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Dec / 09

Is Your Financial Life on Track? Take This 10 Minute Financial Audit

If you know that you are not in complete control of your life, it is a good idea to listen to the discussion in the following article. Life is hectic. Day to day chores, work, and family obligations can keep us from our longer term aspirations. We may have goals that we set up at the beginning of the year or a timeline that we want to accomplish as we move through certain stages of our life, but these targets can seem elusive, if we do not occasionally take a realistic assessment of our progress. Perhaps, a quick 10 minute financial audit is a good place to start.

Take ten to reflect on your financial life and measure your financial “pulse” to see if you are in decent financial shape. Here are a few quick and easy questions for you to ask yourself to complete the review:

First, are you prepared for a catastrophe?

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We all have family members, coworkers, and friends who have experienced a job loss, death, or disability. We tend to think naively that a similar event would never happen to us; but unfortunately, we are not immune from hardship. Ask yourself the following specific questions.

Is your job secure? If not, do you have at least 6 months cash to cover your expenses until you can find employment?
If you or your loved one were to die, would there be sufficient insurance to cover your future living expenses such that you could maintain your current lifestyle?
Do you have an updated will and other estate planning documents or would there be chaos or confusion among your family members upon your death or incapacity?
If the primary earner was to become disabled, how would you cover the lost income from his or her salary?
If you have group disability, will the after tax benefit be sufficient to pay your monthly living expenses? (Disability benefits for which premiums are paid with pretax dollars are taxable, whereas benefits paid with after tax dollars are tax free).
Even if you were to cover the basics through a disability policy, would you be able to still save for retirement?

These are tough questions to ponder, but very important to consider, just in case the unthinkable happens. The probability of a disability is very real. Statistics show that just over 1 in 4 of today’s 20 year-olds will become disabled before they retire, and that of the 37 million disabled Americans(in 2013), 50% are in their working years (age 18-64).*

In fact, a typical non-smoking female, age 35, 5’4″, 125 pounds, who works in an office job with some outdoor physical responsibilities, and who leads a healthy lifestyle, has a 24% chance of becoming disabled for 3 months or longer during her career with a 38% chance that the disability will last 5 years or longer. The typical male has a 21% chance of becoming disabled with the same rate as females of a long term disability (38%).* Of course, the risks are higher for people who do not live a healthy lifestyle.

If you can’t answer the questions above, or you are concerned that you are not protected in the event of an unforeseen circumstance, you need to focus on risk management. You should immediately look into additional insurance coverage to protect against these events.

Second, are you moving closer to your important life goals?

If you need to purchase a car or other large purchase in the near future, are you gradually saving money in a separate savings account so that you can pay for your purchase in cash?

Are you contributing annually to your kids’ college funding accounts? It is best to start as early as possible so that you save less each year. If you wait until the kids are in high school, there are fewer years to save and the process will be much more onerous. Time and dollar compounding make the process easier requiring that you save less over time.

Are you saving at least 10% of your salary (not including your employer contribution) for retirement and are you on track to retire? (A basic rule of thumb is for a retiree to amass roughly 15 times their income by age 65. By age 50, you should have about 6 times your income saved; and at 40, 2.5 times your income saved.) If you are behind, you will need to save more than 10%.

Third, do you understand what your invested in and why?

You should primarily be aware of how much exposure to the stock market you have and if that makes sense given your age, goals, and investing personality. Ultimately, you should have a low cost, diversified portfolio of funds that you can stick with, even in the event of a very large market correction.

You should also not be paying high fees for investment management and for “active” funds. If you think you are paying too much or are worried you have too many accounts that are spread over several investment companies, you would likely benefit from cost reduction, consolidation, and simplification.

Finally, do you have anxiety over any aspect of your financial life?

If there is something that is bothering you, it is important to address it quickly and thoroughly so that you can sleep better at night. Furthermore, if you are the kind of person that would find it hard to quickly pull together your key financial documents such as recent tax forms, investment statements, and insurance policies, you will likely benefit from some financial housekeeping and coaching. Awareness and intention are important elements for financial success. To this end, you may find that working with a financial advisor or coach is a great way to improve and enhance your financial security.

