtk). If you want customized help consult with a financial planner that specializes in your stage of life. Do not let another year go by without knowing whether you are on track for retirement.

Katy Song, CFP, focuses on comprehensive financial planning for families with young children and couples starting their lives together. You can contact Katy at katy@katysong.com , visit her website katysong.com, or follow her on twitter @katydavissong.

Market uncertainty, record low interest rates, lack of housing inventory, signs of economic recovery, increasing rents… When you put all of these together, what do you get? A lot of questions about whether this is the “perfect” time to buy or keep renting.

I speak with a lot of people looking for houses and there seems to be a little frenzy developing for those looking to buy a 3+ bedroom home for less than $1million in Marin or San Francisco. If you are in this position or are contemplating getting in the market, first, take a deep breath and know one thing for sure: You will likely not time the market perfectly. Second, do not get caught up in the frenzy. Know exactly what is right for your financial situation and family (price, down payment size, mortgage terms, location, etc.).

Marin is a special market. The supply of housing is limited and the demand is high given its proximity to San Francisco, good public schools and family environment. The excess of demand over supply means that values tend to remain high and long-term growth prospects for this investment are strong. So, is housing a safe investment again?

Yes, if you are buying for the long-term (either as a primary residence or rental property). Over the past thirty years, real estate has tended to return about 2-3% over inflation. While not as impressive as the historic stock market return of 7%, you also get to live in your investment (or get income as a landlord), and a tax deduction for mortgage interest and property tax. This tax deduction usually makes buying more affordable than renting, but you have to have a down payment and steady income to afford all the costs associated with home ownership.

The biggest regret I have seen over the past four years is when a family buys a house because they feel they “have to” because they have kids and then losing all their equity when they quickly out grow that house or no longer want to pay a hefty mortgage on an underwater property.

Has the Marin housing market bottomed out?

U.S. home prices have fallen 34% over the past six years and there are signs that it may turn back up by spring 2013- if not before. Much of the decline has been fueled by distressed sales, which are far from over. The backlog of distress sales could push U.S. home prices down another 5% in 2012 before the market bottoms out next spring (according to Moody’s). The Case-Shiller 20-city composite shows San Francisco home prices down 40% from their peak.

However, within Marin there are a multitude of micro-markets. For example, the median home price for a 3 bedroom in Novato is down 49% from five years ago, while down only 9% in Mill Valley (source:Trulia). It is difficult to estimate the number of homes in Marin that could be in line for foreclosure or short sale, but even if the market goes down another 5% this year, you will come out ahead in the long run. For example, if you buy a $750,000 house today and it drops 5% in value in its first year but in all subsequent years the value grows by 2.5%, your house could be worth $1.14million in 20 years. That is a 52% return on your initial investment.

How do you know if buying is right for you?

First, look at your finances, income, potential down payment and whether you can find something you like in your price range. If you want move-in ready, you will pay for it in Marin. Most of the times, you can rent a nicer house than you can afford to buy.

Second, the lender will tell you. Gone are the days of easy money. It is tough to get a mortgage, and you will need to strongly meet the three “approval triangle” factors (1) Income (debt ratio), 2) Credit (median credit score), and 3) Equity (loan to value ratio)), before you will see a penny from a bank.

Finally, with low inventory and pent up demand, cash is king. The bigger your down payment, the stronger your offer will be. The market will inevitably decide whether now is the right time for you to buy a home in Marin.

For more information, check out my video on Home Purchase financial advice. Buying A Home, Katy Song CFP

Katy Song, CFP, focuses on comprehensive financial planning for families with young children and couples starting their lives together. You can contact Katy at katy@katysong.com , visit her website katysong.com, or follow her on twitter @katydavissong. She lives in Mill Valley with her husband, 4 ½ year old daughter and year-old son.

You know you should be saving but you aren’t, or if you are, you feel like you are not saving enough. Why do you do this? And how much should you be saving? Read on to find out.

As a financial planner, I come across all types of people with different relationships with money and spending/saving habits. Most families want to save more and ensure they are making the right decisions for their money based on the family’s priorities. Despite good intentions, it seems very difficult to reduce spending and save more. Why is this change in behavior so hard?

