How Much is That Doggy (or Cat) in the Window?

Many of you who know me personally have by now had a chance to meet Lucy. My wife and I could not be happier with our miniature dachshund we rescued a little over a year ago and the joy she has brought to our home. At times she is childlike, at times she is a full-fledged friend, at times she is a loyal companion, and she’s always a mess…

There was the time when she ate a Plink as I was rearranging things under the sink, and she started belching up lemon-scented bubbles. That was hilarious only after I had her treated at the emergency vet and convinced my wife not to kill me. For the record, Lucy had great puppy breath for almost a month.

There was also the time that Lucy learned what an ant hill was as she chased some sort of beetle in the grass straight into the mother of all anthills. She owes me a lot of itching and a tube of ointment, but I didn’t think twice about rescuing her from the divisions of ants that were none too pleased by her intrusion. I’d do it again if I had to!

There was also that time when Lucy jumped off the ground onto the sofa and then onto the coffee table because she undoubtedly wanted a glass of eggnog. Little did she know that she would get several glasses and a pitcher’s worth in the process as she slid off the slick table. I was irate as I cleaned things up. Everything looked pristine, and I was finally headed towards my milky, nutmeg-covered pup when she looked me dead in the eye and decided to shake her coat clean herself. I couldn’t help but laugh as I was back at step one of the cleanup process.

Why do I tell you all these stories? Two reasons, really. One, I love Lucy and all the fun she provides. Two, owning a pet can be expensive, and I’d like to offer a few thoughts on how you can experience the joys of owning a pet without crying cats and dogs!

• Consider adopting a pet. Adoption fees are often much less than what you would pay a breeder.
• Consider the pet’s size. Most small animals eat less food than their larger counterparts. Less food means less expense. Enough said!
• Don’t go treat or toy crazy. Sure it’s fun to hold out a piece of pig ear, a cheese and bacon flavored ice cream, or a squeaky toy that resembles your rival team’s mascot and see your pet’s excitement, but treats are an additional expense and most of the time are not the healthiest thing in the world for your pet. Remember that undivided attention, back-scratching, and head-patting can get you a long way with your pet (and maybe even your husband come to think of it), and they are free!
• Think about your upcoming trips. It doesn’t take many nights of boarding a pet before your 5-star hotel will need to become a 3-star hotel in order to make ends meet. If you have a pet, think about day trips, or trips you can take your pet on with you, to avoid this expense. If you’re lucky, you may also be able to find a trustworthy friend or relative who will periodically be happy to pet-sit for you.
• Do not try to skimp on health care. Get your pets their vaccinations, buy them quality food, and get them the medicine they need when they are sick. A few dollars saved every month on less than desirable care can go up in smoke quickly with a serious illness or infection.
• Consider passing on pet insurance. I know people who swear by pet insurance and people who swear at pet insurance. All I will say is consider the premiums, consider the deductibles, and read the details about what sicknesses and conditions are covered before you reach a conclusion. If you make me choose, I say pass on pet insurance if you have saved up a decent-sized rainy day fund because you are somewhat self-insured. This strategy allows you to decide what is in your pet’s best interest and your financial interest when you actually have to, as opposed to throwing a little into the pet insurance pot every month wondering if you or your pet will ever need it. To be honest with you, when I look at Lucy’s unexpected medical costs versus the pet insurance premiums I would have paid, it looks about even so far.

I hope this gives you some things to consider if you are thinking about becoming a pet owner or even if you already have a dog or a cat of your own. I’d like to write more, but I just heard a crash and a bark. There is simply no telling…

-Tom

Making Your List, Budgeting It Twice

Credit: Kittisak

I ran out this past weekend to grab some paper towels and cough drops at a local store, and I saw something that would make Dracula, Frankenstein, and even Edward Scissorhands writhe in horror: Christmas merchandise already for sale. I’m as jolly of an elf as they come when it’s December, and I’ll be blaring those catchy Christmas tunes the day after Thanksgiving, but I could have sworn we were still in the middle of October! Yes, next to the Halloween decorations, candy, and costumes were Christmas cards, wrapping paper, and lights. I had planned on saving this post for a few weeks down the road, but the stores have left me no choice. Today, we’re going to look at how to budget for Christmas gifts.