The financial planning process is a great way to create a roadmap for your financial life. Working with a fee only CERTIFIED FINANCIAL PLANNERTM professional is a great place to start. The planner can put together a comprehensive plan and then meet with you to review the plan on at least an annual basis. For my clients, each year I provide a color coded financial “report card” that measures progress toward specific financial goals in all areas of their financial life—insurance, cash flows, college planning, retirement planning and estate planning.

We also review their portfolio, and discuss market valuations and the very real and ongoing potential for markets to correct. This ensures that the client is mentally and emotionally prepared for market volatility and protects them against irrational behavior at market peaks and troughs. A tax checklist is also reviewed to see if there are opportunities to reduce taxes, both in the short and long term.

Annual reviews are an essential part of the financial planning process. They provide feedback on progress and direction in response to changes in financial markets and retirement and tax legislation. Most importantly, they provide moral support and encouragement for the client. The review forces clients to focus on their finances in an intentional way.

I once told one of my long term clients that since she had been coming in for years and her plan was in good shape, we could move to less frequent reviews, say every other year, if she wanted. She commented that she was happy to pay the fee for more frequent reviews, as it forced her to pull her information together and give it a good look every year. This annual exercise was meaningful for her and well worth the time and investment.

Dec / 03

Do you need to retire early or are you just yearning for a purposeful life?

At this middle age you might have thought about what you will become in 10 years, 20 years, even when you retire. However, for some people, they might just simply lead a life without a clear direction even if they are nearing their retirement age.

Many Baby Boomers are working long and hard in stress-filled jobs. After 20-plus years laboring in the same industry, performing the same duties day in and day out, they have gradually lost the passion they once had for their career. In a “flight or fright” response, they are reflexively expressing a desire to retire early and rid themselves of their daily toil.

This knee-jerk desire to tell their boss to “take this job and shove it” often occurs due to a lack of purpose and passion in their everyday life. Perhaps, rather than trying to retire at the age of “50 something”, these frustrated workers should instead consider redesigning their work life such that it aligns with their core values. In doing so, they may find work to be a source of pleasure and excitement as opposed to a continued source of stress. Their physical health may improve too, as studies show that continuing to work later in life can significantly improve physical and mental well-being.

This blog was inspired by a presentation given by Randy Gardner, JD, LLM, MBA, CPA, CFP(R) at the 19th annual Garrett Planning Network retreat which I recently attended. Mr. Gardner emphasized that many retirement plans, especially early retirement plans, fail because the retiree does not have his or her “next step” configured.

A retiree’s ext step— Ask what am I retiring to?

A good question to ask oneself prior to retirement is, “what am I retiring to?” It is extremely helpful to envision a typical day, week, month in retirement. How will you fill your day? What is your purpose or passion? And, better yet, why can’t you instill that passion in your workplace today?

An early retirement can be hazardous to your health.

Gardner also cited research that suggests that an early retirement may be hazardous to your health, as calling it quits early is highly correlated to an increased risk of heart attacks as well as Alzheimer’s and dementia.

In a study by the Institute of Psychiatry at King’s college, London, researchers found that keeping the brain active later in life reduce the chances of an early onset of Alzheimer’s. In fact, there was a significant link between late retirement and delayed symptoms. The researchers found no link between education or employment and dementia risk, but found that those who retired later prolonged their mental abilities above the threshold for dementia.

Furthermore, mortality rates increase with a reduction in the retirement age.

In a study out of the University of Zurich researchers found that a reduction in the retirement age causes a significant increase in the risk of premature death – defined as death before age 67—particularly for males. According to the study, one additional year of early retirement, causes an increase in the risk of premature death of 2.4 percentage points.

Losing daily structure can lead to boredom, and chronic boredom is bad for your health.

Experts purport that the root cause of declining health in retirement is due to a lack of purpose. Having a long and successful career provides structure for the week and gives us all a reason to get out of bed in the morning. Losing that structure can lead to boredom, and chronic boredom is bad for your health.

In addition to these non- financial risks, the risk of longevity, increased taxation, legislative changes to entitlement programs, and poor market returns can hamper a retiree’s ability to receive adequate lifelong income.

Plus, let’s face it; the math of an early retirement can be daunting. It is hard to work for 30 years and live off of your savings for possibly the next 50 years. There is a good chance that you will need to downscale your lifestyle in order to make your assets last.

How can a generation of burnt out Boomers respond to these ongoing pangs for an early retirement?