Behavioral Finance economists are working to indentify why we make certain financial decisions that run contrary to our goals, and more importantly, how to change behavior so that we make the right decisions. Shlomo Benartzi, an economist and professor at UCLA’s Anderson School of Business, sums up “why we do not save” into three behaviors:

• Desire for immediate Gratification- wanting rewards today instead of in the future. Self-control today is a problem for most Americans, “Spend today, Save tomorrow”. It is more fun.
• Inertia- a tendency to do nothing. Unless you are offered a 401(k) plan (only 50% of workers in the U.S. are eligible) and are automatically enrolled in the plan, most people do not systematically save for retirement. Even if you have a 401(k) plan, only about 1% of workers save the needed amount to reach their retirement goal. Why? Because it involves checking boxes and making investment decisions, which people avoid.
• Loss Aversion- strong preference for avoiding loss over acquiring gain. Americans tend to frame savings as a loss because it means you have to go without something today. So, they do not save.

During the recent Great Recession, the personal savings rate in the U.S. increased above 5%. Unfortunately, it does not appear that this change in behavior is sticking. By September 2011, the savings rate dropped down to 3.6%, which is around the pre-Great Recession rate. How much should you be saving?

According to Elizabeth Warren’s Balanced Money Formula, you should spend 50% of your net income on “needs”, 30% on “wants” and 20% on savings. If you earn over $200k per year, have two kids and own a home in the Bay Area, you likely take-home about $160k. This means you should spend $80,000 on needs, $48,000 on wants and $32,000 on savings.  The amount is not really important; you have to do what works for your family. Getting in the habit of saving is more important!

So, how can you reframe savings and implement a strategy that overcomes a desire for immediate gratification, inertia and loss aversion?

My advice: 1) Set your savings goals, 2) Put the infrastructure in place, and 3) Start autopilot. Let’s say that you dream of taking a three week vacation to New Zealand (expected cost ~$15k) with your family in five years and feel like you will never be able to afford it. Consider this, if you set up a $50 per week automatic transfer from your checking account to an investment account earning 5%, you would have the $15,000 needed in five years for your dream trip.

I am a big fan of weekly automatic withdrawals from checking accounts. Usually, you don’t miss the money because it is a relatively small amount, it is automated (inertia be damned) and you won’t feel the loss of this money if you never knew it was there.

Claimed Advantage #1: Your investment grows tax free as long as it is used for qualified higher education (college, grad school). This is a heavily
marketed benefit of these plans; however, according to Gary Sipos, the founder of College Cash Solutions, “There is a lot of sizzle, but no steak.” Mr. Sipos has looked at thousands of 529 plans that are maturing (i.e. the kids are going to college now), and there is little to no growth in any of the plans. He says that most parents are thrilled to just get out their contributions and not lose money! A rate of return around 3% for a 529 plan is considered amazing.  In addition, there are management fees and other hidden costs that erode any gain you might have.

Claimed Advantage #2: Donor maintains control of the money. While the account is for the benefit of your child, you write the checks to the school and your child doesn’t have access to the money. If you had a regular brokerage account, you maintain control as well, so this does not appear to provide much benefit.

Claimed Advantage #3: Low maintenance option. When you invest in a 529 plan, the plan professionals handle your investments and you do not have to worry about how to invest your money. This benefit assumes that the plan professionals are looking out for your best interest and maximizing your return on investment. While plans now offer more investment selections, the selection is still very limited and comprised of a lot of “dogs” when it comes to mutual funds.

For example, Savingforcollege.com ranks New York’s Vanguard 529 Plan #1 right now. They offer 3 age based investment options and 13 other investment options. Let’s say you have a child under 5 and pick the Aggressive Growth option. This option has underperformed its  benchmark in every year, plus you pay 0.25% management fee each year. The underlying investment of this option is Vanguard’s Institutional Total Stock Market Index Fund.

A better option, do it yourself!  Open a brokerage account in your name and earmark it for your child’s college savings. Buy Vanguard Total Stock Market Index Fund (Ticker VTSMX), pay a one-time commission to buy the fund (~$7) and no ongoing account fee.  If you did this instead of the New York 529 plan, your investment would outperform the Aggressive Growth option and the benchmark.

The benefits of the DIY approach: Almost unlimited investment selection, no ongoing management fee, ultimate flexibility and control over the money, and a chance to actually grow your money!

Another great way to save for college is a Roth IRA. If you own a business there is another more tax beneficial way to save for college. Hire your kids (1099 vendors), given them work experience, pay them up to $5,000 per year, open a Roth IRA for them and invest their earned $5,000. They won’t pay any income tax and the contributions can be withdrawn (tax-free) and used for anything once the account has been open for five years. This is also an expense for your business and lowers its taxable income. This is a win, win situation! In addition, financial Aid does not take any retirement assets into consideration, so this money will not count against your child. But, remember to fire your kids in their junior year of high school. You do not want them earning any income in their junior or senior year because it will be counted against them for financial aid.

