The Best Piece of Financial Advice You’ve Ever Received

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Many of you who know me personally are familiar with my love of quotes and one-liners. What can I say? I like simple statements that can be remembered and candid statements that cut to the chase and don’t beat around the bush. That’s why I asked a number of friends, family members, and people I work with what the best single piece of financial advice was they had ever received. Here are some of the responses:

“Little pigs get fat, but hogs get slaughtered.” – This can have to do with greed or pressing your luck.
“Live below your means.” – This is the number one response for me personally because it’s so short, so powerful, and so true. If you spend less than you make, financial planning becomes a matter of determining the optimal order to go about achieving your financial goals, but if you spend more than you make, financial planning simply becomes a question of how best to take on water.
 “No one on their death bed has ever said they wished they had spent more time at the office.” – There are a lot of disenchanted former employees and retirees that can swear to this one. Then again, there are a lot of friends, spouses, and children who probably can, too.
“If you do something you love, you’ll never work a day in your life.” – There is much more to choosing an occupation than salary, bonus opportunities, vacation days, and benefits, and life moves pretty fast.
“Money often costs too much.” – Don’t let money cost you your happiness, your health, your friends, your family, or your faith. Don’t clinch your fist so tightly that you miss out on what really matters.
“An investment in knowledge pays the best interest.” – Especially right now given where today’s interest rates are!
“Wealth is the ability to fully experience life.” – I know some multi-millionaires who would be willing to admit they are poor and I know some people living paycheck to paycheck who seem to be quite rich.
“Never spend your money before you have it.” – This can lead to credit card debt and emotional disappointment. Don’t count on gifts, inheritances, bonuses, or equity awards tied to future performance until the money is in the bank!
“The stock market is designed to transfer money from the active to the patient.” Frequent action in a portfolio may feel good, but I firmly believe investing with a long-term approach gives you the best chance for investment success. Sure, make an occasional tactical move and rebalance your portfolio when there has been a sizable move in the markets, but be cognizant that transaction costs, fees, and taxes can kill investment returns.
“If you will live like no one else, later you can live like no one else.” You are going to have a finite amount of money pass through your hands during your life. It’s either more now or more later, and you’re going to need some later.
“Know what you own and why you own it.” I truly believe everyone wants a basic understanding of their finances. If you don’t know why you have something, you should find out why you do, or you probably shouldn’t have it. In practice I don’t ever suggest a technique, strategy, or investment to someone unless I can explain it.
“Try to be greedy when others are fearful and try to be fearful when others are greedy.” This is Buffettesque contrarian investment strategy at its core. It is usually "warmer" if you are in the herd with other investors, but it does often make sense to head in the opposite direction of the herd when it comes to investing. Buy low and sell high. Don’t buy high, sell low, and repeat until you are broke with the rest of the herd!
“Keep giving while you’re living so you’re knowing where it’s going.” – Giving to other people or even charitable causes can be quite fulfilling while you are still alive. It can also be a great way to test your potential beneficiaries and heirs with a little to see if they would be good stewards with a lot.
“Money is nothing more than a tool.” – If you can come to the realization that money is nothing more than a mechanism for peace of mind and a tool to purchase experiences, provide experiences, and further causes, your whole financial, social, and spiritual outlook could look a lot different.

It is my hope that these pieces of financial advice will be as valuable to you and your friends and loved ones as they are to me. If you have one that's not on the list please share!

-Tom

Money Mistakes We All Make

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So many of my posts are suggestions and recommendations to do what is financially right. Today I thought I’d head in a different direction and highlight some common financial wrongs. Here is a list of seven of the most common money mistakes I’ve run into, and I’m sad to say I’ve even committed a few of these myself!

• Not Considering the Financial Consequences of Student Loans: It’s so very easy to want to go to a certain college or institution or to get a specific degree, but will you really be able to get a job that pays enough to justify the expense? Far too many people sign up for mounds of student debt without considering the monthly debt payments and the length of those monthly debt payments versus their expected incomes when they are trying to decide what college to attend and what degree to obtain. It’s also important to make sure an advanced degree will equate to enough additional earnings to justify the expense.
• Postpone Saving: If ends are meeting, but there’s not much leftover, it’s easy to fall into the rut of saying that you’ll start saving just as soon as you can. This is dangerous because life magically seems to always be getting more expensive. No matter your income or lifestyle, finding a way to save a little each month is really the only sure-fire way to get ahead and make financial progress towards your goals.
• Too Much Car: Even after thoughtfully considering your finances and researching cars online, after taking a test drive at a dealership it is really easy to crave the better model with the premium wheels and entertainment package. Get what you need, not what you don’t. Additional money spent on a slightly nicer ride could go to a lot more critical financial goals such as establishing a rainy day fund or saving for retirement.
• Rush to Buy a House / Too Much House / Furnish Too Well Too Quickly: Buying a home too quickly can really strain a person’s finances. The goal should not be to live like you want to eventually live when you retire; the goal should be to live. Just like buying too much car, buying too much house is also really easy to do. Being a new homeowner brings a list of new expenses, large monthly mortgage payments can be daunting, and you can’t always count on the price of real estate going up. As you are furnishing a house it’s important to go at a reasonable pace and decorate things as you can, not just a bunch of junk all at once or a bunch of fancy things that torpedo your cash or create recurring credit card debt. A new house doesn’t have to look like Pinterest or Southern Living overnight!
• Children, but No Wills: Once you get married, you should probably have a will. Once you have kids, you should definitely have a will! A will is how you name guardians for your children, and even though it is the last thing you probably want to do between sleepless nights and sippy cups, it needs to be done. Wills also help make sure your spouse is looked after and your final wishes will actually be fulfilled.
• Being Too Risky / Getting Too Defensive: So much is written, and rightfully so, about investors who get too risky and end up losing large portions of their investment portfolios. I won’t pile on further to that rant today, but I will offer that I think there should probably be a little more written about investors who get too defensive and end up spending down their assets and losing their purchasing power because their portfolios don’t generate enough growth. Portfolio growth is a function of interest, dividends, and appreciation; interest and dividends alone may not be enough to help you maintain your lifestyle.
• Waiting Too Long To Move on Your Own Terms: Very few people want to move to the smaller house, the retirement center, or the skilled nursing facility, but there’s a lot to be said for moving when you can versus moving when you have to. Although often an emotional decision and process for the mover(s) and their family, doing so at your own pace and at your own accord is often a lot smoother and more dignified than waiting for a fall or other “triggering event.”

We all make mistakes, but now there’s no reason for you to make these!

-Tom

Continuing Care Retirement Communities

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Continuing Care Retirement Communities or CCRCs are becoming more and more common. CCRCs are retirement communities that offer different levels of service and health care at the same location or campus. Most CCRCs have apartments, cottages, or small houses, which allow healthier residents to experience a neighborhood feel while still enjoying access to the amenities (restaurants, gyms, libraries, clubs, etc.) of the larger campus. CCRCs also usually have smaller apartments or rooms for residents who need more assistance in addition to skilled nursing facilities and rehabilitation centers. The idea is to not have to move to multiple residences towards the end of one’s life, and to not have to be separated from a healthier or sicker spouse.

The growing popularity of CCRCs is due to a number of reasons. For one, residents want to keep their independence as long as possible and CCRCs allow them the flexibility to do so. CCRCs also allow many sick residents to stay with, or at least in the same facility as, their healthier spouse. Additionally, many residents either do not want to be a burden on their spouse or family, or simply do not have spouses or families that are able to handle the burden of care necessary to support them. With people living longer and longer, I would expect this trend to continue. I’ve already seen it as I have helped a growing number of clients transition themselves or their parents to CCRCs. It’s a big decision; emotionally and financially, and one that should not be taken lightly. In that spirit, I’d like to offer a few financial tips I’ve learned along the way.

