Financial Planning for Life After College: A Complete Guide

Introduction and Problem Statement

It has frequently been said that the end of college is not an end at all, but rather the beginning of life's journey. Because life is a journey rather than a race, it is important to make some plans ahead of time so that the path is known and the destination understood to the extent possible in advance. When most people set out on a journey to destinations unknown, they usually secure a map ahead of time to avoid getting lost. Likewise, a map of an individual's life journey can help a person stay on course and avoid the pitfalls that await the unwary along life's roads. At any rate, with such a life map in hand, the journey through life will be more predictable and progress easier to chart.

Statement of the Problem

Growing old and retiring is a phenomenon of growing importance in economic life. As a result of the establishment of Social Security in 1935, the increase of private pensions after World War II, and the general rise in living standards since the Great Depression, an extended period of retirement has come to be regarded as a normal end to a successful career. Furthermore, as a result of innovations in healthcare technology and medicine, longevity has been increasing while retirement ages have been declining. Retired people therefore represent a growing proportion of the population. When the baby boom generation began retiring, this proportion rose at a sharper rate. "Faced with the prospect of changes to retirement plan provisions, many workers will probably prefer lower early retirement benefits rather than pushing back the age at which retirement can commence" (Rappaport & Schieber, 1993, p. 148). Consequently, trends in retirement have raised important questions about the financial soundness of the main institutions that provide income to retirees and their families, such as Social Security, other public and private pension plans, and Medicare (Aaron & Burtless, 1984). Identifying effective means of ensuring a sound retirement early on just makes good business sense today.

Purpose of Study

The purpose of this study is to develop a comprehensive and viable financial plan for a graduating college student that will grow and change as he passes through the different stages of life. The key points addressed in this financial planning regimen include goal setting, saving, debt management, insurance needs, career planning, and retirement planning, and how each of these is impacted as the student moves from single to married to family to retired.

Importance of Study

The demographic composition of the United States is changing in fundamental ways. Beyond the ethnic shifts taking place in the country, there will be far more people retiring in the years to come than ever before. The graduates of today are faced with a dual burden: inheriting this growing retired segment of workers while trying to provide for their own personal well-being and that of their families. In order to achieve a satisfactory standard of living as life progresses in this changing environment, younger workers are going to have to hit the ground running.

Rationale of Study

It is widely recognized that early planning is an important part of the retirement planning process. According to McKinney (2003), "A well-planned estate allows you to decide how your property will be administered during your lifetime and distributed after your death." Today, many Americans are affluent at midlife and are naturally looking forward to a comfortable retirement. These individuals already enjoy sizable pensions, investments, and an accumulation of assets such as homes, second homes, and other valuable property. "They need not worry about outliving their assets and may be more concerned about protecting their wealth through tax-saving strategies, estate planning and setting up trusts for their heirs" (Genovese, 1997, p. 13).

Those adults who have not begun to plan, however, may learn the hard way about what is involved in the process when they are forced to assist their aging parents with financial and estate decisions. "While many older adults have well-organized financial affairs, other adult children find parents' plans and records in disarray. They may get 'on the job' experience as they try to untangle their parents' affairs after a health or financial crisis" (Genovese, 1997, p. 13). While practical experience may be the best teacher, the importance of saving for retirement is reinforced for many people who are alarmed by their first experience with the costs of home care, retirement community living, or nursing home care. Genovese reports that a private nursing home costs $40,000 per year or more, depending on the part of the country and the type of facility. Another factor that can shock first-time estate planners is the realization that their parents may outlive their resources or face spending down their assets to qualify for Medicaid when they enter a nursing home.

Definition of Key Terms

Career. For the purposes of this study, the term "career" refers to employment in an occupation that will ultimately lead to retirement along a predictable career path in a profession of the individual's choosing. For those who fail to make the distinction between life's "calling" and a "career," the results can be disappointing or even disastrous. According to McGee (2003), people who do not pursue employment in an occupation they will enjoy are going to pay for it the rest of their working lives. By defining career success in terms that also embrace personal satisfaction, self-worth, the type of lifestyle demanded by the occupation, and what benefits can reasonably be expected from pursuing such a career path, the individual will be in a better position emotionally and psychologically — and perhaps even financially — when the journey is over.