The future costs of college are staggering, and it is important to start saving as early as possible to take advantage of the power of compounding. However, a 529 plan is not the best or only solution.  I am a strong  proponent of diversification. I have 529 plans for both of my kids, as well as Roth IRAs for them and a brokerage account earmarked for their college.  I use the 529 plans for money given to them by their grandparents, which makes grandma happy. Fingers crossed there will be some tax free growth to take advantage of but I am not relying on it.

The Dragon is said to create excitement, unpredictability and intensity. This can bring out some wonderful behaviors like enthusiasm, but throwing caution to the wind can lead to unnecessary risks. Personally, I am ready for some excitement but want to steer clear of drama. So, what does this Year of the Water Dragon mean for your financial future over the next year?  Here is some advice based on Chinese interpretations of the year to come:

1. This is a great year for innovative businesses and ideas. Technology (Fire element) will be robust, and new trends are predicted to help this sector do well. Some astrologers warn that a few of the old school technology companies (e.g. HP) will not fare well. What does this mean for you? If you have a new usiness venture idea, now is the time to act on it. Make sure you have planned ahead, know what you need to pay your bills and invest in the business, as well as a timeline for evaluating your success. Also, if you have not looked at your retirement and brokerage accounts recently, take a look and make sure you have some     exposure to the tech sector and growth segment of the stock market. You do not need to directly own Apple stock to do this (it’s in most mutual funds). Check out low cost ETFs like iShares S&P Growth Index (IVW) or tech sector specific ETFs like Vanguard Information Technology ETF (VGT).
2. The economic crisis will not end during 2012 and markets will remain volatile. However, you can still make money this year, and Metal and Earth elements are predicted to do well.  What does this mean for you? The Metal and Earth elements indicate that gold and silver, the energy sector and real estate will do well. Again, look at your portfolio and evaluate your holdings. In addition, I do not see the U.S. housing market improving any time soon, but it could be a great investment opportunity if you have cash burning a hole in your pocket.
3. The energy of the Dragon might cause you to spend more than normal, so be careful!  What does this mean for you? If you STILL do not have a pro-active spending plan and way to track your expense, stop making excuses and do it. Free online services make family money management easy and a little fun. Check     out mint.com or learnvest.com (geared towards women).

In my article last year “Three Cheers for the Year of the Rabbit”, I wrote that you needed to get prepared for 2012’s Year of the Dragon when caution is said to be thrown to the four winds and all kinds of overly
ambitious and daring projects are undertaken.  I am excited and ready for new opportunities but am taking the next month to assess my current position and set boundaries for the unpredictable year to come.

In 2011, the Year of the Rabbit takes over and is said to bring a placid year for us to lick our wounds from the Year of the Tiger and get some much needed rest.  Personally, I will have a newborn baby in the New Year, and I am hoping for peace and serenity (wishful thinking I’m sure since he will be a Tiger). So, what does this earthly Rabbit zodiac sign mean for your financial future over the next year?  According to some interpretations of the Chinese sign, here is some advice:

1. Money can be made without too much labor. Life should be leisurely as we allow ourselves the luxuries which we have been craving. A temperate year with unhurried pace. For once, it may seem possible to be carefree and happy without too many obstacles. What does this mean for you? Do you want to take a real vacation or buy some new clothes? Make a list of the things you would like to experience or treat yourself to in 2011 and      prioritize. Pick the one thing that means the most to you and is     financially feasible, and commit to doing it in 2011.
2. However, do not become too indulgent. The influence of the
   Rabbit tends to spoil those who like too much comfort, and thus impair their effectiveness and sense of duty. What does this mean for you? When you make your list of things you want/want to do in 2011, reflect on what will make you and your family happy. Is it an experience together or a new gadget? If you try to do everything on your list, you may end up lessening the value of each individual item.
3. Use diplomacy to get what you want, not force. By using     persuasion, acting with discretion and making reasonable concessions, you will get your desired outcome without too much difficulty. What does this mean for you? Are you thinking of buying a home or negotiating a raise this year? Use reason and persuasion instead of issuing ultimatums to get what you want.
4. Law and order will be lax; rules and regulations will not be
   rigidly enforced. No one seems very inclined to bother with these
   unpleasant realities. They are busy enjoying themselves, entertaining others or simply taking it easy. The scene is quiet and calm, even deteriorating to the point of sleepiness. We will all have a tendency to put off disagreeable tasks as long as possible. What does this mean for you? Are there things on your “Financial To Do List” that have been there for years waiting for you to tackle? For example, rebalancing your 401(k), setting a Spending Plan, or getting life insurance or an estate plan in place. Do not let the calmness of the Rabbit cause another year to go by. Enlist the help of friends, other moms or professionals to get one or all of these goals accomplished in 2011.