1. Know what you can do. As you might imagine, there are varying qualities of CCRCs with varying costs. It’s important to look at what your new living expenses would be and whether that is a feasible “burn rate” given your amount of assets and life expectancy. Many people have to sell their primary residence to make a move to a CCRC possible.
2. Figure out your real estate options. If you need to sell your primary residence when moving into a CCRC, talk with the CCRC before making any decisions. In some cases they have people or relationships that can help you clean out and even sell a home at discounted rates. I’m talking estate sale experts, realtors, and mortgage brokers. Some CCRCs offer financing on a short term loan between the time you sell your primary residence and move in, but sometimes “outside” financing on a loan to bridge you between the sale of your old home and the purchase of your new CCRC home may be necessary.
3. Consider refundable versus nonrefundable options. Some CCRCs charge you more up front, but promise to give your heirs a portion of your down payment back after you pass away or if you pass away within a certain period of time. Depending on the specific offer, your financial capabilities, and your life expectancy, there can be a strategic decision to be made here.
4. Consult with a CPA. At certain CCRCs, a portion of your initial down payment can qualify as a medical deduction for income tax purposes. Ask any CCRC you are considering if this is the case, and then if so, talk with your CPA. A really large medical deduction might cause you to have a really low or negative income tax year in the year you move into a CCRC, so it may make sense to pull some income forward or recognize some extra income in such a year if possible. Perhaps the CCRC will let you pay the down payment over two tax years so you can spread out the deduction? A medical deduction for moving into a really nice CCRC can near six figures, so the tax planning on this isn’t something to just do yourself or with your generic tax software!
5. Get on a waiting list sooner rather than later. There are more people interested in CCRCs than there are spots available. If you know there is a particular facility you are interested in or you have friends going into, inquire if there is a waiting list. Usually you can get on a waiting list for several hundred to a few thousand dollars that may even be refundable if you change your mind. You may not be able to get into the CCRC you want to when you need it if you don’t go ahead and get on the list beforehand!

As always, if I can be of assistance to you or someone in your family considering a move into a CCRC, please let me know. You know where to find me.

-Tom

Normal Investors – Status Quo

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Think back to Thanksgiving. Remember the turkey, the dressing, the delicious side dishes, and the waiting on Aunt Ethel to finish warming her green bean casserole? Think about where you were sitting. Was this where you always sit? If you typically celebrate Thanksgiving in the same way, at the same place, with the same people, I bet you were sitting in your usual place. Given the chance, would you have chosen a different seat? Unless you’re still stuck at the “kid’s table,” you’re over an air vent, or that really smelly cousin is next to you, I bet you would prefer not to change seats.

Where do you bank? If it’s with a big, national bank, I bet there’s a pretty good chance it’s where your parents banked or where you have banked for a long time. Why do you still bank there? Is the interest rate spectacular? Is the customer service spectacular?

Why do many people sit at the same spot every year at Thanksgiving? Why do many people bank with the same bank for all of their lives? I think it’s because it’s easier to stay with what you know. It’s easier to stay with what you have. It’s easier to keep the status quo. An inherent desire to keep the status quo is a fifth tendency I believe many normal investors have.

In my line of work people usually come to me for one of two things. Some people want me to analyze how they’re doing financially and to let them know if they’re forgetting anything major or if they’re doing anything blatantly wrong, but a majority of people want me to analyze their financial situation and make recommendations as to how they can improve or enhance their financial standing. In both cases, I often end up trying to get people to tweak their financial status quos. From my experience I’ve found that trying to convince someone to diversify out of a particular stock they’ve always had can be like trying to convince a teenager they can’t keep dating someone, trying to tell someone they need to reduce their lifestyle a little can be like trying to tell a sports fanatic they can’t watch all of their team’s games, and trying to get someone to change their insurance coverage can be like trying to get someone to change an ingredient in grandma’s legendary potato salad recipe. Even if people concur with my recommendations, achieving the implementation of those recommendations, can be another thing entirely.

This status quo tendency to stay with what you know and are used to negatively impacts many investors. It can cause someone not to prudently diversify their investments. It can cause someone not to reallocate/rebalance their portfolio at the top of a bull market or at the bottom of a cyclical pullback. It can even cause someone to never invest at all!

Another part of the status quo tendency is that many people, like myself, don’t enjoy making difficult or complicated decisions. Consider organ donation. Are you an organ donor? Are you not? Don’t you want to help others? Don’t you want every chance to live before your organs are “harvested?” Let’s consider organ donation in Europe. Look at the chart below showing the percentage of citizens in certain European countries who are organ donors.

 

Why are there so many less organ donors in Denmark, the Netherlands, the United Kingdom, and Germany? It’s because in Denmark, the Netherlands, the United Kingdom, and Germany, you have to opt-in to be an organ donor. If you go with the default, you are not an organ donor. In the other countries illustrated in blue, the opposite holds true. You have to opt-out to not be an organ donor. If you go with the default, you are an organ donor. I find this pretty convincing that many people feel it’s easier to go with the status quo than really spend the time and energy considering and implementing a difficult decision like whether to be an organ donor or not; or whether to diversify investments, cut spending, or adjust insurance.

Change can be good, but change is not always better. It’s my job to give people confidence when they have a good thing going, and to give people questions to ponder and recommendations to consider when I believe the status quo can be improved upon. Don’t just be a normal investor. I encourage you to really consider your status quo, and to tweak it if necessary.

-Tom

Your Sunny Day Fund

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One of the terms you have most frequently seen in my 146 (now 147) blog posts since 2012 is “rainy day fund.” It’s an unhappy term, but a necessary pillar of financial security. Cars break, houses fall apart, people get sick, and people lose their jobs. If people don’t have enough money saved up to get them through their unique personal thunderstorms, things don’t usually go so well. You need enough cash to be able to get through dark financial times. It’s as simple as that. I haven’t met many people who disagree with me on that premise, and I can tell you from experience that it usually doesn’t take very long for someone who is serious about financial security to build up a reasonable rainy day fund.

After someone has a rainy day fund, I frequently recommend that they work on saving more and investing more for things like the next car, the second home, and most importantly, retirement. I’ve found that there are some highly motivated, goal-driven people who go after hitting their savings and investing goals with the same vigor with which they built a rainy day fund, but I’ve also observed that a lot of people seem to lose “steam” or momentum. Why is that? I think it may be because saving for future wants and needs requires a little more self-control. It also lacks a catchy name.

So today, I’d like to throw out a happier term that I first heard on the radio as part of an advertisement for a national bank. I’d like to start calling the brokerage accounts, 401(k)s, and IRAs that you are saving into for your future your “sunny day fund.” Doesn’t that have a nice, warm glow to it? Doesn’t it have a better ring than some of the hideous titles bestowed upon employee savings vehicles? I think so!

As I’ve often said, my greatest concern for current workers, and particularly those of my generation and younger, is that the rules of the game are changing. Retirees once had pensions, Social Security benefits, and their savings to get them through the rest of their lives, but today’s workers will have to rely much more heavily, if not entirely, on their savings to get them through the rest of their lives. Sadly, I believe this means the days of being able to save very little and still retire with a reasonable income are numbered.

Saving and investing for your future are critical. It’s more fun to spend now, there’s no question, but I hear it’s also nice not to have to work until the day you die. Working towards that dream car, that vacation home, and those annual family trips by saving and investing now can be fun, too! Maybe it doesn’t feel as fun in a brokerage account, 401(k), IRA, or another type of account, but I really think it can be fun if you tweak your perspective just a little bit and decide that you are saving and investing to accumulate enough assets to propel yourself through the golden years. The bigger your sunny day fund becomes, the brighter your future could be.

