Pick a date!

You can’t predict the future, but you need to start somewhere. Retiring at 65 is no longer the default. Your target age should stem from your values, so revisit or define them.

Ten years out

This is a time to get a reality check on your financial life and start to envision what retirement will be like.

• Time to take a basic retirement planning class. Look to your local community college, retirement system pension planners, or professional organizations. You’re not trying to become an expert or nail down your plan. But you are trying to figure out what you need to know and what you need to think about.
• How much money have you saved in a 401(k), 403(b) or other retirement account?  Do you need to save more?  Will you need to work longer?  Do you need to adjust your allocations to make them more aggressive or (more likely) conservative
• Will you get a pension? When will you reach the vesting requirements?  How much will you receive? How will it be paid out? In a lump sum, monthly, etc.?)
• Do you have a copy of your Social Security statement? How much can you expect to receive?
• What other assets and investments can contribute to your retirement? Are there any potential drains on your income?
• Start having conversations with your close friends and family members about your vision for your “retirement.”  How do you want to spend your time?  What skills might you want to keep using in part-time or volunteer work?

 Five years out

• Revisit the questions from 10 years out.
• This is a good time to start a journal. Take some of those daydreams you put away and make them more specific. For example, rather than “spend time with grandkids,” you might write “spend two dinners a week with grandchildren.”

 Two years out (or less)

Time to get serious.

1. Make sure your partner/spouse is involved, if you have one and they aren’t already. Communicate and negotiate with them about how you expect to spend your days and money.
2. Hire a financial planner if you haven’t already done so. You want a fiduciary. The Financial Planning Association is a great place to find one.
3. Create a realistic budget. Figure out if you’ll need to work for income or where you may need to cut back on expenses.
4. Figure out when you’ll take Social Security, whether and when you will sign up for Medicare, etc.
5. Turn that “stake in the ground” into a real retirement date. Put a date in the calendar to retire, whether you share this with your employer or not.
6. Get more specific about how you’ll spend your newly found time.

 I often say it’s not about the plan, it’s about planNING. Life happens. Mid-flight corrections are necessary, and you can’t schedule those.  But following this schedule will help minimize the changes and the surprises.

Take the pressure off!

You do not have to have all of the answers now, so start by separating the financial part from the how-to-pass-the-time part. I often tell clients who are “stuck” on how to begin planning for retirement to focus on the first three years and then on the last three years. This takes the stress out of a big question like, “What the heck am I going to do for 20-30 years?!”

For the first three years, write down the collection of projects you want to get done. This often leads to a very satisfying feeling of purpose and direction. It’s like you’re still working, but you’re working on the stuff you want to work on and have been putting off. I’ve had clients travel for a year, remodel homes and take care of grandchildren, to name a few.

Then write down your ideal last three years, which are also usually easy to envision. These are typically slower, easier, quieter. This part also comes with specifics, such as:

• where you’ll live,
• who you’ll rely on for companionship and support,
• how you’ll want to manage your physical slow-down,
• how you want to be cared for and who will take care of you, and
• how you’ll feel at the end of each day

This process helps you figure out how much money or assets you need to set aside to meet these criteria, which will help build the financial part of your retirement plan.

Now for the years in between. I recommend making a list of the skills you want to keep using. This will likely have far fewer specifics than the first or last three years. That’s fine. For instance,

• I’ve had teachers that want to continuing teaching, so they consider tutoring.
• Those leaving executive positions find there are all kinds of nonprofit boards looking for expertise in leadership, development and managing a budget without having to manage employees.
• Some people enjoy mentoring others and find places to create those relationships.
• Talk to others who have retired. Keep your networks going with people who are or are not in the workforce. You don’t need to know exactly what you want to do, but it’s helpful to identify those skills of which you are most proud, most willing to “give away,” and most likely to energize and satisfy you.

In my experience, most people take two to three years to settle into a “retirement groove.” They tackle all of their projects early on, then they hit the end of that list and it takes a while to figure out how to spend their days. Even those who have done a “whole lotta nothin’” in the first year of retirement realize they want to make a change in how they spend their time. This is typical and normal. I also find it takes two to three years for the budget to work itself out. Rest assured, both how to spend time and how to spend money do work out. And both begin with figuring out how to spend the first three years and how to spend the last three years.