As a Rabbit (born in April 1975), the guidance provided by the Chinese zodiac calendar puts me in my comfort zone for the next year. What is not to like about a year of rest and leisure? By heeding the advice above, you can be better prepared for 2012’s Year of the Dragon when caution is said to be thrown to the four winds and all kinds of overly ambitious and daring projects are undertaken.

How To Keep Your New Year's Resolutions

As a financial planner, I do a lot of “planning” for my clients all year long. Over the years I have learned what works and doesn’t work for making meaningful changes that stick.  For example, cutting things out cold turkey doesn’t work.  Long lasting meaningful change needs to be progressive, which means you first need to learn to crawl, then walk, then run.  

Whether your resolutions are financial or not, to ensure success in keeping these resolutions you need to plan ahead (before January 1^st is optimal) and create steps that progress so that you build on your success over time to accomplish a larger goal. It is positive momentum from these successes that is going to help you stick with your resolutions throughout the year.

Here are some easy steps to get your progressive resolution plan in place:

Identify the “big” goal and be specific.  Is it losing 30 pounds?  Saving $10,000 for a vacation? Paying down your Home Equity Loan by $5,000? The more specific you are with the goal, the more likely you are to accomplish it.

Determine interim steps or smaller goals that are also measurable and more easily attainted. Using the examples in Step #1, your “crawling phase” could be:  lose 5 pounds, save $1,000 by March 1^st in a high yield savings account, and transfer $417 a month to repay the HELOC.
Set-up infrastructure to ensure progress. If you want to know if you lost 5 pounds, you need a scale.  If your goal is saving for a big trip, you need a high yield savings account dedicated to travel. If you want to repay your HELOC, create an electronic bill pay for it through your online banking account.

Pre-set progress reviews so that you are accountable to yourself.  For example, at the end of each month or quarter pick a date that you will take the time to assess your progress against your goal, acknowledge what is working and any obstacles you face.  Give yourself 30 minutes. Put all of these appointments with yourself in your calendar now and stick to them.  Through this review process, you are learning
to “walk”.

Reward progress made towards your goal. With each milestone and progressive step you successfully take, build in a small reward to help you stay the course.  Perhaps it is a new article of clothing for every 10 pounds you lose, or travel magazines for every $1,000 saved towards your trip or something to spruce up your house as you pay down your debt.  These rewards will refuel you so that you are ready to “run”.

By making progressive New Year’s resolutions and following these easy steps, you are giving yourself the structure you need to ensure success. Take the time now to plan at least one resolution for the next year. If you wait, the year will be gone before you know it.

Is it habit, boredom, or not wanting to miss a “great” deal?

My advice: Extend Thanksgiving for the entire weekend and do not get caught in the spending frenzy. Thanksgiving seems to be the one day where we are content to socialize, watch some football and enjoy a good meal together. Notice there is no shopping mentioned. Extend this through the rest of the weekend.

Step 1: Agree to put your credit cards away, including no online shopping, until next week. I am highly confident that you will not regret it.

Step 2: Set your Holiday Spending plan, including budgets for gifts, holiday parties and meals, hostess gifts, etc. Be as specific as possible.

Step 3: Pay cash for holiday spending. If you just can’t pass up the cash back rewards or points on your credit cards, check in at the end of each week until the holidays are over to see how much you are spending versus your plan. Holiday spending can easily spin out of control. You need to stay one step ahead.

Step 4: Reflect on what you want the holidays to mean for you and your family. Do not feel obligated to give gifts. Most people tell me they want the holidays to be about creating family memories, giving thanks and cherishing their loved ones. No gift can convey these sentiments.

It is so very easy to get swept up into the spending frenzy. Marketing campaigns are everywhere! Take control and just say no… at least until Monday.

Since every family likely needs some form of childcare, what are the options and how do you pay for it? Below is a summary of childcare options (Pros/Cons) and estimated costs.

Options and Costs

Nanny- A nanny is a single caregiver that takes care of one or more children in your home. Most families say they pay between $15-22 per hour for the care of one child. If you need a full-time nanny, it will cost you around $2,400-$3,500 per month for 40 hours per week.

Pros:

Flexibility- You can set a schedule that works best for your family.
Location- A nanny comes to your home, so no drop off required. They can help with the morning routine and with the household when kids are napping.
Health- Since your baby is at home and not exposed to other kids and their germs, he/she is less likely to be sick. Plus, even if your baby is sick your nanny is there to take care of them so you can go to work.

Cons:
Cost- This is the most expensive childcare option, unless you do a nanny share (which can cut the cost in half!).
Finding the Right Fit- Finding the right person for the job is a challenge. As the boss, it is your job to make all the hiring and firing decisions, and this can be too much for some parents.