“Purpose perhaps is more important than exercise.”

Rather than retire early, Gardner suggests that burnt-out workers instead instill purpose in their lives. In fact, he believes that purpose is “perhaps more important than exercise.” Frustrated workers of all ages owe it to themselves to design a career that engages them in the things that they are passionate about. Since only 20% of workers find their jobs to be engaging, they need to commit to strategies that improve their work responsibilities and environment.

Mr. Gardner recommends that people engage in “job-crafting.” Job-crafting is the process of redesigning your job in order to engage in tasks, relationships, and intellectual pursuits that engage, excite and interest you.

Here are some tips I put together based on the job crafting concept that will hopefully help you get started in creating your purposeful career and life.

Find out which tasks you enjoy and try to incorporate them into your work.

If you would like to write, start a blog or newsletter for your company or industry. If you enjoy working in a team or competitive environment, see if there is an opportunity to join a task force in your company. If you enjoy working with your hands to create things, start a small business that allows you to do this or add these activities to your weekend to do list. During your vacations, engage in the pursuits that energize you. This will refresh you when you return to work.

Determine which relationships are most important to you and try to build these within your work day

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It could mean that you need more time with peers whom you work with, or perhaps, you crave a connection with a more experienced mentor. You may need a study group or network of people outside your company but within your trade or industry to connect with. Increasing these connections can make you feel part of a larger group and also help you build bridges with colleagues across the country.

You may crave relationships that are outside of the workplace during the week, so you should take the time to meet with friends for lunch or dinner after work in order to get a break from the people you work with every day.

Maybe you work by yourself in a home office and you need to be more intentional about getting out and connecting with other professionals like yourself. The point is that with some soul searching, you can identify the things that frustrate you about your job and try to refine them so that they work for you.

Although I am a solo practitioner, I really value the relationships I have built over the years with other financial planners and industry professionals I have met through the Garrett Network. They make me feel like I am not alone and less isolated. I connect and engage with them through webinars, study groups, and our annual meeting.

Re-engineering your work functions could give you a renewed perspective.

Finally, we are driven by curiosity and intellect toward various careers or pursuits; periodically we need to be stimulated to nurture our creativity and sharpen our intuitive skills. Performing our job functions in the same way day in and out can make our skills stale. Re-engineering your work functions can give you a renewed perspective. Mentoring a younger employee new to the organization may also provide you with a fresh outlook on your job as well as foster camaraderie.

Complete This “Passion” Exercise

In order to create you ideal career and personal life, I encourage you to:

Create long list of all of the things that you are passionate about. Compile this for all the areas of your life.
Pick the top ten things you are most passionate about from the list
Ask yourself—why do I enjoy this pursuit? Mr. Gardner encourages people to be as specific and exhaustive about what aspects of their passions they enjoy, as opposed to focusing on the activities themselves. This particular step can provide rich insight into what really excites us and makes us tick.
Create a long term plan to infuse your life with elements from your passion list. We tend to get bogged down in short term thinking, which can make us irrational and depressed when we don’t reach our goals quickly. People who are able to think and plan longer term tend to be more optimistic about their situation. In short, create a plan for the next few decades as opposed to the next 365 days.

A valuable tool I recommend to my clients which helps them identify their passions, is the Highlands Ability Battery test. Its premise is that the skills or abilities that come naturally to you, tend to be the ones that you enjoy. The function of the Highlands Ability Battery test is to define each of your abilities and then determine the patterns or “clusters” into which they fall. Armed with this knowledge, individuals are able to avoid stress and achieve satisfaction with work.

Finally, remember that some stress can be a good thing. Stress is a necessary emotion and intermittent stressful events are probably what keep the brain more alert and enable you to perform better. Here is a related article on how successful people manage their stress.

Don’t plan your retirement to fail; instead, plan for passion. Not only will your work seem like play, but it will also help you achieve the financial independence you now crave.

Nov / 20

3 Debt Tips from a Debt Collector

It is not easy to live in this life diffrent from many people. Especially if it about tradition, including how you spent your money on holiday. With the holiday shopping season well underway, the spirit of giving to family, friends and just causes comes with a high cost.

According to creditcards.com, the total U.S. consumer debt stands at $2.43 trillion for 2019, and falling into debt during the holidays is a reality for many. In fact, the National Retail Federation found that Americans spent $52 billion on Black Friday shopping this year.