Some say you should keep the Christmas spirit all year long. While I tend to agree with the sentiment, many families take their credit card bills from the holiday season with them into the next year, and I don’t want you to start the new year like that! Even many families who do not overspend around the holidays, or have more than enough assets to smoothly absorb the financial damage taken during the twelve days of Christmas, still don’t have any idea how much Christmas costs. Christmas is expensive! I’m not trying to be the Grinch or Mr. Scrooge, I’m just trying to make sure you have enough cash left over at the end of the holiday season to buy your favorite financial planner a gift, or at least start 2013 in good shape.

In order to spread your Christmas cheer effectively, you need a budget. Figure out how much you can, or want, to spend on Christmas gifts. This amount is totally your call, but I really don’t think you should go into debt for Christmas beyond what you can immediately pay off. Once you have your budget, get some cute Christmas stationary, a nice sheet of notebook paper, download a Christmas list template, install a Christmas list app, or make your own spreadsheet and start listing who all you will be shopping for. Once you’ve done this comes the hard part - putting a dollar amount next to each name, and when you are done, seeing how the sum of your dollar amounts next to names looks versus your originally budgeted amount. If it’s higher, keep tweaking or crossing “naughty” people off your list until you get within your budget. If it’s lower, keep what you have; chances are you forgot someone or will end up spending a little more for “the perfect gift” for someone else anyway.

Now you’ve got a really organized and financially responsible map on how to Christmas shop. Hit all the stores and do your worst, but always take your list with you to keep you on track. Do not deviate from your original budget no matter how great the sale, how pretty the handbag, or how swank the new electronic device. Otherwise, this process really won’t help you.

Feel free to pay with credit cards you already have (Do not open up all those store credit cards for their little, one-time discounts, no matter how tempting), but paying with cash isn’t a bad idea either to help keep your spending in perspective. Also, save your receipts. The receipts will help you reconcile your spending and allow someone on your list to return the argyle socks and T-shirts you got them should something else strike their fancy.

I know these suggestions may seem pretty obvious and fairly simple, but not a lot of people take the time or invest the effort to do this. Trust me; writing up a Christmas list budget can really help the craziness of holiday shopping go a lot smoother and faster, without the overspending.

This is going to sound weird, but Happy Halloween… and Merry Christmas!

-Tom

You’re Retired, Now What?

Credit: stockimages

Just because you are retired does not mean you need to stop managing your finances. It does mean that after a long day at work, I’m a little jealous of you, but what do you care? You’re retired! After all those hours, all of your sacrifices, all of your savings and retirement plan contributions (hopefully), you deserve it. Today, I’m going to wrap up our suggested financial plan for a lifetime and offer some suggestions on how to make the most out of retirement without running out of money. Here goes…

