Scared Silly

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What scares you? I mean what really makes all the hair on the back of your neck stand up, leaves you unable to utter a sound, and frightens you into a panicked hysteria?

I’m not a superhero or a he-man by any stretch, but not that much really frightens me. Sure, I’m like most people and don’t like thinking a lot about death, but it’s not like I have coulrophobia or something. Let’s see, I’m a little cowardly towards scorpions, I’m not a fan of snakes, I don’t like walking down spiral staircases that I can see through, and drowning has always been an utmost concern of mine, but all in all, I’m usually pretty level and calm. That’s why an article I read in the August edition of InvestmentNews surprised me.

The article focused on a recent study conducted by Nationwide Financial that sought to determine what investors fear. The study concluded that 83% of the people feared another financial crisis, 68% feared that their savings would not be enough to get them through retirement, and 64% were afraid of not being able to maintain their current lifestyle. These statistics didn’t make me happy, but they did not overly surprise me. However, the fact that only 58% of the people surveyed said they feared death did come as a bit of a shock to me. Am I really that weird? (Hey, don’t answer that!) Are people really more afraid of financial ups and downs than they are of the Grim Reaper? The only non-financial fear that scored anywhere near the financial fears was skydiving, with 81% of the people saying they were afraid of that extreme activity. You can call it my purpose, my goal, or my motivation, but I don’t want any members of my family, my friends, or the clients I serve to fear market volatility, retirement feasibility, or financial sustainability more than death or skydiving!

The financial crisis of the late 2000s was certainly terrible, but so were the Dotcom Bubble, Black Monday, the Great Inflation of the 1970s, and the Great Depression. I’m sorry to say it, but one day, there will be another financial crisis. And guess what? If your investments are prudently diversified, you have an adequate rainy day fund, and you can cut back on a little of your discretionary spending, you’ll probably be able to hang on until the recovery begins.

Not knowing when you can retire or not knowing what kind of lifestyle you can afford to live in retirement is a frightening proposition, and it should be, but that’s part of the reason why my profession exists. Outside of relying on blind luck, a technical analysis you’ve prepared yourself, or the work of a financial planner, how do you know when you can make it through retirement with the lifestyle you desire or at least one you can accept? Well, are you going to receive a pension? What did your last Social Security annual statement say, or what does your Social Security Benefit Calculator spit out? Add these together with any other "permanent" sources of income you may have, and that’s probably close to your “retirement paycheck.” Then, take a look at all of your investment assets (brokerage accounts, 401(k)s, IRAs, etc.) and think about how much you could probably afford to withdraw every year between now and when you kick the bucket, considering the expected returns of your investment strategy. This should give you some idea of your probable retirement lifestyle. What you come up with may still sound pretty vague to you, but it makes me wonder if the people surveyed were really afraid of being able to navigate through retirement, or if they were just afraid of not being able to spend as much in retirement as they had dreamed about. Don’t get me wrong, retirement planning and ensuring your financial independence require careful monitoring and frequent updating to make sure all systems are go, but it doesn’t have to be Freddy Krueger.   

Finally, if people are afraid of not being able to maintain their current lifestyle, I’ve found that probably means they have an inadequate emergency fund, unsustainable spending habits, or they foresee a life-altering event like having another mouth to feed, losing a job, or facing the financial consequences of the death of a spouse. You can’t always control life-altering events, but having a little extra saved up and almost always spending less than you are making will go a long way towards calming this fear.

I know financial crises can be dicey, retirement planning can be daunting, and lifestyle sustaining can be critical, but a predatory arthropod of the order Scorpiones in the class Arachnida with snapping claws and a poised stinger still scares me more!

-Tom

Two Recipes for Success

Credit: Vichaya Kiatying-Angsulee

My wife and I both enjoy cooking. She’s a much better baker than me, and I’m a little bit more of a grill master than her, but if you ever get the chance to eat at our table, I don’t think you’ll be too disappointed regardless which one of us is the head chef. One night last week I happened to be working on a grilled chicken Greek salad for our dinner and was thinking about my day at work. I had a simple yet profound realization: Achieving financial success is a lot like cooking. Financial success is like cooking in the sense that both take time, attention, skill, and most importantly, adding the right ingredients at the right time. What I mean is that:

• Owning a bunch of stocks and real estate without having enough cash on hand is like having a whole bunch of macaroni and not enough cheese. The first time you face some financially significant, unforeseen expenses or are forced to live through a downturn in the stock or real estate market, you will find it a lot less pleasant trying to make ends meet with potentially depreciated stocks or illiquid real estate than you would if you had adequate cash savings in place. It could just be me, but if I’m going to err on the ratio of macaroni and cheese, it’s going to have a little extra cheese.
• Having a bunch of cash, CDs, and bonds, but no stocks or “growthier” assets to keep up with inflation, is like serving oatmeal without raisins, butter, or brown sugar. Sure, the oatmeal may initially make you feel nice and warm, but it’s not going to be enough to tide you over against long-term inflation.
• Saving only in retirement accounts like 401(k)s and Traditional IRAs, but not saving any funds in taxable portfolios or brokerage accounts along the way, is like stockpiling nothing but hot salsa for your chips. It’s good that you’re saving up, but it’s going to burn from a tax perspective when you need assets to supplement your cash flow in retirement (withdrawals would be taxed at ordinary income tax rates). Wouldn’t the taste of a little milder salsa or maybe some queso from a taxable portfolio or brokerage account help break up the tax heat in retirement (withdrawals would be taxed at capital gain income tax rates)?
• Keeping a bunch of debt without purposefully striving to extinguish that debt is like resigning yourself to the fact that your salt shaker has a gaping hole in the bottom of it without doing something about it. Plug the hole in your salt shaker and your monthly cash flow by paying off debt and eliminating its nasty monthly strain on your finances!
• Having a great investment strategy without addressing your life insurance, disability insurance, property and casualty insurance, or estate plan is like painstakingly picking out all of the best strawberries for a nice fruit salad, but closing your eyes and randomly selecting all the other types of fruit required to complete the dish. It only takes one really bad banana to mess the whole fruit salad up. So remember that it is crucial to address all parts of your financial plan and examine all components of your overall financial security.
• Trying to plan for retirement in an afternoon or completely fix the path your finances are headed down in one quick swoop is like trying to make a Thanksgiving turkey five minutes before company arrives. Developing and implementing a successful plan that helps you achieve your financial and life goals is more like making that perfect turkey, a six layer cake, or a really delicious stew; it takes time and care.

I really do enjoy cooking, and most days, I really enjoy financial planning. Maybe that’s because in many ways they are not that different. In terms of being a chef or a wealth advisor, I know that I’m not yet Bobby Flay, but my recipe book and cooking techniques are growing every day. As always, please don’t hesitate to let me know if you or someone you know needs “a cup of sugar” and think I might be able to help.

 

Finally, you might have noticed I titled this post “Two Recipes for Success.” If you’ve read this far, you’re in luck! Here’s a second recipe, and it’s one of my family and friends' favorite meals I make:

Tom’s “Barcelona Chicken”

Requires:
Chicken Breasts
Sweet Baby Ray’s Original Barbecue Sauce
Cholula Hot Sauce, Tabasco, or Hot Wing Sauce
Grandma’s Molasses
Honey
Velveeta Cheese
Red Onion
Tomato
Salt and Pepper

 

Directions:
1) Preheat oven to 375 degrees.
2) Take chicken breasts and remove excess fat. Lightly season with salt and pepper on both sides and lay in a baking dish. Drizzle chicken breasts with Cholula (or Tabasco or hot wing sauce), Grandma’s Molasses, and honey. Generously smother with Sweet Baby Ray’s.
3) Place chicken in oven for 45 minutes.
4) Dice tomato into little cubes.
5) Slice onion and sauté in skillet with a little olive oil. If onions are very strong, throw in a little pinch of sugar. Sauté until slightly browned and then remove from heat.
6) After 45 minutes, remove chicken from oven and cut open one chicken breast to make sure it's almost done cooking. Then lay one slice of Velveeta cheese on each chicken breast. Toss back in the oven for 5 more minutes until the cheese is nice and melted.
7) Remove chicken from oven and serve on plates. Top each chicken breast with a few of the diced tomatoes and sautéed onions.

Bon appétit!

-Tom

It Happens

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Late last year, my wife and I sat down and discussed some of our financial goals for 2013. Essentially, we agreed to four: to put into our 401(k) plans what was necessary to receive our employers’ maximum matches, to make our annual contributions to our Roth IRAs, to increase our “rainy day fund,” and to lower the amount of principal owed on our mortgage to a specific amount. Well, not to brag, but things were going pretty swimmingly. Well, until it happened…

You see, a couple of months ago, there was this period where our karma, luck, mojo, or whatever you want to call it, was not so good. It started when I had a small medical flare up (don’t worry, I’m all good now) that generated some expenses beyond our insurance coverage. Then, my wife’s car had an unexpected electrical problem. Shortly thereafter, we would find out my car needed major repairs to ensure my ability to steer, our digital camera would break, and my computer would make it known that its days were numbered. A week or two of better luck then mercifully came, but only to be vanquished by our garbage disposal giving up the ghost. Then, there was our dachshund Lucy’s annual checkup that yielded some dog toothpaste so expensive that I’m considering trying it out on my own pearly whites! I know in the larger scheme of things that these are “first world problems,” and I still have a lot to be thankful for, but sheesh! Enough is enough already! Uncle! Make it stop!