Beware of the phony debt collector…

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These days, falling behind on some bills is the new normal since so many people are juggling unemployment checks or part time salaries. But that opens the door for fake collectors to scam people out of credit card numbers and bank account information. According to the Fair Debt Collection Practices Act, a debt collector cannot threaten arrest, call you after 9 p.m., at your place of work or contact others regarding your debt. If so, that person may very well be a scam artist.

Don’t be ‘naughty’ with your credit cards…

Credit cards can be useful tools for consumers, but you have to be careful not to abuse them during the holiday season. They can spell a quick slide into unmanageable debt if misused. Creditcards.com reported that the average credit card debt per household was $15,799 and the average annual percentage rate on credit card with a balance on it was 13.10 percent, as of May 2019

Have no fear; help is on the way…

Not paying off debt can have other consequences besides having to dole out extra cash due to a high interest rate. A lowered credit score can affect your ability to snag a great deal on your next car, appliance, home or other purchases – or may prevent you from obtaining future credit altogether. According to the Consumer Financial Protection Bureau, 70% of consumers surveyed say they have noticed new credit card disclosures on their bills. But fewer than one-third say this caused them to make bigger payments or stop charging up their cards.

The benefits of working with a mortgage apr calculator

Modern times have taught people of a different manner to approach things. When looking to purchase a valuable item like a house or a car, people choose to borrow money. Having the entire sum is close to impossible in some cases and purchasing a home is often a necessary step in life. Borrowing money from either a bank or a financial institution which is dedicated to this field has its costs. The problem with loans is that the client never gets the entire story from the very beginning. People are lured by incredible amounts of money which seem to be given easily to almost everyone. There are no impossible conditions to accomplish which might come between the borrower and the needed sum of money. When the contract is done and the sun of money received has been spent, the truth arises and it can be devastating in some cases. Working with a professional annual percentage rate calculator brings forward several benefits.

The first real advantage is the fact that you get the whole truth from the very beginning. With a mortgage apr calculator, you know exactly what to expect when you are borrowing money. It is a known fact that when you decide to file for a loan, the costs of the entire affair will end up being larger than the sum of money borrowed. The good thing about using an annual mortgage rate calculator is that you have the possibility to better distinguish among your choices. The APR could very well become a criterion based on which you select the loaner. Secondly, the next benefit on the list is that you can tell whether or not your loan needs refinancing. The APR has the tendency to fluctuate and these modifications can affect you over time. Only a mortgage apr calculator can tell you whether or not you should file for a loan refinancing and where is the best place to obtain it.

Last, but not least on the list of benefits, the annual percentage rate calculator can tell you exactly what type of loan you can actually afford. This is very important, because even if several loaners offer you the same sum of money, one might present less extra costs. Luckily, a tool as efficient as the mortgage apr calculator can offer you the guidance you need when selecting where to borrow money from. It is true that one cannot take a decision based solely on the results provided by the annual percentage rate calculator. There are multiple other factors which come to influence the decision of the client as far as the borrower is concerned. However, using the annual percentage rate calculator can provide the client with relevant pieces of information. As you can see, the use of a mortgage apr calculator brings forward a complete and truthful overview of the borrower, the chance to better compare borrowers among them and offers the client details on the loan he can afford. In a world which is characterized through loans and the concept of borrowing, this instrument is indeed on the client’s side.

Make Your Own Holiday Money Traditions

Most people would say that they have money “habits” and not necessarily money “traditions.” Money is often looked at as a necessary evil instead of a tool that can help you focus on your priorities in life. Take the changing of the seasons as an opportune time to change your attitude towards money. Instead of your adversary, make it your friend and form new positive traditions that align with how you would like to feel about money.

Create Financial Traditions

Tradition #1 – Maximize Retirement Savings. For most companies, the fall is “open enrollment” season for benefits. While you should be able to change your 401(k) elections at any time throughout the year, most people don’t bother to look at their retirement until it is time to confirm your elections. If you turned down or off your retirement savings when you bought your house or had a child, now is the time to commit to this new tradition and maximize your contribution. For 2010, you can put away $16,500 pre-tax, which will not only make sure you are staying on track for this important goal but also ensure you pay less in taxes. Don’t forget a SAHP either! As long as the working spouse earned at least $5,000 during the year, a SAHP can put away $5,000 in a traditional IRA, or in a Roth IRA (if your Adjusted Gross Income is less than $166,000). Think of the great example you are setting for your children and how happy they will be when they don’t have to support you in your retirement!