• Get your cash up. I’ve found that most people have a “magic number” they like to maintain in their personal cash account. What’s yours? (I bet a number just popped into your head.) Some people I know have $10,000 or less because they don’t trust themselves with temptation, and that’s fine, - they know themselves. Some have almost 5 years’ worth of living expenses in cash because that gives them enough security to turn off the radio and television personalities who are telling them that the world is about to end for the 276th time. There is no correct answer, but I’d figure out how much your annual living expenses are above your annual incoming Social Security and/or pension payments, and I’d set aside somewhere between one and two times that amount in cash. If you stay above your “magic number,” you’ll be happier.
• Fine tune your asset allocation, again. No, this is not a copy and paste from last week; this is a genuine suggestion. If you don’t want to risk running out of money in your eighties and wondering where you can get a job, make sure your portfolio is in a prudent place. You want to have a sizable allocation in cash and bonds to ensure the stability of your nest egg, but you also need a sizable allocation in equities to allow for principal growth and to protect against inflation. What’s your checking account earning you right now? What do you think the inflation rate will be over the next decade? What do you think the stock market’s volatility will be over the next decade? See why you need an adequate amount of cash and bonds for income and stability, but at the same time, you also need an adequate amount of stocks for growth and inflation-protection?
• Vigilantly watch your annual withdrawal rate relative to your investment assets. No matter how wealthy you are, your investment assets get to dictate your lifestyle in retirement, not the other way around. If you look back and see that you are withdrawing more than 4 or 5% per year and you are in your 60s or early 70s, my alarm bells are going off, and yours should too! 5 to 6% in your 70s and 80s is likely doable, but don’t push it. I know you can’t take your money with you, but running out of funds to support yourself is a lot worse on you and your kids than leaving them a little.
• Update your Estate Documents. Not to be morbid or anything, but most of the time when people retire, they have a good portion of their life behind them. You need to make sure you have an up-to-date will that fulfills your desires and leaves behind the legacy you intend. As tax laws change, you may need to revisit your will periodically to make sure your plan is still on track. It’s also a good idea to redo your power of attorneys and health care directives as states frequently update these documents. It is not only crucial to have these forms in place, but you also need to have current versions in place to make sure your doctors, hospitals, and financial institutions will honor your intended wishes and listen to those you wanted to act on your behalf.
• Give while you’re living. I know, I know; I just told you to be careful about withdrawing and outliving your nest egg, and now I'm telling you to give it away. The key is thoughtfully balancing your wants, needs, and wishes, and avoiding acting on a whim. Back to my original point though: a colleague of mine often tells people to “Keep giving while you’re living so you’re knowing where it’s going,” and I couldn’t agree more. If you are in a comfortable enough financial position, wouldn’t it make you happier to see your grandson’s excitement if you took him to the Grand Canyon yourself as opposed to having to look down on him through some clouds and pearly gates? Wouldn’t it mean more to your kids if you set aside funds for your new granddaughter’s college tuition right off the bat as opposed to giving them the assets posthumously after they’ve been sacrificing and struggling to save for years? Again, I’m not trying to be morbid, and you need to be careful not to become the sugar momma or sugar daddy for several generations, but at least consider doing what you can, and actually want to do for others you care about, while you are able to enjoy the memories.
• Move on. I recognize I’m still a relatively young guy in this wild and crazy world, but I am often just as much a counselor to clients as I am a CPA or financial planner. I can’t tell you how many people I’ve seen struggle with retirement emotionally. You need to realize that retirement is not just sleeping in and going to the beach. Retirement is a financial, life-changing event. You no longer have a boss (except your wife). You may no longer have deadlines. You may have more free time than you actually want. You may see many workplace “friends” fade into just former co-workers. Many people love retirement from the start, and I hope you do, but it can hurt emotionally. My suggestions would be to find or dust off some hobbies, volunteer with some organizations you care about, find some television shows or a good book, travel, exercise more, and reconnect with some old friends or make some new ones. Most importantly, diligently and patiently work on reshaping your life with your spouse and family. You may not be used to being around them as much as you are in retirement, but they aren’t used to being around you as much either!

I hope you’ve gotten something out of the Now What? series. I encourage you to save these posts and put them in a place where you will periodically stumble across them to see how you’re doing. I’m not saying this because I think I’ve got it all figured out or because my plan is tailor-made for you; I’m saying this because I want you to be able to live a full life and retire in style without always fearing your finances. My suggestions won’t work for everyone, but in many cases, I believe they will get you off to a really good start.

Well, I finished the Now What? series, now what? Guess you’ll have to check back in next week.

-Tom

You’re an Empty-Nester, Now What?

Credit: tratong

This post is going to be special because it’s the only one thus far that I’ve written while cruising at 26,000 feet (I was flying back from visiting an out-of-state client). If you like what you read, let me know, and I will try to travel a little more often. If this post ends up not being one of your favorites, I blame the stale peanuts and the guy next to me who did not turn off all of his electronic devices before take-off.

I tell you about my flight because I think landing a plane is a fitting metaphor to describe what you should be preparing for in the “Empty-Nester” stage of life. What I mean is that the flight of parenthood is largely over, and now it’s finally time to get back to focusing on you and your spouse (and your financial well-being.) I know clients who admittedly are quite sad that their children have driven off into the real world, and I know clients who are secretly (or even not so secretly) taking a big sigh of relief and considering throwing a party. Whatever your emotions, it’s time to take a closer look at planning for retirement. You can choose to plan ahead and have a nice, smooth landing, or you can choose to wing it and hope things work out. Considering my wife’s and my mother’s disdain for turbulence, I’m going to recommend planning ahead and making a smooth landing. Here are a few tips on how to make sure you arrive at your retirement destination confidently and successfully:

• Make sure you get your “raise.” In my last post, I mentioned that it should be your eventual goal as parents to get your kids off your payroll. Stopping or significantly lowering your financial support of your children is not mean or wrong; it’s about simply being a mother bird and forcing them to fly out of the nest. Some kids may fly out on their own, but based on many of my clients’ experiences, gently pushing those hesitant kids out of the nest is oftentimes the best thing you can do for them! Once your children fly away, it’s going to feel like you have gotten a raise, and maybe even a big one! Take this extra money from your reduced kid expenses and boost your savings, eliminate your debt, or contribute more to your retirement plans. Having your kids off in college or working in the real world does not mean the random greeting card with a $20 bill needs to stop or that short-term assistance with replacing a transmission is a bad idea, but you need to make sure that any remaining “financial umbilical cord” between you and your children is not stunting their growth or independence, or more importantly, damaging your ability to retire.
• Take your debt down to zero. If at all possible, you want to go into retirement debt-free. Not only will your fixed monthly expenses be lower, but you will also sleep better. I say this because I’ve found it’s rare to have a calm or even a happy client who is not working and is still in significant debt. I frankly don’t care what the interest rate is, what the monthly payment is, or whether it’s your mortgage, the remaining principal on your new car, your utilized home equity line, or the debt you worked up that weekend in Vegas, I would almost always advise you to be debt-free by the time you go into retirement. Figure out when you are going to retire and how much money it’s going to take to eliminate your debt. Figure out if you are going to utilize any extra cash you may have, start applying your “raise”  money we just talked about, or if you should consider dipping into one of your investment accounts to pay down your debt. Hopefully as an “Empty-Nester” you can implement a plan to be debt-free by retirement, but if you cannot figure out a plan that will work, you may need to push back that retirement date you have in mind.
• Figure out how much you will need or how much you can afford. This may take some homework on your part, but you need to figure out how much you are planning on spending every month in retirement. Do you want to keep your current lifestyle? Are you willing to cut back your lifestyle a little? Are you planning on living it up? Look at the monthly income you need to allow you to live the way you want in retirement, and compare that to your pension (if you have one) and your expected Social Security income. You’ll probably begin to look at your investment assets in a whole new way. You may conclude that you have enough and are still working simply for personal satisfaction or to achieve those retirement benefits. You may also conclude that you need to build those investment assets up by working longer and contributing more, but at least you now have the motivation to keep punching the time clock. Whatever your financial situation, you need to know how much you have versus how much you need versus how much you want. Please realize that this is much more valuable information when you are preparing for retirement as opposed to beginning retirement.
• Fine tune your asset allocation. I’ve been preaching to you since the beginning of this blog to think about investing as a long-term strategy, and I’ve meant it. However, if you are an “Empty Nester” considering retirement, your time horizon is not as long as it used to be. This does not mean you need to put your cash in a shoebox, buy a bunch of precious metals, or start looking at lots of Certificate of Deposits (CDs), but it does mean you should take a look at your holdings. If you are conservatively invested, it may be time to stay the course. If you are aggressively invested, it is probably time to dial back the risk a little. You should remain invested to beat inflation and allow for principal growth of your assets, but you want to make sure you are not subjecting your hard-earned nest egg to any undue risk in the eleventh hour. A big market downturn, an industry’s bubble popping, or a sharp fall in some undiversified stock hurts a 60-year-old a lot worse than a 30-year-old. Do not try to strike it rich by going “all-in” with risky investments so late in your career either!

I cannot stress to you how important it is for you to have a financial plan in place going into retirement. In fact, I’d argue this is the single, most-crucial time in your life to have a detailed financial plan. Please do not risk crashing and burning; it’s just not worth it, and you literally can’t afford to be wrong.

Well, we have one chapter left in the Now What? series. Be sure to read next week’s post as we will wrap up our lifetime financial plan overview and take a look at what you, or others you may know, should consider doing after retirement.

Have a good week, and remember to go with the cookies over the peanuts the next time you fly, trust me.

-Tom

You Just Had A Kid, Now What?

Credit: Maggie Smith

I love kids. One day I want one; maybe even two. Okay, you caught me, I’d take three, but that’s about as many as I care to think about. My wife and I will be thankful for however many kids we end up having, but we already know kids are hard work.