I don’t share my rotten luck with you to ask for sympathy or to make you feel sorry for my wife and me. You shouldn’t. Everybody has stuff happen to them, and everyone has unforeseen expenses that rear their ugly heads out of nowhere. I share all of this with you to let you know that it will be okay and to remind you that if you have an adequately established emergency fund, you can often be okay relatively quickly. My medical bills are now paid, our car maintenance is complete, we have a new digital camera, we have a much better garbage disposal, and Lucy’s toothpaste seems to be helping her. I still haven’t replaced my dying computer, but knock on wood, we’ll get there.

My wife and I have been able to overcome most of our unexpected expenses because we had an emergency fund in place. We addressed the medical bills and urgent car problems with that emergency fund, but we handled the other, less “mission critical” inconveniences over a period of time after we had more paychecks roll in and recharged our emergency fund. We also tightened our belts on our discretionary spending just a tad. Most of our ambitious 2013 financial goals are still achievable, but after those expenses, I’m no longer certain we can both increase our “rainy day fund” and lower our mortgage principal to the extent we had hoped without altering our desired lifestyle, but that won’t stop us from trying! I just know that after being reminded of how fast large, unexpected expenses can pile up, increasing our “rainy day fund” will be the priority.

I may have a pretty strong financial background, but I don’t have all the answers. I’m just like you, and not immune to the financial strains that come up in life. As Sugarland so perfectly puts it in their popular song It Happens:

Ain't no rhyme or reason
No complicated meaning
Ain't no need to overthink it
Let go laughing
Life don't go quite like you planned it
We try so hard to understand it
The irrefutable, indisputable fact is
It happens

-Tom

P.S. I kid you not that BOTH of our air conditioning units quit working within 48 hours of my original draft of this post! Argh! It happens.

How to Spend It All

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Usually I try to write something about how to save money, budget, or invest. Occasionally I’ll go a little further out on a limb and talk about tax-saving opportunities, the importance of adequate insurance, or even some estate planning considerations. I try to make my messages timely, truthful, fairly upbeat, and hopefully, helpful. Today I’m doing something different: I’m throwing a changeup. I’m going to tell you how you can spend it all. Based on my personal experiences, situations I’ve heard about, and things I’ve read, I’m going to try to convey to you a shockingly simple lesson I’ve learned: No amount of money is so large that it cannot be spent.

• If you own so many pieces of real estate that you can’t rattle off all of the zip codes, you could probably spend it all. Even if you can afford the properties, the upkeep, additional insurance required, and property taxes might whittle away at your financial position over time. Also, as we relearned in the mid-to-late 2000s, real estate does not always appreciate.
• If you are so concentrated in one (or even a handful of stocks) that an Enron-esque fiasco for your holding(s) would literally bring you to tears, you could probably spend it all. I know, “They’re a great company, always have been and always will be,” but please go talk to some undiversified General Motors, Wachovia, and Lehman Brothers shareholders and get their perspectives.
• If you can’t say no to a single charitable call-a-thon or “urgent” donation request form in the mail, you could probably spend it all. Giving to charity is great on so many financial and personal levels, but if you are giving more and more, and your income and assets are not keeping up, you might find yourself someday needing charity.
• If you frequently “binge shop,” you could probably spend it all. Whether it is shoes, purses, hunting equipment, or the latest technological gadgets and gizmos does not matter; whether you can control your spending or not when times get a little hard does.
• If you can’t possibly have fun at a restaurant, hotel, or golf course that is not 5 stars, you could probably spend it all. Sometimes a peanut butter and jelly sandwich, a Holiday Inn Express, and a countryside course without a “19th Hole Bar & Grill” can suffice.
• If you can’t stop giving money away to your family, you could probably spend it all. Helping those you care about can be such an admirable act and very much appreciated by the recipients, but sometimes tough love and an occasional “No” will actually help them more in the long run.
• If you can’t ever achieve emotional peace when it comes to how you are invested, you can probably spend it all. I once saw a cartoon sketch that showed a stock market chart where the individual kept buying at the top of the market and selling at the bottom of the market. The punchline read something to the effect of “Repeat until broke!” Life is too short to not have peace of mind and the ability to focus on what is truly important. Sure there are market ups and downs, but if you are ever invested in a way that leaves you constantly uncomfortable, you shouldn’t be.  