-Tom

When the Stork is Looming

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I don’t know about you, but I know a lot of pregnant people right now. Maybe it’s my age and stage in life, maybe there is something in the air, or maybe there is something in the water! I don’t know what it is, but there are going to be some overworked storks in 2015!

If we know one another personally, you probably know that my wife and I just had a child of our own. I'm still working on my swaddling technique and I haven't quite figured out how to shove the “pack and play” back in that tiny little bag, but I have learned a few things over these past several months. For my currently pregnant and maybe one-day pregnant readers out there (and their spouses), here are seven financial tips:

1. If possible, get health coverage where the insurance company will pay 100% of your costs after your deductible and copayments have been met. Call me Captain Obvious, but births are significant health care events, so they are going to have a price tag. If you’re on a plan that covers 100% after you reach your deductible, you have the comfort of being able to back-in to what your birth medical expenses will likely be without having to wonder how much it could cost if there are complications. If you are planning to have children, health insurance is a good thing to address before you are pregnant because you don’t always get an open enrollment period before the baby arrives. You can also go ahead and strategize about whose plan the baby is going to be on if both parents have health insurance.
2. Boost your life insurance or get life insurance if you haven’t already. If Mom is going to stay at home for a while or shift to part-time, Mom needs to have some significant life insurance on Dad should something happen to Dad and his paycheck. If Dad is going to keep working and Mom is going to look after the baby, Dad needs to have some significant life insurance on Mom should something happen to Mom and her child care services. Interchange “Mom” and “Dad” here as needed, but you get the picture. An article I recently read pointed out that going ahead and boosting a woman’s life insurance early in her pregnancy may be a good idea as complications such as gestational diabetes could arise during the pregnancy and obviously, situations could occur at birth. As you would probably expect, it’s cheaper and easier to get life insurance if you have fewer health issues and less treatment history.
3. If Mom is going on maternity leave, there is a good chance she will be drawing short-term disability that will very likely not be 100% of her pay. This means you have a pay cut coming, and you need to plan accordingly! I’d suggest ratcheting up the savings now if Mom is still working so that you can offset your upcoming pay cut when the time comes and not have to significantly change your lifestyle.
4. Many of our friends that are already parents have warned us about looking after “us.” A baby can be a wonderful addition, but he or she takes time and energy, and can subtract from what you can offer your spouse and your friends. In that spirit, I’d also start saving for date nights and friend nights. It’s not just dinner and a movie anymore! It’s going to be dinner, a movie, and a babysitter. Look after the baby, but look after your marriage and your friends, too!
5. Pay off your credit cards! You should do this whether you are having a baby or not, but I can already tell you that you’re going to want to have as much spending power available to you as you can. Baby stuff is expensive! I’m sure you’ll get some gifts (and my wife and I are very appreciative of what we have received), but you’re not going to get all that you need without buying some of the stuff yourself.
6. In the spirit of my comment about baby “stuff” not being terribly cheap, don’t overspend or overbuy baby stuff, either. It makes me sound like an old man, but I can tell you for a fact I wasn’t raised with all the gadgets and gizmos that some of these baby stores tell you that you “have to have.” My wife asked a good friend of hers who was a recent Mom to accompany us as we started considering what we would need for our new family member, and I think that was one of the best ideas we’ve had. My wife may have invited her friend for comfort, support, and wisdom, but every time she told us we didn’t need the premium plus version of that bottle, or the spa edition of the bath apparatus, or the nuclear-powered thermometer, I literally felt money going back into my wallet!
7. Try to figure out what the new normal budget is going to look like. Whether it’s pay cuts, health insurance expense increases, double income households becoming single income households, daycare expenses, or lots and lots and lots of diapers to be purchased, your budget probably won’t look the same after the little one arrives. No matter how cute those little hats and booties are, your financial principles need to stay the same: spend less than you make and live within your means.

I’ve got a feeling I’m going to be writing a lot of posts at strange hours over the next few months…

-Tom

What If It’s Not Working?

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Money comes, money goes. You get paid. Wahoo! Then the cable bill comes... Then the phone bill... Then the water bill, power bill, car payment, and house payment all come on one, lovely day. @#$%! This is the month when homeowner’s insurance premiums come in? Did you forget about that? (I know I did!) Wow. There’s just not that much more left than before you and I got paid! And we’re supposed to go to that new, pricey restaurant this weekend with our friends… Do you ever feel like this? I think most people do.

So what should you do when it’s not working? You’re certainly working hard, and you’re reading all of those helpful financial blogs every time your friend pumps one out (hopefully), but your financial situation is just not improving that much. What should you do? In three words:

Try something different.

If you’re having trouble saving money, open a second cash account and direct deposit a portion from each pay check into it. Pretend it’s another one of those deductions on your check no one really understands, and I bet your cash will finally build!

If you’re having trouble paying down your credit card debt or you keep “overusing” your debit card, play rock, paper, scissors with your plastic cards and go with scissors! Cut them up into a lot of pieces (to help reduce the chance of identity theft), and try using cash. When you see how many pictures of Andrew Jackson or Benjamin Franklin something takes, it may feel different and help your self-restraint.

If you’re having trouble actually increasing your contributions to your retirement plan at work, think Nike - just do it! As long as your increased contribution isn’t horribly unreasonable, you’ll probably naturally figure out how to make your reduced income work once you have less income actually coming in.

The one I’ve actually seen a lot of lately is someone trying to do too many good things at once. I admire people who do this, but let’s be realistic; you can’t boost cash, pay down debt, save for a new car, save for a new house, save for your kid’s college, save for your kid’s wedding, and save for that long overdue dream vacation all at the same time. I mean you could, but unless you’re making really big money, that “shotgun approach” isn’t going to work. Based on my experience, most people taking the “shotgun approach” end up feeling like they aren’t making any progress, get frustrated, and then return to spending what they make. Instead, I’d suggest that you go with a “surgical strike approach,” and go after one or only a few items at a time. Boost cash, then pay down debt while keeping your cash up. Save for a car, buy a car, and then save for the new house. This way you will feel like you are making financial progress because you are accomplishing something that is tangible and observable. Things will get checked off your list, and you may find that your rate of financial progress seems to pick up momentum.

If what you are trying to do financially isn’t working, don’t feel bad. When talking about his many attempts to invent the lightbulb, Thomas Edison said that he had not failed, he’d just found 10,000 ways that didn’t work! Edison also said, “Our greatest weakness lies in giving up. The most certain way to succeed is always just to try one more time.”

If you don’t want to listen to this Thomas, that’s fine, but please listen to Thomas Edison. Try one more time!

-Tom

My Default Savings Plan

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I don’t know about you, but I often do better with a plan. To my wife’s credit, she’s helped me become more able to enjoy going along with an unexpected or unanticipated opportunity, but there are still some areas in my life where I need some “navigational buoys” so to speak. One of those areas is savings, and I don’t think I’m alone in that regard. Without a savings plan in place, money seems to burn holes in pockets and disappear.

With that in mind, I’d like to offer up my default savings plan. Now, this plan is not exactly what I always do, it is not what I always advise accumulating clients to do, and it might not even be what I’d specifically recommend for you, but I do believe it is a good place to start for most people. Here goes:

1. Try to live off of 60% -70% of your take-home pay. If you so choose, tithe or donate 10%, spend 10% on fun, and save 10% - 20%.
2. Of the 10% - 20% I recommend you at least save, I’d suggest you consider doing the following, and in the following order:
1. Save six months’ worth of your monthly expenses in a cash savings account separate from your day-to-day checking account.
2. Pay down any and all outstanding credit card debt you may have and keep it paid off!
3. If applicable, make sure you are contributing to your employer’s retirement plan the amount or percentage you need to in order to maximize their matching contribution.
3. Once you’ve addressed number two, I’d propose making maximum IRA contributions (probably to a Roth IRA if you can, but it could depend…).
4. Once number two and number three are checked off, I’d propose you utilize your savings in the following ways:

• 1/3 as additional contributions to your employer’s retirement plan.
• 1/3 as contributions to a taxable brokerage account (after all, you may want to be able to access some of your investments penalty-free before your 50s).
• 1/3 as additional principal payments to reduce your school, car, home, or other debt(s).