I had to laugh the other day, though, when a post requested a referral to a financial planner who “could explain all the options for paying for college that people use.”  This person wanted unbiased advice and essentially the a la carte menu of possibilities. That would be a little like me walking into the paint store and saying, “I just want to see all the colors people use to paint their walls.”  Have you ever seen how many colors there are, how many different shades of the same color, and how many brands of paints?  That’s before you get to oil or acrylic.  Don’t get me started on brushes. And have you ever taken a sample of favorite paint home from the store, put it on the wall and hated it?  This original poster would have been better off with a survey.

Your advisor should advise YOU.

Here are the many ways I’ve seen college get funded:

• Kid decides not to go to college or not to go right away.
• Kid decides to live at home and attend two-year college.
• 529 plans.
• Paying out of income as the child goes to college.  In other words, not using savings at all.  (Heck, in one instance, the family’s annual tuition expense went down when the kid left a private high school and went to a state university and the family bought a new car.)
• Brokerage and investment accounts.
• Grandparents or other family members paid for it.
• Scholarships.
• Work-study programs.
• Loans.  (Remember, you can borrow for education but not retirement)
• Life insurance cash values.
• Investment properties (either selling them or using rental income).
• Inheritances and inheritance advances.

I could go on.  My point is that there is no right way to do this, you need someone who can listen to you, understand your values and know who you are, and help you navigate among the many options with a presentation of the beauties and pitfalls of each. That’s what good advisors do:  they listen well, they have opinions, they articulate them, and help their clients come to their own decisions about their financial lives.  This is why good advice is worth it.  It saves you time, money, anguish and agony.  A strategy for college funding is not always easy to just paint over.  Make sure you get as good of a look as you can at the start.

What to eliminate from 31 ideas and what to add

There’s an older article that refers to 31 ideas. I see no reason to replicate it.  Check it out.  There are some great suggestions.

 
Here’s what I would not do (or at least be wary of):

• Make an extra mortgage payment.  This is only worthwhile if you’ve sat down with your financial planner and decided this is actually in your best interests.  It likely isn’t.

• Increase your student loan payment.  Again, only worthwhile if you’ve considered the interest rate, whether you can deduct the interest, and whether it makes sense in your overall financial plan.  Remember, paying off debts is not the same as accumulating assets.

• Seeking a lower interest credit card.  Initiating new credit can bring down your credit score, so if you’re planning to buy a house, this could be a bad idea.  Otherwise, it’s a great idea.

• Be careful about shopping for new home and auto policies.  Make sure that you’re not losing “seniority” at your insurer that you would be giving up should you change companies.

 
Here’s what I applaud and highly recommend:

• Set an automated payment toward your debt.  In this, I’m thinking about the minimum monthly payments.  Make sure those are paid automatically.  Now, you might always pay more or pay them off, but I can’t tell you how many clients thought they were paying ABC Bank for their mortgage but sent the payment to the credit card division and didn’t catch the mistake until they were 30 days late.  Yikes.

• Check your credit report.

• Reread your estate planning documents. Make sure you still agree with them.

• Walk a loved one through your affairs. 

 
Here’s what I would add:

• Call your mortgage broker and see if you can do better on your residential loans.

• See the comment near “Investments and Retirement” about checking out your medical report file from the nationwide consumer reporting agencies.  Like checking your credit report, you may discover mistakes that are causing you money.

• Consider buying long-term care insurance.

 
If we can help you with any of these items or with a referral, please call.

Even a broken clock is right twice a day

Look at predictions this way:  It’s everyone’s chance to put their hat in the ring in the game of “I told you so.”  That’s all.  Somebody is going to get bragging rights at the end.  I often tell my clients that my crystal ball is as good as theirs.  I might be more educated or more experienced or more articulate about it, but it’s really just as good as anyone else’s.   Remember, past performance is not a predictor of future results.  Just because someone’s gotten it right in the past doesn’t mean that person gets it right this time around.

There are many folks out there saying the S&P is going to be up substantially within the next two years.  Time to throw all your money into the stock market, right?  Not so fast.  The last “secular bear markets”—that is, those extended periods of time since 1906 in which the market has ultimately been down from the beginning of that period to the end—have averaged about 15 years.  We’re about 10 years into this secular bear market.  Understand that even within secular bear markets, there are years that are “up” and there are opportunities to make money.  So, yeah, the markets might be up the next two years, but that doesn’t mean we’ve entered an official “secular bull market”—that is, an extended period of time in which the markets are up.  And we won’t know that until we’re officially into it, which takes 20/20 hindsight years from now.

What almost all bear markets have in common is volatility.  You have to manage volatility.  It’s a silent killer on portfolios.  Go back to your plan.  Make adjustments according to that plan.  Do your best not to lose money and don’t be greedy.  You don’t need to capture the top of the market to meet financial planning goals at risk of a significant drop.  Balance your allocations, reduce your volatility, and even out your returns so that you ultimately meet those financial goals over time.