I’m not trying to be Scrooge. I just thought I’d take a different approach to my usual message of saving and being fiscally responsible, and instead, share a few, common ways on how you can make hard-earned assets disappear.

Being broke and working is bad. Being broke and retired is even worse. Potentially leaving a little to your heirs may not be your goal, but it isn’t the worst thing in the world, either. Remember, if you really don’t like your heirs, you can always bequeath whatever you have left to your friends or to charity.

Please, whatever you do, just don’t spend it all!

-Tom

The Homemaker Retirement Plan

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There is a lot of financial advice out there for people who are working and for people who are retired. I like to think I’ve helped add to that. However, there is also a pretty sizable group of people who a lot of the best and brightest financial gurus, and your humble blogger here, don’t address nearly often enough: homemakers. A few Google searches and a personal reflection on all of the financial articles, commentaries, and calls I’ve read and listened to over the past several years confirmed my suspicion that financial advice for homemakers is pretty limited, so I hereby dedicate this post to the homemakers of the world. This one’s for you!

“Stay-at-home moms,” “Mr. Moms,” spouses who don’t need to work, spouses who don’t want to work – whatever you want to call them – for a few minutes, let’s call them homemakers. As I mentioned earlier, it's the working spouses who are usually sought after by the lawyers, insurance agents, and brokers of the world, but I believe homemakers, too, have a need for some very important financial planning. So here are three suggestions to help homemakers work toward a successful retirement plan, hopefully just like their employed spouses.

• Insurance- It’s crucial to make sure both the breadwinner’s and the homemaker’s lives are adequately insured.
• It may seem like a no-brainer to have a sizable life insurance policy on the breadwinner, but is it enough? Is the policy large enough to allow the homemaker adequate time to jump into the labor force? Is the policy large enough to allow the homemaker and the rest of the immediate family to maintain their lifestyle if the homemaker’s salary is not going to be as large as the breadwinner’s salary was? If there are young kids involved, is the policy big enough to provide for the additional supervision expenses that will be incurred if the homemaker has to go into the office instead of run the household?
• Some of you may ask why you would want to pay for a life insurance policy on a homemaker. Well, if young kids are involved, is the breadwinner going to quit an income-producing job and run the household if the homemaker has an unfortunate demise? In many cases, that’s probably not a sustainable option, so factoring in the additional supervision expenses that will be incurred by the breadwinner if the homemaker is unable to run the household is a necessary consideration and can probably best be addressed by a relatively small and short-term life insurance policy.

• Spousal IRAs- Not many of those brokers obsessed with only the working spouse cover this, but the non-working spouse can now also make annual IRA contributions ($5,500 per year or $6,500 if over age 50) as long as their working spouse has enough earned income ($11,000 per year or $13,000 if over age 50) to cover both of their contributions. Five or six thousand dollars a year may not sound like a healthy retirement plan right off the bat, but let’s say a homemaker was able to stash $5,000 away in a Spousal IRA every year for the thirty years their spouse worked - that would be $150,000 assuming no stock market growth at all! Isn’t it crazy that by diligently saving and contributing a few thousand dollars a year to a Spousal IRA that a homemaker could end up with a retirement account comparable to many people who are actively employed for their whole working life?

• Managing Expenses- Some homemakers may consider themselves the head of their household, while others might consider their employed spouses the head of their household. Either way, I think it’s probably safe to say that the homemaker has a clearer understanding of the day-to-day operating expenses of the home. Therefore, I think it is crucial for the breadwinner (who probably has a better idea of the future income coming in) and the homemaker to keep each other updated on their financial forecasts. A homemaker’s insights on upcoming expenses and cash flow needs can be valuable information to the breadwinner (and even their financial planner) in making sure the family budget is going to work.

 

I think the three suggestions above should definitely be considered by all homemakers and their spouses, but if I haven’t convinced you, let me try one more way… I hope you will pardon me for being rude, but do you make more than $96,261 per year? You see, I read an article early last year that showed what you would have to pay a chef, house cleaner, driver, laundromat, lawn care provider, and child care provider to do the average tasks done by a homemaker, and $96,261 was the number the article landed on! With that being said, I think it’s safe to say that although a homemaker’s work may not earn the big bucks, a homemaker’s work is often worth the big bucks, and therefore deserves proper financial planning considerations!

 

-Tom