Sure, there might be a college fund for a little one, a pending basement renovation, or an upcoming anniversary trip that needs some of your savings firepower, but this should at least get you started. It is my hope that you will use my plan as your plan. It is my hope that you will use this plan as your policy as your personal and financial situation progresses, so that one day, you don’t look back and wonder where all of that hard-earned cash went. However, if you want to talk specifics about your situation, I’m happy to. You know where to find me.

 

-Tom

Landing the Plane

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Many of you know that I love analogies. One of my favorites that I use with people who are nearing the end of their careers is that they should think about entering into retirement like landing a plane. Whether the gainfully-employed ride has been smooth sailing or more than a little turbulent doesn’t really change the fact that you need to be prepared to land the plane. The retirement landing can be graceful and you can reach your home destination smiling, or the landing can go pretty poorly and even end in a fiery crash of sorts. Most people prefer the graceful landing that ends with smiling, so if you’re thinking about retirement, I thought I’d share a few tips on how you might want to land your very own plane.

1. Get Your Cash Up – When working, I recommend most people keep around three to six months’ worth of their core living expenses in cash. In retirement, I’ve found that most people prefer a little more. If you have a particular cash number that helps you sleep better, go for it, but otherwise I normally recommend one to two years’ worth of your core living expenses in cash. That may sound a little crazy to you, but when your paycheck goes away (or goes down) when you do retire and there is a cyclical pullback in the stock market, you might feel differently.
2. Have a Plan for Where Your Income Will Come From – If you have a pension, that’s really great, but where is the rest of the cash you need to fund your lifestyle going to come from? Randomly pulling cash from various investment accounts and haphazardly deciding when to turn on an annuity or start drawing Social Security is usually not a good strategy. You need a plan! There are tax implications and timing implications that need to be considered if you want to land as efficiently and effectively as possible!
3. Strive to be Debt-Free – This may require using a decent chunk of your assets, or you might even decide that you want to work a year or two longer so you can do this, but if you can go into retirement debt-free, it is huge! Imagine how it feels to still get that mortgage bill you’re used to when you’re not getting that pay check you’re used to. Being debt-free going into retirement not only really seems to help many of my clients psychologically, but it also helps take pressure off cash and investment accounts. If your monthly mortgage payment is making up a sizable chunk of your fixed expenses, and you can make it disappear before you lower your landing gear, I’d be willing to bet you’ll feel a lot better.
4. Make the Big Purchases Before You Retire – What? I’m telling you to spend money? Well, sort of. This may also sound a little batty, but if you are going to need something such as a new car or a new roof in the next couple of years, I’d probably suggest you go ahead and accelerate that purchase while you’re still working and making the big(ger) bucks. Assuming your retirement income will be a little lower than your working income, I’ve found that going ahead and taking care of some of the big ticket items can make your landing feel a little smoother. Put simply, big expenses can hurt the psyche and the pocketbook, but they seem to hurt less if you’re still working.
5. Get to Know Your New Boss/Co-Worker – I’m certainly not a therapist, but I am observant enough to have noted that some people’s transition to a little more family time seems to go better than others. Sure, you’ll have to get used to spending a lot more time with your husband or wife, but that knife cuts both ways; they will have to get used to spending a lot more time with you, too! Working to improve your relationship with your spouse and developing some mutual and separate activities before you retire are probably really good ideas. I’ve heard it said that retirement is twice as much spouse and half as much money! I don’t know about that, but you get the point. Consider some relationship planning before you exit your plane and head to baggage claim.
6. Think About What You’re Going to Do Once You’ve Landed – I know I said I’m not a therapist, but you need a plan for you when you retire. My busy, ambitious, and hardworking clients who eat, sleep, and bleed what they do for a living tell me that retiring can feel like jumping off of a moving train. The emotions of that jump and coming to a relative stop can be a tough adjustment. Take a trip, sleep in for a few weeks, do the crossword, but have a plan for after that. Things such as volunteer work, periodic consulting, gardening, car restoring, or woodworking can be good things. You’re going to want to have something to do. Retiring is a treat for some, but I’ve seen it be a difficult pill for others to swallow. Do as you wish, but I’d suggest you have some hobbies and groups lined up before you bid your boss adieu.

 

I don’t know about you, but I think the landing is one of the most important parts of a flight. If you’re beginning your descent and could use a little help making your approach, please let me know. This has been your captain speaking.

 

-Tom

Quit It!

Credit: Stuart Miles

A lot of my posts aren’t meant to get you to actually do something. Most of them are just supposed to make you think about life and your finances, and occasionally laugh a little. Some of my posts are more of a “call to action,” where it is my hope that you will either continue doing the good practices you are already doing or change potentially troublesome ways and proceed differently. Either way, today’s post is a little different. I’m not going to suggest that you do this or that you do that. Instead, I’m going to share several, common, bad financial habits that I see a lot of and ask you NOT to do them.

1. Carrying a Credit Card Balance – You should pay off your credit cards each and every month without exception, period. If there is an exception or you’re not at a place where you can pay off all of your credit cards, you really should adjust your lifestyle until you can. The impending doom of credit card debt and its frighteningly high interest rate(s) just aren’t worth it. Use credit cards for your convenience and to earn perks, but not to buy what you will have trouble affording.
2. Having Too Small of a Rainy Day Fund – Do you really have savings? I’m not just talking about specifically having a savings account – I mean actual savings. If you could not withstand a temporary period of unemployment, you could not afford a used car should something happen to your current mode of transportation, or you would have trouble paying your maximum health insurance deductible, you probably haven’t saved enough. Sure, it’s not fun seeing all of that cash just sitting there, but it does feel good knowing it’s there if you need it, and unless you’re a lot luckier than most, at some point in life, you are going to have a rainy day.
3. Having No Idea Where It’s Going – Want to try something that can be a little scary? Annualize your take-home pay (your paycheck after taxes, insurance, 401(k) savings, etc.), and then back out your annualized fixed expenses such as your mortgage, car payment, and utilities. What happened to all that’s left? Where did it go? If you can’t speak to where a large part of your remaining income went, that may mean you could have better utilized your cash flow towards savings, investing, and debt reduction as opposed to, well, wherever it went.
4. Saving for College, Not Retirement – This one leads me to a serious and not so pleasant question: Would you rather your child have to pay for college or have to pay to look after you in retirement? I know the answer is neither, but in some cases, that may not be an option. Saving for a child’s college expenses is an admirable act of love, but it probably should not be done if it jeopardizes your own financial independence. Children could get scholarships, they could be athletes, they could be artists, and they might not even want or need to go to college. Save for both if you can, but please remember that looking after your own retirement is helping your children in the long run, too!
5. Letting One Spouse Do It All – Unfortunately, I see this time and time again where one spouse is the dominant financial spouse. I’m not necessarily talking the largest “bread winner” here, I’m talking about the situation where one spouse pays all of the bills, balances all of the cash accounts, knows all of the passwords and secret question answers, and keeps all of the files. As long as no one becomes disabled, decides to get a divorce, or dies, having a dominant financial spouse could be fine, but it is a little dangerous. If you have a spouse, I’d encourage you to either split up and alternate some of the duties or at least agree to formally go over your finances once or twice a year. This builds trust, leads to good conversations, and helps make sure the back-up financial quarterback gets some reps should the starting financial quarterback go down.