Tradition #2 – Find Real Holiday Spirit and Set a Holiday Spending Plan. This lackluster economy has made many families cut back their spending and re-evaluate on what they spend their money. I have seen families do very well at living within their means and then completely blow it when it comes to the holidays. Do yourself a favor this holiday season and decide in advance how much you would like to spend on gifts for your immediate family and other relatives. Set a target amount, and try your hardest to stick to it. Impulse purchases can ruin the best-laid plans, so if something catches your eye in a store… wait 24 hours and go back if you really think it is the perfect gift. Also, take time to critically evaluate whether you need to get everyone in your family a gift. Most people give relatives gifts because it is a “tradition,” but if you do not want to carry that tradition onto the next generation now is the time to make the change.

Also, have you gotten in the habit of giving new friends or their children gifts at the holidays? Instead of giving more “stuff” to each other, consider having a potluck holiday party and creating a new memory.

Tradition #3 – Keep What You Value and Get Rid of The Rest. Do you have closets in your house filled with things you do not use, a garage full of who-knows-what, or even a storage space? Start an annual tradition or semi-annual tradition of going through your possessions and deciding what you really value and want to keep. You may want to enlist a good friend to help you go through your closets and be a reality check. Also, it seems that kids are never too young to start accumulating stuff they never use. Try to make it fun by making piles to keep, donate or recycle. If the donate or recycle piles are bigger than the keep pile, reward yourself, or your kids with a fun treat like an afternoon out picking pumpkins.

While the urge to purge is deep in my bones, my daughter is getting the hang of it as well. Every few months she decides that she has outgrown something (a book, jacket, toy) and specified to whom it should go, be it a friend’s younger sibling, her school or someone who might like it more than she does.

You can always turn this tradition into a money maker by having a yard sale or selling goods through Craigslist or eBay. Also, remember that donations are tax-deductible, so you will be saving some money by paying less in taxes.

These are just a few examples of traditions we have implemented in our family. There is something comforting about having a tradition and calling it your own. Ideally, I would love my children to look back on their childhood fondly and to have developed a very positive relationship with money from an early age. As my grandmother always said, “good habits start young, but you’re never too old to learn.”

May / 22

Do we have a retirement crisis on our hands?

Many studies show that Americans are woefully behind on their savings for retirement. In fact, according to the 2018 EBRI annual survey, roughly 60% of all workers surveyed have less than $25,000 saved for retirement. But things might not be as bad as they seem.

A recent study by risk management firm Towers Watson attempts to debunk the magnitude of the retirement crisis in America. The authors suggest that most retirees will be better off than predicted, since they don’t require as high a replacement ratio of preretirement income, as what is commonly recommended. They argue that the often quoted rule of thumb that retirees will need to fund 85% of pre-retirement income annually, may be too high. In reality, retirement cash flow needs change over time. As retirees age they move through the “go-go” years, the “slow-go” years, and then the “no-go” years. We spend far less than we anticipate at the end of our lifecycle, due to diminished mobility and health.

In addition, the savings cycle is variable. People will forgo savings early in their career, but ramp savings up substantially in the latter stage of their working years to make up for lost time.

I was recently asked to comment on the Towers Watson study by reporter Mandi Woodruff for an article in Yahoo Finance. My instant reaction to this story was that individual investors have to take these rule-of-thumb numbers with a grain of salt. The data on annual retirement savings is flawed (as the Towers Watson report points out). For example, it does not include the value of pensions, real estate, or closely held businesses. It also does not include the value of transfer payments and other governmental programs, so the resulting data set is incomplete. We cannot draw conclusions based solely on this data.

Gauging retirement readiness should be done on an individual basis. More importantly, as a financial planner who specializes in retirement planning, I know that simple tools or rules of thumb are crude at best. They are like applying blunt machetes in a surgical procedure. They are not going to result in the precision that is needed for each individual’s situation.

