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 four major ones are injury, illness, death, and lawsuits, and you need to know how to protect yourself.

Reason #2: To Eliminate Personal Debt

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 it had climbed to only 47 years. If you were alive, you worked. There was no such thing as retirement.

Today, though, life expectancy at birth is 76; today’s 76-year-olds have a life expectancy of 86. According to some estimates, by the year 2000, 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?

Of course, these tables assume life expectancies will remain at current levels. But that might not be the case. Indeed, research suggests that people will continue to live longer and longer. In fact, even those as old as 35 today might be alive in the 22nd century.

Life expectancy tables from such diverse groups as the IRS, life insurers, the National Institutes of Health and the Center for Disease Control and Prevention all say roughly the same thing: A child born in 1995 has a life expectancy of 76 years (up from 47 in 1900); a 76-year-old today is expected to live to 86; to92 for an 86-year-old; and there are not supposed to be 93-year-olds.

Why are these figures important? Well, if you’re wondering how much money you’ll need in retirement to avoid running out of money during your lifetime, you need to project how long that lifetime will be. Based on the actuarial data provided by various government agencies, most financial planners assume their clients will live to age 85, and conservative planners (my firm included) use age 90, just to be safe (the longer you live, the more money you’ll need).

However, even "conservative" figures like age 90 could be way off the mark. Based on the relatively new fields of gerontology, microbiology, and biotechnology, some believe that people in the year 2050 could be expected to live to age 140. No typo there: That’s one hundred and 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 eight years younger than my Grandmom Fannie is at this writing. Let’s face it: For many of us, 2050 is a done deal.

And now it’s 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 Have Multiple Marriages

First, you would be likely to have a number of spouses during your lifetime. Like all the other futurisms to follow, this one is not as far-fetched as it may first appear. After all, half of all Americans who marry eventually divorce; more than half later remarry. Thus, we’re already a multiple-marriage society. It’ll just become more so: More people will do it and more people will do it more often. (After all, the only thing that is forever are diamonds !!)

Even for those who don’t divorce, longer life spans often will result in one spouse outliving another by decades, which in turn will lead to more remarriages.

You'll Have Multiple Careers

Second, you will have five or six careers. You’ll go to school, get a degree, develop expertise in a given field, devote yourself to it for 20 or 30 years, then quit and start again, doing something entirely different. Think that’s crazy? Millions of military retirees, police officers, firefighters, and schoolteachers already do this. They "retire" at 40 or 50 with 20 or 30 years of service and, with their monthly pension checks in the mail, they head off to new challenges. This strategy will become more common in the new millennium and the phrase "double-dipper" will give way to "quintuple-dipper" as people have five or six 20-year careers in their lifetime. The notion of "retirement" as we know it today could fade away.

You'll Extend Your Rites of Passage

As our lifetimes become extended, so too will our rites of passage. As recently as 1960, it was common to marry in your late teens; the phrase "old maid" still 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. So what does that make us 50+ year olds.

As I bet yours does, my own life provides examples of this brave new world: My former college roommate (now 40) is only a little closer to marriage now than when we were in school; my 52-year-old cousin will be 72 when his youngest Son graduates from medical school); a friend of one of my daughters has three daddies (one biological, one marital, and one legal); and my 82-year-old mother continues to defy the actuaries (go, Mom!).

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 once envisioned. 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?

I don’t have that answer, but the 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 pick up the tab, it is very conceivable that many 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 own care should have the right to choose death. To some, Dr. Kevorkian is evil, to others he is a godsend, and to the remainder, he is 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 $3,000 a month. Even if you ignore 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 1995 will cost high-income families (defined as those earning more than $56,700 per year) nearly $350,000. Families earning less than $37,700 will still spend more than $176,000, while those in between will rack up expenses of nearly $239,000. That’s per child — and only for the first 17 years!

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 1994, the cost of college will be $180,000 for an in-state school and $300,000 for the Ivy League.

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

And if you are lucky enough to have daughters, instead of sons, get ready for another major expense: The wedding! According to Bride’s Magazine, the average cost is $19,000; Washingtonian magazine puts it at $28,000.

Reason #7: To Buy a Car

With the average price of a car is $20,000+, this 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?

Reason #8: To Buy a Home

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

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 is that money going to come from?

Most people are ignorant of this message. Of today’s retirees, 51% have incomes below $10,000 a year. I’m not saying these people never earned more than $10,000 a year while they were working. Rather, their income dropped below $10,000 when they retired. Also, the Social Security Administration defines financial independence as an annual income of $24,000 a year. Would you consider yourself financially independent if you earned just $2,000 a month?

Another 30% of retired Americans earn $10,000 to $20,000 a year. That means only 19% of retirees earn more than $20,000 a year. The rest — 81% of all retired Americans — are financial failures.

But these 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. You need take action !!

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, it’s estimated that one in two will require long-term care at some point. The average annual cost of a nursing home exceeds $50,000; neither your health insurance nor Medicare will pay for it. The result: 12.8 million senior citizens today are supported by others, because they don’t have the money to care for themselves.

Reason #11: To Pass Wealth on 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, for the first time in our nation’s history, the transfer of wealth is going backwards, and economists worry that most Americans are not prepared for this new reality. You need to learn how to avoid that problem.

It is for all these reasons — to protect against risk; to eliminate debt; because 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.