 

If you’re reading this post, it’s my hope and belief that you are already not plagued with many of these bad habits, but if you are, quit it! If you know a friend or family member who is plagued with some of these bad habits and think of this post, please share it!

 

-Tom

What You Need to Save to Reach $1M

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There is something magical about one million dollars. A lot of people seem to view it as the line between rich and not rich. I don’t buy that as I’ve seen plenty of people with less than seven digits who are personally and financially wealthy, and I’ve seen plenty of people with seven digits or more who are personally “starving” and somehow still feel financially poor. Now that I have car payments and house payments and see taxes and health insurance expenses deducted from my paycheck, I can also see how, over time, someone could go through a million dollars. I think it’s the act of having to use a second comma to write out "$1,000,000” that makes it such a big deal.

I don’t know whether you’re trying to become a millionaire or not. I don’t know whether you’re going to have a pension, what your Social Security may or may not look like, or what type of lifestyle you are looking to sustain in retirement, so I can’t really tell you that a million dollars will even be enough for you. Besides, who knows what taxes will look like when you are ready to retire? Who knows what inflation will be between now and then? What I can tell you is that saving and investing is important, and that saving and investing sooner rather than later can have a critical impact on your future outlook.

Below, please take a look at a graph showing how much you would need to save per year, based on when you start saving (assuming a flat, six percent annual rate of return), to reach one million dollars by age 65.

For me personally, all of these annual savings figures represent a significant amount of money, but some of them look a lot more feasible than others. If you start saving early by living below or at least within your means, you save diligently paycheck after paycheck, and you have a little bit of luck and good fortune, I think most people should have a shot at saving up a lot of money for retirement - maybe even a million bucks! That being said, if someone keeps buying the latest gadget or accessory, living paycheck to paycheck, and carrying on like there is no tomorrow, starting to save at age 55 or so is not going to be a lot of fun, and more frighteningly, it might not even do that much good.

In short, no matter how old you are or how much you can save, I’d suggest you start saving now! In the words of the hit novel and movie franchise The Hunger Games, by saving now, the odds will be ever in your favor.

-Tom

Lessons from a Castle in the Clouds

While on our vacation to the Northeast seeking out beautiful fall leaves, quaint bed and breakfasts, and scrumptious cider doughnuts, my wife and I also paid a visit to Thomas and Olive Plant’s mountaintop estate, Lucknow. The old residence was impressive, but the views were truly breathtaking; hence the more commonly heard name, Castle in the Clouds.

As we learned from our tour guide, Thomas Plant’s story was initially a fairy tale. Thomas did more than achieve the American Dream as he rose from a relatively poor immigrant to a millionaire shoe manufacturer with a castle in the clouds, literally. Unfortunately, though, there was not a happily ever after. Thomas Plant committed three very common financial mistakes that would consume his hard-earned wealth and leave him at the mercy of his creditors on his deathbed.

1. Lack of Diversification – I cannot reiterate how important it is to not have all of your eggs in one basket. For whatever reason, as a fifty-one-year-old retiree with more money than he could have ever imagined, Thomas Plant decided to put a lot of his money into one thing, Russian bonds. His timing could not have been worse. In 1917, the Russian Revolution would forever change the fabric of Russia, and also cost Thomas Plant most of his investments.
2. Losing at Poker Mentality – You know how when you are already losing at poker you often find yourself betting more aggressively in hopes that you will recoup your losses? Well some of that typical behavior seems to carry over into the investment world. Thomas Plant was probably more than a little miffed about his Bolshevik bond returns (or the lack thereof), so he decided to double down by investing a lot of the money he still had in sugar futures. Don’t understand sugar futures? Don’t feel bad; neither did Thomas Plant! He had already lost a considerable amount of money, so he decided to invest even more aggressively with the hope of making his money back. That doesn’t usually end well.
3. Too Much Real Estate – I may have some dissenters on this one, but I think it’s important to realize that real estate is not exactly an investment. Real estate is land, a house, or a building. Historically, it often goes up in value over a long enough period of time, but not always. Real estate is not as liquid as cash or stocks and bonds, so someone cutting it too closely financially with too much invested in real estate could very well find themselves trying to sell at an inopportune time or when they don’t want to.  Real estate can also require debt, upkeep, insurance, and property taxes. Even if you are renting your real estate to someone, these expenses can be a hole in your financial bucket, slowly draining away your wealth. Believe me when I tell you that Thomas Plant’s house was awesome. It had a pool table, a knight in shining armor, a long driveway, and even a secret passage, but it also chewed up a considerable portion of his net worth to build and maintain. After his bond debacle and failed “all in” with sugar futures, Thomas Plant didn’t have much more than his house. Try as he did, he couldn’t sell his house when he needed to (as the Great Depression was in full swing), and Lucknow was eventually auctioned off. His creditors happened to be friends, so they were kind enough to let him live in his Castle in the Clouds until he died, but according to our tour guide, the bank actually changed the locks before Olive Plant got home from the hospital the day her husband died!

Thomas Plant seemed like a nice enough guy. He did a lot of things right, but he also did a few things wrong that cost him dearly. Please don’t let any of the mistakes Thomas Plant made cost you your castle, wherever it may be.

 

-Tom

Savings is a Bill!

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I’ll be the first to tell you that I have some quirks. For example, I have to write out a to-do list every week, my office desk has to be clean before I can go home (I throw stuff in drawers), and seeing a lot of unread emails causes me a lot more angst than it probably should. Another one of my quirks is that I cannot stand unpaid bills. Paper or electronic, if a bill comes in, it gets paid that very day (unless I’m on vacation or seriously ill). Maybe you’re not quite as crazy as me, but if you’re reading this post, I trust you pay your bills pretty promptly, too.

My wife and I are also pretty good savers, but even I must admit that my love for saving money pales in comparison to my hatred of unpaid bills. That’s why when I heard about a new approach, or more accurately, a new twist on how to think about saving, I got excited. The twist is this: What if we viewed savings as a bill?

When the power bill comes in, I pay it. When the mortgage statement comes in, I swear, and then I pay it. When my wife’s credit card bill comes in, she pays it. At the end of the pay cycle, or month, or year, we usually have a little bit more income left over than we have expenses, so we try to save it, but that doesn’t always work out. Luckily, my wife and I have been blessed to have enough coming in to be able to save a little, but we also have to constantly work at being disciplined and diligent enough to save. Even though we’re pleased with our savings efforts, at times, we could do better, and I bet viewing our savings as a bill would help.

The “savings is a bill approach” is not earth-shaking, and it’s certainly not complicated, but if you or your family are struggling to save enough to meet your financial goals, or to save at all, I’d recommend you try this tweak. If savings is a bill, it comes out at the front of the pay period, not at the end. If savings is a bill, it’s a regular expense and must be viewed as a recipient of part of your income pie, not just the residual crumbs. If savings is a bill, I bet you and I will both save more, and more regularly.

Sorry, but I’ve got to run. The water bill calleth!

-Tom

Freedom from Student Loans

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While reading an article recently published in InvestmentNews, I was surprised to learn that 71% of college graduates coming out of school with a bachelor’s degree have student loan debt. I was also surprised to learn that student loan debt has passed credit card debt and is now the largest form of consumer debt after home mortgages. When considering the 71% of college graduates with student loan debt, the average debt is close to $30,000!

I knew student loan debt was a burden for many people, but I’ll be honest, I didn’t have any idea that it impacted nearly three out of four college graduates. I was also a little shocked by the magnitude of the average debt. So, what if you’re like the majority of college graduates out there, and you’ve got some significant student loan debt relative to your current salary weighing you down? What should you do? I’d like to share some thoughts.

If it were me, I’d get a job after college graduation as quickly as I possibly could. Even if it was not my ideal job and was just a short-term opportunity, I’d want some income so that I could hopefully avoid taking on any additional debt and maybe even begin to think about attacking my student loan debt principal. 