The best way to approach retirement planning is to work from the bottom up and determine the clients’ specific personal cash needs and requirements over the balance of their lives. Quick on line calculators and rules such as multiple of final income or spending as a ratio of income can’t possibly apply to everyone. These repeatedly quoted prescriptions for success insinuate that the planning process is static and deterministic, when in fact, it is a dynamic process based on many fluid assumptions and variables. The ever changing-nature of a client’s personal life, tax laws, financial markets, etc. require that the plan is periodically updated.

Instead of a rules based approach, each client should be evaluated in a highly customized and holistic way. That is the essence of true financial planning. It’s not just about investments anymore. It is about how a person will fulfill their dreams and what money can do for them during their lifetime. It is about career planning, lifestyle planning, legacy planning, tax planning, and cash flow planning. More importantly, it also encompasses the “x factor” of a client’s behavior towards and attitudes about money in his or her life.

While many in the field of finance are touting the trend and threat of robo-advisors, holistic retirement planning lends itself far more to the human touch. Since many Baby Boomers are entering the distribution phase of their financial life, customized financial planning is becoming more important than ever.

Proper financial planning starts with an in-depth conversation with a client to better understand what makes him or her tick. It requires listening, attentiveness, and is done best when there is an ongoing relationship with that client. It is not a one and done event.

A detailed retirement plan projection often requires the client answering the following questions:

What are you needs, wants, and bucket list items in retirement?
When would you like to retire and how will you phase into the new lifestyle? Will you still want to engage in part time work once you quit your job?
How will you spend your free time? What might a typical day look like?
How often will you be travelling and where will you go?
How often will you be connecting with friends and family?
Do you want to leave money to heirs or a favorite charity? How will gifts to kids and your charities change upon retirement?
How healthy are you and do you have a history of longevity in your family?
How much are you willing to save in order to achieve an early retirement? And conversely, how much are you willing to cut spending before and after retirement, in order to retire early?
What are your plans for your home? Will you relocate? Will you keep your second home? Will you need any major improvements done? Will you downsize?
How often will you buy cars and other vehicles? How much will you spend on each vehicle?

These questions not only help to determine annual and overall cash flow needs, they also can help assess behavior around money as well as risk tolerance.

I often use the metaphor of a jigsaw puzzle. Each client walks into my office and figuratively drops the pieces of their life puzzle on my table. Each puzzle picture is uniquely different. It is up to the client and me to put these pieces together to develop a vibrant picture of their future retirement years.

While I think these rules of thumb to assess retirement readiness are not adequate, there are some principles that are highly correlative to retirement readiness.

I suggest that if clients are serious about wealth-building they should save at least 15% of their salary throughout your career and that should limit wealth in personal real estate to no more than 25% of your total assets.

These principles encourage strong savings mentality, keep debt to a minimum, and reduce exposure to a low return asset class (personal real estate). Living below one’s means is a successful way to build wealth and a good lifelong habit. A strong savings rate helps protect against longevity and poor investment returns, as well as having to heavily tilt retirement savings to the back end of a career–which makes the investor more susceptible to market corrections in the years just prior to retirement.

Finally, the personalized, holistic approach to retirement planning addresses the significant challenges that savers have with regard to retirement planning. Having a planner that fully understands these risks and properly accounts for them will help the client feel more confident about his or her prospects for retirement. For example, if the planner assumes conservative investment return assumptions, accounts for higher healthcare cost inflation, adjusts Social Security benefits to account for some reform, assumes a relatively long life span, and the clients still have a high chance of success, they will feel more confident about their upcoming retirement. The peace of mind that is achieved through the financial planning process is something that a rule of thumb or quick on line calculator won’t necessarily provide.

While the savings statistics for Americans suggest significant shortfalls in retirement, working with a planner to determine how to maximize financial opportunities like Social Security and pension maximization, tax reduction strategies, and maximization of their human capital, is essential to preparing for a successful retirement. Ideally, the process is started as early as possible to improve a retiree’s chance of success and ensure that their unique vision of retirement is realized.

Apr / 08

Save Smart for Retirement

Although many people want to retire comfortably, saving the funds needed to do so can be a challenge. Fortunately, there are some simple strategies that people can use to increase the odds that they will be able to save the money they need in order to retire.

Saving Is Important

Building a cushion of savings is important so that people have a safety net, and they also need these funds if they want to invest. By using some straightforward tips to save, they will hopefully have some added motivation to put more way.