You must make your own path

Start here:  It’s not your fault.  Your parents probably had their retirements built this way:

     • By the government (Social Security)
     • By their employer(s) (a pension)
     • By their savings (what they saved)

But your retirement probably looks more like this:

     • Your savings (maybe a 401k plan)
     • Your savings
     • Your savings

Not only is this a daunting proposition, but the people who probably help you with advice about many things (your parents) are often unable to help you at all in retirement planning because what they did won’t work for you.  As a result, this generation is a little lost.  Not your fault.  But it is your responsibility to recognize that you may need some assistance and help in learning what needs to be done, when and how.  Read.  Ask questions.  Do research.  This is your life and your money.  You can do this.

And, well, that’s what I’m here for.  I can help, too.  Let’s get started.

But interest rates are so low!

Yes, I know.  But interest rates don’t matter. Stop chasing sexy interest rates while forsaking good financial decision-making.

I’ll also wager that the same familial financial advice-givers that told you to get the 30-year fixed-rate mortgage also told you not to spend money on depreciating assets, like a fancy car.  They say that it’s not financially prudent to throw a lot of money at something that you don’t have for very long and is ultimately disposable. (This particular piece of advice I agree with, by the way, but I will also concede that fancy cars are fun to drive and are a nice luxury item to purchase with disposable income.)

Please, please, please see the inconsistencies in these two positions. 

My clients who are in adjustable rate mortgages are saving a truckload of money right now, both in their mortgage balances, payments, and lack of refinancing fees.  Their interest rates are in the 3’s or lower.  For all of you who just read that sentence and are secretly and smugly thinking about how smart you are for getting a fixed-rate mortgage at 4.5% because interest rates are going up, I ask you these questions:  How do you know and when will it happen?  Those questions are important.

Look at this math:  The longer a rate is fixed, the higher the interest rate.  The longer the term of the mortgage, the more the bank makes.  A 30-year fixed-rate mortgage at 4.5% has an interest charge that is 82% of the original loan amount.  In the first five years, you pay 25% of the total interest charge.  In most cases, the loan balance isn’t cut in half until after year 20.  No kidding.  Here’s another fun math factoid of mine: A $500K loan, fixed at 3% has a payment of $2108.  In five years, the loan balance is $445K.  The same $500K loan, fixed at 6% has a payment of $2998.  In five years, the balance is $465K (yes, $20K higher after making $53K more in payments).

What does this mean?  If you’re going to take out a home loan for 10 years or less, the adjustable rate mortgage mostly likely puts you money ahead.  You’ll pay less overall and chip away at the principal faster such that in higher interest-rate years, you’ll be paying a higher interest rate but on a lower loan amount.  It still makes sense to take the adjustable, even in a low interest-rate environment. In fact, I would argue, especially so in a low interest-rate environment.

The 30-year fixed-rate loan is the Cadillac of mortgages—big, expensive, and probably disposed of in 10 years or less through sale or refinance.  If you won’t buy a fancy car, why are you buying a fancy mortgage?  I know, it is humbling to think about.  Your familial financial advice-givers mean well.  They do.  Sometimes they just don’t know what they don’t know.  Now you do.

Managing the Cycle of Emotion

My real point in this post is to remind people about the cycle of emotion.  There’s an explanation for why the equities market return 7-8% historically over a 30-year period, and why the average do-it-yourself investor makes 2% at best.  It’s called buying and selling on the cycle of emotion.  Instead of buying low and selling high, most investors do the opposite.  A neighbor mentions an investment, and the potential investor does nothing until the price has increase and his or her confidence has increased.  By the time they have the guts to invest, the price is even higher.  Invariably, the investment rises and then loses value and the investor sells at a loss in a moment of panic or despair.  The discouraged investor swears s/he will never do that again.  Until, of course, the neighbor mentions the next big thing.

You can manage the cycle of emotion through systematic implementation of a financial plan that is in alignment with your investment goals, philosophies, and risk tolerance.  The trick is to stick to it and to make thoughtful adjustments as the markets make their adjustments.

My favorite comment I’ve heard lately is that the “flight to gold at these prices is a flight to Armageddon.” Still makes me laugh.  Let’s face it, if you’re wanting to buy gold because you’re concerned about the global geopolitical system and currencies collapsing, you might be better off with land.  At least then you might get food and water because you can’t eat gold.  I’m not convinced that market fundamentals justify gold’s price.  Fear seems to have a bigger influence in that market.  Gold is not a good inflation hedge, and it’s in danger of losing value very quickly when the economy recovers.  Don’t get caught in the frenzy.  Fear is not the best place from which to make decisions.  Look at your financial plan.  Follow it.