If it were me, I’d look into consolidating my student loans (if I had more than one) so that they would be easier to manage. One check per month would feel less overwhelming, and the interest rate on the consolidated loan could even be beneficial.

If it were me, I’d obviously keep making minimum payments on my student loan debt, but I’d set aside a reasonable cash emergency fund, I’d contribute whatever it took to get my employer’s maximum company match to my 401(k) or retirement plan, and I’d pay down any credit card debt I had before attacking my student loan debt principal. My goal would certainly be to get my student loan debt paid off, but I need to make sure I can survive a “rainy day” and go ahead and begin saving for my retirement, as retirement dollars contributed now have a longer time frame to really appreciate than retirement dollars contributed years from now. After I had my rainy day fund built up, my retirement contributions in order, and my credit card debt zeroed out, it would be full-fledged war on my student loan principal until I was able to remove the giant debt stone that had been tied around my neck as I pursued a higher education and a brighter future.

While I’d do everything I could to eliminate my debt burden, I wouldn’t put my life totally on hold. I admire and respect people who are focused on extinguishing their student loan debt as soon as possible, but putting off things such as getting married, renting your own apartment, and buying a reliable car in the name of paying down student loan debt may not be the best life choice. It may be the best financial choice, but it may not be the best life choice. Do whatever you think is best, but I wouldn’t put off taking the next steps in your life and move back in with your parents solely so you can live as inexpensively as possible and pay down your student loan debt as soon as possible.

I understand that some members of my generation aren’t yet interested in my ramblings about investing, insurance, and estate planning because they are still battling their student loans, but that doesn’t mean I can’t help. Get a job, set aside some cash, start contributing to your employer’s retirement plan, and live thriftily so that you can pay off your student loans as soon as reasonably possible, but don’t “postpone” your life. Once you’re free from your student loans, you’ll have a lot more cash flow free up, and you’ll be ready to take flight towards your other financial and life goals.

-Tom

How to Plan an Affordable Trip

If you know me personally, you probably know that I love to travel. Travelling is awesome. You get to experience historical sites, visit beautiful and exotic places, and eat a lot of delicious food. Well, like most of you out there, I’m not lighting my proverbial cigars with $100 bills, so when I travel, my budget has to be within reason. Luckily, my wife shares my love of visiting new places and doing new things, so we save specifically for trips and spend less in some other areas of our lives. Even though this extra saving allows us to spend more on vacations, a lot of our travelling escapades are also the result of careful planning and a few tricks of the trip-planning trade. With this in mind, I thought I’d share a few tips on how you can plan an affordable trip.

• Plan and book your trip really early. That may sound crazy to some of you, but when it comes to getting a good deal on a trip, I really believe the early bird gets the worm. You can sometimes get sweet deals and complimentary upgrades, but if you make your plans early you can also get the aisle seats on airplanes, the window seats at restaurants, and more central seats for shows and concerts. Aisle seats, window seats, and more central seats don’t usually cost that much extra, if at all, but they can certainly make a trip that much better of an experience. Some of you will probably counter that you can get good deals at the last minute, and you’re absolutely right, but last-minute deals aren’t always available for what you want or need. Personally, I don’t want that last-minute stress when I’m trying to enjoy a glorious trip or vacation.
• Don’t make things more expensive than they have to be. Tote your own bags to the room (if you don’t, keep it classy and tip the bellhop), don’t buy the family picture at every landmark you visit, and go with the full-sized rental car instead of the mid-sized SUV. Little things like that can save a little money and not reduce the overall quality of the trip.
• You don’t always have to have a drink. Alcoholic beverages can certainly be a fun treat, but they aren’t always required. Have a few more waters and a couple fewer drinks, and you’ll have a few more bucks and maybe even a few more memories.
• Travel light. Oh my goodness! Nothing irritates me more than baggage fees, so I do everything in my power to avoid them. Pack just carry-on luggage if you can, but if you need to check a bag, make sure it fits the weight requirements so you don’t get charged even more! If you’re travelling on multiple airlines or internationally, consider going with the airline(s) with friendlier (and more economical) bag policies.
• Be careful of tourist traps. Some tourist traps, such as shops or restaurants, are a great part of the experience, but don’t fall into the costliest of tourist traps, such as a gas station at the Grand Canyon or a camera equipment shop at the top of the Eiffel Tower. Think ahead and gather what you need before you travel.
• Look for coupon codes. I know they’re a nuisance to look up and they work a lot less often than I’d like, but a few minutes on Google can save you some real money. In the last few years I’ve found and used promotional codes intended for the guests of a hotel that was hosting a video game convention, for being a return customer, and for being a CPA. If you’re a member of a group such as AARP, have served or are serving in the military, or are an active or retired government employee, there are lots of promotional codes out there for you! It doesn’t hurt to look!
• Consider currency implications. If you want to travel internationally and are trying to decide where to go, look at the currency exchange rates and find somewhere favorable. Not only will doing this make you look smart now, but it could also make you look smart when you arrive somewhere and trade in a few Greenbacks for a lot of local currency.
• Look at websites like TripAdvisor.com. I don’t often specifically “plug” things, but Trip Advisor is my homeboy. It’s the best and most accurate source I’ve found for vetting hotels, restaurants, and landmarks. Look for options with lots of stars and not so many dollar signs. Look for a reasonable number of reviews and make sure the reviews are recent, too. I used to be skeptical, but now I’m a believer. You may think you want the hotel restaurant now, but after looking at a site like Trip Advisor, you may find that hidden jewel of a place that costs a lot less, has better food, is a lot more fun, and is within walking distance.
• Go to National Parks. If you want to feel small, you want to be awed, and you want to experience natural beauty, go to national parks. They usually cost close to nothing to drive in, and visiting them can be a really good and enjoyable way to chew up a lot of time you could be using seeing less amazing things that cost a lot more!

 

These are a few of my tips. What are some tricks of the trade you other travel enthusiasts out there utilize to see the world without taking out a second mortgage?

 

-Tom

How Famous People Lose Their Money

Credit: photostock

One of the saddest lessons I’ve learned during my time in the wealth management/financial advice business is that no amount of money or income can make someone immune from overspending. If you don’t live within your means, you can blow it; if you don’t properly diversify your assets, they can vanish; and if you do something that’s just plain stupid, you can make a lot of dollar signs go bye-bye, too. When I started writing this post I was going to give you some specific examples of how some famous people lost their fortunes, but the more I researched, the sadder I got. I just couldn’t believe what I was discovering. So, I’ve decided I’ll give you the examples, but I’ll remove the celebrities’ names. This will protect the identities of the personally innocent, but financially guilty. After all, they don’t need any more pain; they’ve already lost most of their money.

• Can you believe that an actor who has been in films grossing more than $4 billion has been reduced to having to take almost any role thrown at him because he lost tons of money on highly speculative investments and wasn’t paying his share in taxes? Maybe so, but he also bought a castle, a dinosaur skull, 22 cars, 47 pieces of art, and a bunch of real estate. Are you kidding me?
• Can you believe that a pretty famous golfer nearly lost it all as a result of gambling away $60,000,000? Sorry, but the zeroes were for effect!
• Can you believe an actress walked away from a movie she had agreed to be in knowing it would cost her $9 million not to honor her previous commitment? Oh, and by the way, she probably could have written a check for the $9 million if she hadn’t recently purchased part of an actual town!
• Can you believe a boxer could throw away $250 million through a bunch of divorces and alimony and child support payments? Of course, there was also a 109-room house…
• Can you believe a really successful musician would buy a $30 million mansion? Actually, I can. What I can’t believe is that he paid 200 people to be part of his “entourage,” and it cost him $500,000 per month! How could anyone maintain that sort of lifestyle? Better yet, why wasn’t I invited to be part of his entourage?
• Can you believe a world champion (and likely hall of fame) pitcher would invest almost everything he earned in his entire career in one, single, solitary investment? Guess what? It didn’t work out! And now he’s too old to pitch…
• Finally, can you believe an actor who has made millions and millions of dollars since 1999 thought it would be okay not to file a tax return reporting his income until 2006? Did he think what happened in 1999-2005 would go away? A lot of back taxes (with penalties and interest) and a little jail time just rocked his oblivious world!