Spend More Effectively

One way to increase the fraction of your income that goes into savings is to spend more effectively. People can make improvements by reviewing their expenses and identifying alternatives that are cheaper and are not substantially different. Once these items have been identified, people can use the extra funds generated to pay for things that are more important to them.

If an individual has more than one brokerage account, he can consolidate these accounts so that the higher level of assets provides them with services that are either cheaper or better.

Don’t Wait for the Perfect Plan

Many individuals fail to take action because they are holding out for the perfect plan. The drawback to this is that the longer they wait to improve their habits for spending and saving, the more money they will end up throwing away.

This principle also applies to investment plans, in that people fail to invest simply because they do not feel they have the perfect plan established. A lot of individuals do not invest because they are worried about making mistakes, but a plan is needed for retirement to be realized.

Continuous Refinement Is Key

Even if an individual has worked out a plan that he considers to be ideal for his situation, assets, goals and tolerance for risk, this plan can become outdated. Technological advancements provide individuals with more options over time, and new investment vehicles are always being created.

When possible, people who are saving for retirement should review their plans in order to see where improvement can be made. There are many investment mistakes that can be made, and people need discipline to ensure that their investment plans do not fall off track.

Savings are important, especially in the face of dwindling pensions and widespread concerns about the prospects for retiring. The doubts that many individuals have about their ability to retire were reflected in a recent Wells Fargo poll, in which 75 percent of respondents predicted that they would still be working during years that people usually use for retirement and an additional 25 percent said that they planned to retire no earlier than 80.

Could you retire in your 30s?

This article by Andrea Coombes for MarketWatch covers the story of a young couple who decided to retire early. No, they did not retire at 60, or 50, or even 40. They decided to quit work in their 30s. Their goal was to amass roughly 25 times their annual spending. They reasoned that if they could live simply and frugally, on roughly $25,000 a year, they could aggressively save enough to retire from their demanding jobs in the technology industry. This would allow them to both be active in raising their 8-year-old son.

Retirement is a math problem. How you live before and after retirement is part of the equation. If you can live on a very small budget, you can possibly retire early. One rule of thumb is to accumulate savings of roughly 25 times your living expenses. In their case, they paid off their home and reached the $600,000 target, so they decided to take the plunge. They now live primarily off their investment income and temporary jobs they take, as needed or as desired, for extra income.

This story underscores that in order for people to decide when they can retire, they need to know two things– how much they realistically need in terms of living expenses and how committed they are to saving aggressively to reach their goal.

It ultimately depends on your cash flow, which is the lifeblood of the financial plan. You need to enhance your awareness of what is coming in and what is going out. How much money do you really need to live on in a year’s time? How much of your salary are you saving? (My guess is that this couple was saving well over 25% of their gross salary annually.) How motivated are you to reach your retirement goal? Since this couple had visualized and articulated their plan to retire early they had a burning and shared desire to accomplish their goal.

Unfortunately, procrastination and a tendency to focus on current wants and needs as opposed to future plans can derail the best intentions.

Many workers think that as long as they save the maximum amount in their workplace retirement plan, it will be enough to provide sufficient income in retirement. But it really depends on their annual spending. For example, a professional couple spending $400,000 a year will have a hard time obtaining adequate income from a $2 million retirement plan once they retire. Remember, too, that a $2 million IRA or 401K is not totally available for income. You need to take the after tax amount into consideration. Two million dollars at a 32% tax rate (federal and state) would only be equivalent to $1.4 million.

Furthermore, in order to ensure that your funds will last you 30 years, you should probably only withdraw roughly 4% of the total, which would be $80,000 before taxes and roughly $55,000 after taxes. That is a large drop in income for someone who is used to spending several hundred thousand dollars a year.

Many of us will also need to save after tax dollars, as well as contribute to our retirement plans, in order to provide adequate income as well as flexibility regarding taxation of withdrawals in retirement. Since this couple retired so early with significant funds, it is likely the bulk of their savings was in after tax accounts. This helps minimize the tax impact of any withdrawals from their savings.

In the end, it all comes down to a trade-off between your lifestyle now and your lifestyle in retirement. If we delay gratification now, we can meet our future goals. If we want to live a simple lifestyle, it will likely be easier to retire early. If we have large spending needs in retirement, we will need to save more or retire later in life.

