See the Chicago Tribune Article for more.

I’d like to publicly thank these clients and the many others who have been willing to open up their financial lives so that others can learn from their experiences.

To Read about John and Mike:

To Read about Jody and Rob:

Couple 1:

Age: 45

Retirement Age: 65

Income: $400,000/year

Savings To Date: $500,000

Retirement Income Goal: $300,000/year (today’s dollars)

Less: Estimated Social Security $50,000/year*

Amount Needed from Investments: $250,000/year (today’s dollars)

Investment Income Needed 1^st Year of Retirement: $547,866**

Annual Investment Needed***: $177,000

% of income to invest to meet Retirement Goal: 44%

Couple 2:

Age: 45

Retirement Age: 65

Income: $80,000/year

Savings To Date: $100,000

Retirement Income Goal: $64,000/year (today’s dollars)

Less: Estimated Social Security $40,000/year*

Amount Needed from Investments: $24,000/year (today’s dollars)

Investment Income Needed 1^st Year of Retirement: $52,587**

Annual Investment Needed***: $13,000

% of income to invest to meet Retirement Goal: 16%

*Social Security could be reduced for higher income taxpayers in the future

** Assumes Inflation of 4%/year and Investment Return of 8% per year

***Increased by inflation rate each year.

The high income Couple needs to save 44% of their income vs. 16% for the moderate-income couple. Why? For the moderate-income couple Social Security will pay a much greater percentage of their retirement income. The Social Security tax is almost like forced retirement savings. The higher income couple is on their own to invest for retirement.

The message: If you have an income in this range or higher, it is even more important to invest a substantial portion of your income for retirement and not to let the fact that you can “afford” things now lead you to establish a lifestyle that will be unsustainable in retirement.

Here three big expenses that many new parents do not plan for:

• Child Care: Full time child care can cost $15,000-$25,000 per year.

• College Savings — If you want to pay for your child to go to the University of Illinois main campus (approx $19,000/year increasing by 6% per year) you would need to start saving $500/month beginning the month the child is born.  For Northwestern (approx $47,000/year increasing by 6% per year) you would need to start saving about $1200/month beginning the month the child is born.

• Additional Medical Expenses — Birth and first year medical expenses can easily reach the out of pocket limit of many employer provided plans.  That limit could is often $2500 to $5000.

How can you avoid the new parent trap?

• Do a financial test drive. If you are thinking you may have children change your spending habits to simulate having these expenses already. For example, have the estimated amounts for child care, college savings, and medical expenses automatically transferred to your savings account each month.  If you can’t live on the amount you have left over, you should rethink your spending priorities before you have children.

• Don’t increase your fixed expenses. If you are living below your means now, this is not the time to buy a larger house, or a new car unless you know you can fit them if your budget and pay for all of the expenses for a new child.  Many parents to be set themselves up with a high fixed expense lifestyle.  When they have children they often end up selling their house or car to afford child care.

• Have a discussion about your priorities. I find many couples have never discussed their life goals in a meaningful way until they are in my office.  This inevitably leads to disagreements about how to use their financial resources.  Parents to be should sit down and prioritize what are the most important things to each of them.  You should then quantify each goal in terms of the time required, the time frame to achieve it, and the financial resources required. Your financial planner can help with this part.

• Own your decisions. Once you have quantified and prioritized your goals, you then can make decisions about how to use your financial resources. Whatever, decisions you make, OWN THEM. My goal is to never hear a client say “we have to sell the car, house, give up vacation.” This implies that an outside force is controlling them.  Much better to say “we decided that something else is more important to us.”  Those who take the latter attitude will be more successful in achieving their most important life goals and set a great example for their children.

Yes, yes I know this post is not investment related, but I believe in a holistic approach to financial planning that goes beyond just investment advice.