Like I said earlier, I started this post intending for it to be funny, but the stories aren’t funny – they’re sad. I can’t help but think of what I could have done for them if they had sought some genuine, unbiased advice. I can’t help but think about what they could have done for themselves if they’d just lived within their ample means, prudently diversified at least a portion of their assets, and avoided doing things that just aren’t smart. They had it, and they threw it away. Grrrrrrr.

 

-Tom

 

Your Humble Abode(s)

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I want you to think about a few things with me. Think about how much the property taxes are on your home. Think about how much your homeowner’s insurance costs. Think about your monthly water bill, gas bill, and electric bill. If you pay someone to mow your lawn, think about that. Do you have an exterminator or a cleaning person? What about the annual fee for your alarm system monitoring? Do you have HOA fees or neighborhood dues? Do you need a pencil and paper yet to add all of that up? Don’t forget there are also those periodic home maintenance surprises that come up like replacing an air conditioning unit, hot water heater, dishwasher, or roof. The point I’m trying to make is that owning and maintaining real estate is expensive.

If you’re a homeowner you already knew that, but have you ever thought about the significant portion of your living expenses that is tied to the upkeep of your residence? Even when not considering any outstanding debt you might have on your house, having your own place requires a lot of cash flow and chews up a lot of assets. It’s important to realize this when you are working, but it is absolutely critical to understand this when you are planning for retirement.

In order to make it in retirement, you have to live off of any income you have coming in (like pensions or Social Security) plus small portions of your investment assets. Some people can live solely off of their retirement income streams, but most people slowly draw down their investment assets over time to supplement their lifestyle in retirement. The thing is, you don’t want to outlive your investment assets, so you’ve got to have a plan to make your nest egg last. A big part of making your investment assets last in retirement is by reducing your fixed expenses, and as we just discussed, a big part of your fixed expenses is often tied to your humble abode(s).

Whether you are planning for retirement, nearing retirement, or finding that you're eating up your nest egg too fast in retirement, here are some tips that might help:

• Pay off your mortgage(s) before you retire. This will likely reduce your fixed expenses significantly and help you make ends meet in retirement.
• Do major capital improvements to your real estate before you retire. If you’re going to redecorate, finish a basement, or get a new refrigerator, do it while your working cash flow is still coming in. It will make you feel better and give you peace of mind. Think of it as investing in staying put.
• Don’t keep multiple residences if you find it difficult financially or physically. Dusting one house stinks. Dusting two houses is awful! Pick one. Think of all of the property taxes, insurance premiums, utility costs, and lower back pain you will save!
• Get out of town. Sure, stay near the kids, but move to the suburbs or the country. Homes are cheaper, property taxes are lower, and the cost of living is likely lower, too. You’ll feel like you have more purchasing power, and you can add the difference between your urban home selling price and suburban home purchase price to your nest egg to strengthen your overall financial position.
• Consider state taxes on retirees. It’s probably not worth moving states just to save on state taxes, but if you’re on the border or a good portion of your family is in a different state, why not consider it? Take a look at this interactive map, and you’ll see that all states’ taxation is not created equal!
• Finally, think about downsizing. All I’m saying is that if you no longer need five bedrooms, why have five bedrooms? If all of the kids come at once, you can help fund their stays in a nice hotel, and you’ll probably still save money versus maintaining your own five-bedroom “bed and breakfast.” If you do decide to downsize, be careful and make sure you don’t more elegantly furnish a smaller house as opposed to actually downsizing and leaving yourself with some extra proceeds to put with your nest egg.

 

Personally, I plan to have a place on the beach when I retire. If my wife and I can swing it, we’d probably like to keep a place near my parents and her parents and/or near our eventual kids and their families. If we can’t swing it, we’ll just visit a lot because it is often a lot cheaper to pay for a hotel or even rent a place for a few weeks than it is to maintain an extra humble abode!

 

The How to Retire Early Series will continue next time with a look at an important piece of everyone’s retirement puzzle: health insurance.

 

-Tom

Start Strong, Finish Stronger

Credit: stockimages

Many retirees (or soon-to-be retirees) have a retirement plan based on what is called a “three-legged stool.” They have their pensions (leg 1), their Social Security (leg 2), and their investment assets (leg 3). They worked hard, they went through a lot, and I don’t begrudge them a bit.

If you’re like me and in the early stages of your working marathon that some people like to call a career, it is easy to get caught up in things such as fancy dinners, “flashy” clothes, and expensive gadgets. It’s a lot more fun to think about surround-sound systems, exotic vacations, and big houses than to think about retirement planning. The problem is, I believe our future well-being depends on just that. I believe the three-legged stool is headed to a museum, and younger people, like me, need a new blueprint. I don’t know many people early in their career who are working toward vested pensions, and I’m not willing to make a big bet on Social Security income as we currently know it still being here 20 or 30 years from now. So, if you ask me, the three-legged stool is looking more like a peg leg for us younger folks. Unless you’re willing to walk the plank (yes, that was a pirate pun), it’s important to realize that the ability to retire in the future is probably going to come down to leg 3: investment assets.

 

If it’s going to come down to investments, you’re going to need to get it right. You need to read the fable of “The Tortoise and the Hare” and take “slow and steady” to heart. You need to invest in an appropriate, long-term strategy. You need to make significant progress towards retirement during the first and second decades of your income-earning life, so you can have a decent chance of having significant assets during the last and second-to-last decades of your life.

• Slow and Steady - Saving $100 a month in your bank account, raising your contributions to your employer’s 401(k) or retirement plan by 1%, and opening a Traditional or Roth IRA account that you’re not sure you can fully contribute to can feel almost silly. It seems like a drop in a bucket, and it is, but it’s a drop in your bucket. It’s the first steps on your journey of a thousand conference calls, staff meetings, and expense reports. The hardest part about beginning a savings plan, implementing a family budget, or taking on a debt reduction plan is starting it! Brief sprints of financial progress and long periods or “naps” where you live at your means (or beyond you means) will make you resemble the hare, and you may not win your race. To be honest, you might not even be able to finish! Dedicated, repetitive steps of saving 10% from every paycheck, increasing your retirement plan contributions every time you get a raise, making those annual IRA contributions, and making 13 payments instead of 12 on your mortgage are how you and the tortoise win the race. I think Aesop may have been a financial planner in his free time…
• Invest Appropriately - I keep reading articles about how the market downturn in 2008 and 2009 has really spooked people in their 20s and 30s (millenials). For example, a recent study by UBS found that on average, millenials have half of their assets in cash and less than one third of their portfolios in stocks. I get it, I really do. Our grandparents’ home values went down like lead balloons, our parents’ investment accounts went down like an ACME anvil on Wile E. Coyote, and we couldn’t get jobs even though we went to college and did everything that was asked of us, but we cannot live in fear. My short-term market crystal ball is still in the shop, but I can tell you that plopping all of your assets under your mattress, in a bank account, in a bunch of bonds, or in an annuity with a minimal, yet allegedly “guaranteed,” return is not going to get it done. Young workers need to make diversified, tax-sensitive, and fee-conscious investments, but they also need to act their age! Long-term, 50% cash, 33% bonds, and 17% somewhere else is for grandpa and grandma - not for working millennials who have a longer time frame for their assets to significantly appreciate.
• Make Progress Early - I cannot emphasize how much higher the odds are that you will be in a good financial position if you start planning for retirement now as opposed to six months before you want to retire. Little things like building up an adequate emergency fund so you don’t have to raid your portfolio and sell when markets are down, making the contributions needed to your employer’s retirement plan to get their maximum match, and paying extra towards long-term debts may not seem like much now, but there will be a day when you look back, and you will smile. I wrote about the unbelievable power of compounding earlier this year, but it is worth restating that a dollar saved in your 50s is not the same as a dollar saved in your 30s! Progress towards your retirement goals at any point is great, but the sooner you can start packing away funds towards your future needs, the greater the chance that you will have meaningful compounding in your favor. If you start strong, you’ll have a much greater chance of finishing stronger.