It will be interesting to see how this couple continues to navigate their frugal journey, especially as expenses rise over time. Their child will likely want to engage in sporting activities, hobbies, video games, and attend college. The future may also bring unexpected medical and long term care expenses.

Plus, there are definitely downsides to such an early retirement. I am not sure a life of leisure would be suitable for most young people, as achievement, socialization, and other benefits from working can be beneficial to one’s physical health and emotional well-being. Furthermore, if a worker remains out of the work force for even just a few years, his skills may become irrelevant, such that he becomes unemployable.

I admire the couple’s ability to save and reach their goal and wish them much success in their endeavor. I hope that in the long term their “hiatus” works for them. My guess is that this couple will eventually decide to go back to work. Saving for 10 to 15 years so that you can live possibly the next 70 years seems like a tough math problem to solve. But adhering to these principles can help us all manage our own retirement math a bit better.

Oct / 31

Is Owning a Business The Best Way To Make Money?

There is another question we need to consider: is owning a business the best way to make money?

This was definitely a belief that I held in my early twenties – that if you wanted to be wealthy you had to own a successful business. I’m not sure if I was influenced by my family, friends or things I read, but I always wanted to start a business of my own.

Now I know I was wrong about this. Wealth can be created by anyone who consistently spends less than they earn and who invests their savings on a regular basis. In fact, the more I look at business failure statistics, the more I wonder about the wisdom of starting any business, despite certainly understanding why people want to.

Once again, we get back to risk and return. Starting or buying a business is risky, but if the business goes well the rewards are high. The business in which I am a shareholder was started by myself and four partners in 1983. We put in $20,000 each and rented a very small, serviced office. Today, we employ well over 280 staff in our offices and South African joint venture.

Funnily enough, the “academic” theory about starting a business is correct. you do need a vision of what you want your business to be and a well-formulated business plan. You must control you cash flow and, in the good years, you must leave money in the company to build up its strength. I feel fortunate that we took the risk in 1983 to quit our quite well-paid jobs, because today business ownership makes me proud, gives me an unbeatable sense of job security and the benefits of controlling my own destiny.

How quickly, though, we forget the reality of starting a business from scratch. In my case, this meant earning next to nothing for five years, working outrageous hours – my partners and I used to laugh about our 35 hours of work. Thirty-five hours on Monday, Tuesday and part of Wednesday; another 35 hours on the other part of Wednesday, Thursday and Friday; and just to top things up, working on Saturday as well. Sometimes we didn’t work on Sunday, holidays were a few days off at Christmas and, as for sick leave, well, we just couldn’t afford to get sick!

If you do want to create significant wealth, building a successful business is certainly one way to get there. Look at people in the “500 most wealthy” lists. Some inherit the money, but most create it by building a business.

Few small businesses will ever grow into a News Corporation and not too many will ever be worth a lot of money, but running a business has benefits beyond the purely financial side. This really struck me when I was sitting on beach. While my kids and some friend were paddling around on a hired aqua bike, I started chatting to the owner of the aqua bike business who was originally from my town. He explained that the business was no world beater but it was pretty good and, living on a beautiful lagoon, next to a beach, hiring boats to generally pleasant tourists was somewhat better than working in a factory in industrial suburbs. He has a point. For him, his business provides lifestyle and a reasonable cash flow. He may have earned more working in his town, but tinkering with boats on Avoca lagoon seems much better.

For every success story like this, though, I know of dozens of failures. Buying or setting up a business for lifestyle is a dangerous thing – you may act on emotion, not logic. If you do plan to start up or buy a business for whatever reason, please be careful.

Look, there’s no denying owning a business sounds good and assuming it works, it is. However, as I found, you’ll probably end up working an awful lot harder for a lot longer than in the job you leave and, for the short term at least, not earning as much.

You’ll also miss out on the benefits that full-time employees are entitled to and often take for granted, such as: employer-funded super; worker’s compensation cover; paid sick leave; four weeks’ paid annual leave; holiday loading; long service leave; and maternity (or paternity) leave. You may also have to forgo other goodies company car; an expense account; paid telephone expenses; low holiday expenses; annual bonuses; share options; and the support of a union or industry association. In other words, when you work for yourself there’s no safety net – you’re on your own. Don’t let me scare the wits out of you, however. While self-employment is not all beer and skittles, the great thing about it is the freedom it gives you to run your own race, which I believe outweighs the negatives.