Goals. A "goal" as discussed in this study is "the object of an action; it is what a person attempts to accomplish." Goals include such efforts as "attempts to sell more products, to improve customer service satisfaction, and to decrease absenteeism in a department by 5 percent" (Ivancevich, 1995, p. 219).

Professional. According to Black's Law Dictionary (1990), a professional is "one who is engaged in one of the learned professions or in an occupation requiring a high level of training and proficiency" (p. 1210).

Goal Setting and Career Planning

In 1978, Locke presented the now-classic paper "The Ubiquity of the Technique of Goal Setting in Theories of and Approaches to Employee Motivation," and ever since there has been growing interest in applying the goal-setting technique to a variety of settings. Locke's view of an individual's conscious goals and intentions was that they were "the primary determinants of behavior" (p. 36); in other words, a universal characteristic of intentional behavior was that it "tends to keep going until it reaches completion." As a result, when a person starts something such as a new job or project, that person will keep striving toward completion until the goal is achieved.

A study was conducted early on to determine whether goals change work efficiency without affecting the associated physiological cost (Wilmore, 1970). To this end, Wilmore conducted a series of experiments to determine whether goals enhanced the accomplishment of a physical task and found that "goals should be behind every performance if maximum performance parameters are to be stimulated" (p. 37). The results of Wilmore's experiments indicated that "physical performances without set goals will not produce the best form of physical response. As has been demonstrated by champion athletes, every task of training and competition must be oriented to some particular explicit goal that will focus the athlete on functioning with the greatest efficiency in performance. A physical activity at training without a goal-orientation is a wasted opportunity for improvement" (1970, p. 38).

Goal setting therefore appears to be an essential component in the effective application of physical effort. In organizational settings, the following issues have been identified as constraints to the effectiveness of the goal-setting technique; many of these also apply to the individual goal-setting process as it relates to career planning:

• Goal setting is rather complex and difficult to sustain.
• Goal setting works well for simple jobs — clerks, typists, loggers, and technicians — but not for complex jobs. Goal setting with jobs in which goals are not easily measured (e.g., teaching, nursing, engineering, accounting) has posed some problems.
• Goal setting encourages game playing. Setting low goals to look good later is one game played by subordinates who do not want to be caught short. Managers play the game of setting an initial goal that is generally not achievable and then finding out how subordinates react.
• Goal setting is used as another check on employees — it is a control device to monitor performance.
• Goal accomplishment can become an obsession. In some situations, goal setters have become so obsessed with achieving their goals that they neglect other important areas of their jobs.
• The positive effects of goal setting are sometimes only temporary (Ivancevich, 1995).

Goal setting seems easy, and many people assume that they have the intuition and inherent skills to set and use goals effectively; however, it has also been shown that training in specific goal-setting skills can be very effective. The career planner should therefore seek to establish goals according to goal specificity, goal difficulty, and goal intensity. Locke defines these components of the goal-setting process as follows:

• Goal Specificity is the degree of quantitative precision (clarity) of the goal.
• Goal Difficulty is the degree of proficiency or the level of performance sought.
• Goal Intensity pertains to the process of setting the goal or of determining how to reach it (Locke, 1978).
• Goal Commitment. According to Ivancevich, "To date, goal intensity has not been widely studied, although a related concept, goal commitment, has been considered in some studies. Goal commitment is the amount of effort used to achieve a goal" (1995, p. 111).

For a recent college graduate in search of an effective planning technique, goal setting provides a method that is responsive to individual needs as well as those of the organization involved. Goal setting also provides solid techniques for accomplishing goals. "Research has shown that specific goals lead to higher output than do vague goals such as 'Do your best'" (Locke, 1978, p. 38). The results of goal setting as a motivational tool are overwhelmingly positive. The studies by Locke and others have shown time and again that setting specific goals leads to better performance than do vague value goals. In fact, in 99 out of 100 studies reviewed by Locke and others, specific goals provided better results (1978).