 

The How to Retire Early Series will continue on next week by considering real estate and the pivotal role it can play in retirement planning. I hope you’ll check it out.

 

-Tom

Now or Later

Credit: Stuart Miles

Over the course of your life, a certain amount of money is going to pass through your hands. Obviously you could make this amount be larger or smaller based on how long you decide to work, but regardless, someone should be able to say “X” number of dollars went through your hands after you’re dead and gone. What that means (if you go into a financial vacuum and put investment returns and cash flow strategy on the sidelines) is you are going to have a finite amount of money to spend during your days on this earth. I’m not trying to be morbid, but I am trying to point out that if you are only going to have a finite amount of money, you can choose to spend more now or you can choose to spend more later - you can’t do both. This now or later concept plays a huge role in saving for retirement - especially in saving for early retirement!

In order to retire early, you need to:

• Live within your means - I know I go on and on about this, but it really is one of the keys to long-term financial success. Simply stated, if you want to be in a position to retire early, you need to be make progress almost every two-week pay period, not break even, and certainly not lose ground. You need to spend less than you make and you need to save the surplus, invest the surplus, or pay down debt with the surplus. It’s okay if you don’t make financial progress every once in a while when your spouse has an unplanned surgery, your car has an unplanned blowout, or your very favorite sports team makes an unplanned appearance in the playoffs and you decide to attend, but that must be the exception, not the rule. If you can’t always get the new shoes, go bar hopping every Friday night, or go golfing every weekend with the guys and make financial progress, then don’t! I guess you can get the shoes, bar hop, and golf if you really really want to, but please remember, if you choose now versus later, you are hurting later.
• Annihilate your fixed expenses - Sorry for the strong wording, but sometimes words such as reduce, pay down, or extinguish don’t have quite enough “oomph” to them. Fixed expenses are all around us. They can be phone bills, television plans, HOA fees, gym memberships, minimum credit card payments, car payments, and mortgage payments. If you want to be in a position to retire early, you need to wage war on fixed expenses. Sure, there’s not a lot that can be done about some fixed expenses such as HOA fees and phone bills, but you can try to cut back on some "fixed" expenses like an under-enjoyed cable package or a neglected gym membership (better yet, keep the gym membership and go exercise instead of watching television). As for credit cards, I always say pay them off entirely, live within your means, and don’t abuse them again unless it’s truly an emergency. Consider putting extra principal every month towards any student loans, car loans, or mortgages, so you can pay them off more quickly and reduce your interest expense. Fewer fixed expenses means you will need less income in retirement to support your lifestyle, so you could probably retire sooner and with fewer assets.
• As good things happen, live below your means - With any luck and a decent strategy in place, good things should eventually happen to you financially. Maybe your company will do really well and you’ll get a nice bonus, maybe you’ll receive a surprise check in the mail from your sweet great aunt in Kentucky’s executor, or maybe a bull market will cause your investments to really soar for a few years. When this happens, stick with your strategy and do as my late grandfather often said and “keep on keeping on.” Just because you are making more money or have more assets doesn’t mean you have to act like it! Keep yourself grounded and keep telling yourself that what you are experiencing is financial progress and momentum towards your goal of not having to work. All I’m saying is why get a Mercedes if your Toyota is still doing fine? Why go to the Caribbean when you could have a better time in the Gulf of Mexico? If you want to retire early, I’d keep those champagne tastes in check, and stick with your beer budget!

Next week we’ll continue the How to Retire Early Series by taking a look at why you need to save and invest sooner rather than later and what you should do with those savings and investments so you can start strong and finish even stronger.

-Tom

How to Fix Your Credit

Credit: khunaspix

I know a lot of good people with not-so-good credit. Most people who ask me how to improve their credit are not repeat offenders. They had an emergency, they decided to take a big trip, or they got a little carried away with their first credit cards. Still, some people have serious, recurring credit problems and are headed in the wrong direction. In this post, I'd like to share five tips on how you can right the ship and start improving your credit once and for all.

1. We’ll call this “1(a),” as in order to have credit at all (good or bad), you need to have used credit. If you don’t have a credit card, get one. The sooner you start wisely using a credit card and paying it off every month, the longer your credit history will be. The longer your credit history is good, the higher your credit score, which will help you get the most favorable terms when it comes time to buy that house or car. If you’re solely focused on trying to improve your credit score, you might even consider using your oldest card (the one you’ve had the longest) over your newer ones.
2. Pay off what you owe every month! If you have a mortgage payment or a car loan payment due, at least pay what is due. If you have a credit card bill, don’t just pay the minimum - pay it all off! If you can’t pay it all off, I understand, but you really need to spend less next month so you can pay it off then. Building up credit card debt doesn’t usually end well, trust me.
3. Even if you can comfortably pay off your credit card every month, try to pay it off before it gets near its limit, even if that means making payments several times a month. Some people have low limits (and some people want low limits, which isn’t a bad thing), but believe it or not, letting your credit card bill rise to near its maximum allowable limit can have negative consequences for your credit score.
4. Long-term debt can help. Associated with a long, good credit history is often the steady reduction of student loans, car loans, mortgages, and home equity lines of credit. Steady, recurring payments (with a little extra principal every now and then) are really one of the best things you can do to improve your credit score. Now I’m not suggesting you go take out a huge thirty-year note on a line of credit in the name of boosting your credit score, but I am saying that by steadily paying your long-term debts you are literally showing other lenders that you would likely be a good steward of any funds they lend you in the future.
5. I’ve mentioned this in previous posts (The Best Home Loan You Could Possibly Hope For and TARGETed to cite a few), but you really should check your credit reports from time to time at annualcreditreport.com. You can check your credit once a year with all three credit bureaus for free if you like, but I also like the strategy of people who check their reports with a different bureau each year, and they just rotate to make the task seem less daunting (unless they find an error and then they check with all three bureaus). I would suggest that you check your credit reports at least every several years, but definitely before you buy a car or take on a mortgage. When you get your credit report, you’re looking for errors, to make sure all the types and forms of credit you are using are listed, and to make sure the limits on each type of credit are up-to-date. While we’re not usually talking massive improvements to your credit score, correcting the fact that you made your October 2013 payment on time and that your Visa actually has a $10,000 limit instead of your initial $5,000 limit can only help. If you find an error, here’s a helpful site listing tips and contact information for the three credit bureaus provided by the Consumer Financial Protection Bureau.

Your credit score can range from around 350 to 850, and anything above a 720 or so is usually considered pretty good. Now just like Rome, your credit score cannot be built (or improved) in a day, but unlike Rome, it can be destroyed pretty quickly. Credit reports usually go back about seven years, so unless you find and correct a serious error or two on your credit report, there really aren’t any “silver bullets” (contrary to what some billboards and late-night commercials will try to tell you). If you’ve done a good job handling your debts and you have a great credit score, keep up the good work. If you’ve had some struggles with credit cards and being able to make payments on all of your debts, I’d encourage you to implement these tips and simply do better going forward. As they say, time heals wounds...and credit scores!

 

-Tom