Reliability- Nannies are human too. They get sick and might not be able to come to work. That might mean you need to stay home from work or spend a fortune for a last minute sitter.

In-Home Daycare- This is usually the least expensive option because In-home daycares can keep costs low by spreading them among more kids. Most parents report paying between $60-70 per day for this option, which equates to $1,200-1,400 for full-time care.  Licensed small home daycares can have up to six children and no more than half can be infants.

Pros:

Affordability- A less expensive option than a nanny. Most In-home daycares often offer less than full-time schedules or half-days that can be a great fit for a parent working part-time.
Socialization- One big bonus of this type of childcare is that your little one gets to make friends, learn from other children and get used to other adults caring for them.

Reliability- In-home daycares always show up to work since they have multiple caregivers.

Cons:
Defined Schedules- Most daycares have very defined pick up times, which can be difficult if you need to work late.
More Sickness- More kids, more germs. Eventually your child will get exposed to these things, but with daycare they will be exposed sooner rather than later. Also, when your child gets sick you’ll have to stay home from work to care for him/her.

Daycare Centers-  These centers have several caregivers watching
larger groups of children in a bigger classroom-like setting. California Law states that the child to caregiver ratio be 6:1 for children under 18 months old.  The costs of daycare centers can be very high for infant care (almost as much as a nanny) but go down as your children get old and the ratio of caregivers gets higher. Average reported costs range from $1600-1900 for full-time care.

Pros:
Proximity to Work- If you work in the city and want your children close to you, daycare centers are centrally located and provide early drop-offs and late pick-ups. This gives you time together in the morning and after work to reconnect.
Socialization- Just like In-home care, your children get automatic friends and most centers have enrichment programs at no extra cost (music, language, etc.).
Reliability- Again, they are always open.
Well Trained Staff- Caregivers must fulfill training requirements in education or early childhood development.

Cons:
Cost- Despite having more children, many daycare centers employ more caregivers than required by law and have relatively high overhead costs. This leads to higher costs to pass onto parents.
More Sickness- Again, more kids, more germs. If your child gets sick, they cannot go to daycare and you will need to stay home or find a last minute sitter.

Now that you know your options, you need to figure out what will work best for your family and what you can afford. With my first born, I stayed home for a year and then used a wonderful In-home daycare part-time until my daughter started pre-school at 2 ½. With my son, I do a nanny share, which is not only the most convenient for me (I work at  ome) but also more affordable. Bottom line… you may need to try a few different options before you find the right fit for you.

I spend about $2,000 per month on childcare right now. It is a lot of money! But, remember it is only temporary. Eventually your children will be in a fine public school system and you can put all those childcare costs to saving for college!

Opposite money types tend to attract each other, but after a few years and adding children to the equation, those endearing differences tend to wear thin.  It is ironic that the differences that drew couples together are now the reason for tension and disagreement. The reality is that 70% of all divorces are due to some sort of money conflict. So, how does a couple get on the same page and create a strong money relationship together?

The answer: It takes hard work! But the hard work pays off with a lifetime of commitment and partnership, along with greater intimacy and trust. If you have a strong money relationship, you have a strong relationship.

Step 1: Understand yourself and your relationship with money. Instead of pointing fingers and blaming your partner, take the time to look at yourself.  How do you look at money? Is it a resource or necessary evil? Do you like to spend or save? Do you like to take risks or want security?  Or, do you just not want to think about it?

Step 2: Understand your partner’s relationship with money. How do they see money? What makes them sleep well at night?

Now that you understand each other, you need to make the money  relationship work.  Step 3: Create transparency.  According to “First Comes Love, Then Comes Money” by Bethany and Scott Palmer, 65% of women have a secret credit card or bank account. This indicates a need for control and represents what they call “financial infidelity.”  Financial infidelity inevitably spills over into other parts of the relationship and overpowers it. If you want to create a strong money relationship, you need to come clean and move forward! Remember, you are on the same team.

Part of this transparency is also agreeing on your family values and getting your priorities and committing to spend 60 minutes every month (I recommend two 30-minute meetings every two weeks) together to talk about your progress against your plan.

Like I said, it takes hard work but there is help to make it easier. Life coach Laura Riordan, Ph.D., and I are running a Financial Coaching for Couples workshop on Saturday, November 3^rd from 3-5 pm at the Town Center Community Room. During this action-oriented workshop, you will discover your passions and those of your partner, learn how to create your shared vision for the life you want and put in place a road map to get you there and stay on track.

Register at http://conta.cc/qL4RHn. Space is limited.