Good Tidbits to Know About LTC Insurance

Long-term care insurance is not my specialty, and while I might be able to sell it, I don’t.  I do recommend that clients integrate it into their financial plans when it makes sense (and it almost always does).  Some good tidbits for you:

1. LTC insurance is designed to protect your assets (your nest egg).  It can help cover the cost of care you receive at home from nurses’ aides, home health aides, and therapists, and can help cover the cost of assisted living facilities and nursing home expenses.
    
2. In CA in 2010, the median annual care cost for a private room in a nursing home was $87,000.  For a semi-private room, about $73,000.  The increase in cost outpaces the inflation rate.
    
3. At least 70% of people over age 65 will require some long-term care services at some point and 40% will need care in a nursing home.
    
4. Elderly women are most likely to utilize the service because they live longer, healthier lives.
    
5. Health insurance and Medicare cover almost none of the cost of nursing homes, assisted-living facilities or in-home care.
    
6. To qualify for Medicaid, people have to pay out of pocket until they are practically destitute (particularly if proper planning hasn’t happened ahead of time).
    
7. Better to obtain insurance when you’re younger and healthier and it’s cheaper.  Not to mention that you’re in a healthier state of mind (not in crisis) and can plan.
    
8. Long-term care insurance can be used to cover the care of someone with Alzheimer’s, an affliction that can last for many years and deplete a family financially.
    
9. LTC premiums can be paid with Heath Savings Account (HSA) monies.
    
10. If you’re self-employed, a portion of your premium may be deductible as health insurance.
     
11. Anyone can pay the premiums on the policy.  Children can pay for LTC insurance to protect against the family vacation home (or any other asset) being sold to meet long-term care costs.
     
12. Remember, your children might be picking your nursing home.  How many choices do you want them to have?

If you need a referral to a long-term care specialist, please let me know.  I can help you figure out whether LTC insurance makes sense in your overall plan.  A specialist can tell you what to look features to look for, what to consider when buying a policy, what riders are worth it, which company to choose, and how much to pay.

You should always make a car payment

Typically, this question is asked from a money-saving perspective:  Will I save more money buying or leasing?  I believe the decision tree looks like this:

1. First, you should always be making a car payment, even if you own the car outright.  If you borrow money to buy or lease the car, you’ll make a payment. But you should do this if you own the car.  Why?  Because buying a new car with cash is like going to a big party and not having a hangover the next day (this analogy is not mine, it’s Kathyrn Amenta’s).  It feels really great.  In 10 years, you’re going to want to have this party again, so you should be saving each month enough money so when you need a new car, you can buy another in cash.  If you’re thinking about buying just to avoid the car payment, that’s the wrong place from which to make a decision.  You will always have a car payment. Even if you borrow money to buy the car, when the loan is paid off, start making those payments to yourself.
    
2. Second, what do you usually do with cars?  I’m the first to admit that I engage whole-heartedly in the American infatuation with the automobile.  I love to drive fun, fast cars.  But when it comes to what I own, I buy cars and hold them as long as I can and run them into the ground.  Let’s face it:  It’s a depreciating asset.  My commitment is 10 years or more to a car.  If this is you, buy.  If you like new cars or if you need it for image purposes professionally, lease.
    
3. Third, do you have kids?  Kids are notoriously hard on cars.  They dent them with their bicycles, they throw up in them, they eat in them and leave their crumbs behind, they crawl all over the inside leaving scratches and bruises.  If you have school-aged kids or younger, buy.  Otherwise, you run the risk of a penalty when you turn the car in at the end of the lease.  If you don’t have kids and you take pretty good care of your car, you might want to lease.
    
4. Fourth, do you drive a lot of miles each year?  If so, buy.
    
5. Fifth, run the numbers, but don’t stress.
    
6. Finally, decide how you feel about the environmental impact.  (What you should do to protect the environment is probably best left to another professionally.  I can amateurishly weigh the argument for/against a new car, but that’s not helpful.)
    

Now that you’re committed to the payment, if you don’t have kids and you don’t drive a lot of miles, in a low interest rate environment, I can make a strong argument for leasing.  You’ll get a new car with all the new features and safety equipment every three years.  If you love that new car smell, you’ll almost always have it.  Let’s face it.  That’s pretty fun.

Drive safely.