Take me for instance: I once threw such a fit in a shopping mall that, as my dad carried me out, I started kicking and screaming violently. I’ve been told a cop stopped my father because the officer thought I was being kidnapped… until my mom could set the record straight. There was also a period where I perfected the art of throwing my pacifier under tables to the most difficult spot to reach possible. My proudest moment though, came when a cook at a Waffle House told my parents they would have to leave because their kid was “disturbing the regulars.” Hard to believe anyone could forgive that, but my parents forgave me, and in time, my whole family forgave the Waffle House chain. We laugh about it now.

I hear there is no greater love than a parent has for a child, and as I said, one day I hope to experience it. I look forward to laughing with my wife and children as our family grows and the years roll by, but I can also tell you from professional experiences that being financially responsible for a child is no laughing matter. Today, I’ve got a few quick tips for you after you start having children to make sure you’re not the one saying, “Wahhhhhhhhhh!”

• Increase your savings. Your cost of living just got more expensive. You may have gotten a new tax exemption, but the tax savings will come nowhere close to what having a child will cost. According to new government data, a middle class family may spend nearly $235,000 on a kid from birth through age seventeen. That’s more than most people spend on a house, and that figure doesn’t even include college! Because your living expenses are on the rise, your rainy day fund needs to be on the rise, too. I know formula and diapers are expensive, but even if you are temporarily becoming a one-income family, you have got to adjust to get your savings up to 9-12 months’ worth of living expenses. Your kid could get sick, your car could fail, or you could have a pipe burst in your home. I know increasing your savings will require sacrifice, but it’s not just about you (or even your spouse) anymore!
• Get adequate life insurance. I was fairly serious when I mentioned this last week after buying a house, but now I literally want you to envision me banging my fist on the table. If something happens to you and you can’t work, can your spouse and child live comfortably? How is your spouse going to earn money if he or she is staying home with the kid? How can your spouse keep working and afford for someone to look after your child during the workday? See the paradox your untimely death could put the people you care about most in? You can prevent this danger by getting enough life insurance to eliminate your debts, provide for adequate childcare for a number of years, and provide a replacement stream of income in case, due to unfortunate circumstances, you aren’t able to contribute. Life insurance premiums are often not as expensive as you might think, and can your family really afford you not having life insurance? You could get hurt instead of passing away, so disability insurance may also be worth some careful consideration.
• Get a will. Once again, you really should have taken care of this when you got married, but if you did not, now is the time. I say this not for you or for your assets; I say this because a will is how you name a legal guardian for your child. I don’t know about you, but I want to have some say as to who would look after my offspring should my wife and I pass away. Just a thought, but if you’re going to pay an attorney to draft a will, you might as well finish your estate plan with power of attorneys and health care directives while you’re at it.
• Start saving for college. As I mentioned in a previous post, there are many effective ways to pay for college, but the most important thing is to start saving sooner rather than later. I personally recommend 529 qualified tuition plans as the best technique, as they are relatively easy to set up, and many investment platforms have an option for your investment allocation to change automatically from more risky to more conservative as the child gets older. After the initial setup, all you have to do is save and watch your plan assets, and your child, grow. All that being said, let me reiterate that your retirement plan is more important than saving for your kid to go to college. Putting your child in a situation years down the road where you do not have the assets needed to sustain yourself in retirement can be a lot more emotionally difficult and financially burdensome to your child than asking him or her to apply for scholarships or to pay off their own student loan.
• Teach your kids about money as they grow. This needs to be an ongoing process from not always giving a quarter for every gumball machine, to offering an allowance in return for chores, to encouraging your child to get that first job. Everyone is different, but the “money messages” my parents instilled in me as I grew up to always live within my means, to save whatever I could, and that I could be whatever I wanted, but would have to earn every inch and dime are still with me today. These lessons taught me that I would one day have to spread my wings and fly, and they have molded me into the person I have become. I’ve heard it said that, as parents, you need to remember you are not just raising kids, you are raising adults.

Don’t worry. The diapers and screaming will quickly turn into borrowing your old car and dating. Follow the above steps, teach your kids a little about life and finances, and love them a lot. One day your kids might just fly away, make you proud, and come off your “payroll!”

-Tom