Financial Planning for Smart People
A great new web site by FraudAvengers (www.fraudavengers.org) has recently started. It is a non-profit group with the goal to educate the public on how crooks use online payment options and technologies to commit fraud.
It is a Texas-based group with the slogan, “Pros preventing cons.”
The site has blog articles to inform individuals and businesses on how to reduce their risk of fraud.
Check it out and sign up. I think it will be very helpful.
A man I truly admired was John Wooden. He coached the UCLA basketball team to a record number of National Championships. I wonder if his record will ever be surpassed.
He had a unique philosophy and attention to detail. (Like teaching his college players how to properly put on their socks. If done incorrectly, it would lead to blisters and make them unable to play).
He followed a creed for happiness. One of his principles was in a poem:
Making the Most of Oneself
Be true to yourself.
Make each day your masterpiece.
Help others.
Drink deeply from good books.
Make friendship a fine art.
Build shelter against a rainy day.
Pray for guidance and give thanks for your blessings every day.
He had high ideals for excellence and a code of conduct to find happiness. He said happiness comes from making and keeping nine promises:
1. Promise yourself that you will talk health, happiness and prosperity as often as possible.
2. Promise yourself to make all your friends know there is something in them that is special that you value.
3. Promise to think only of the best, to work only for the best and to expect only the best in yourself and others.
4. Promise to be just as enthusiastic about the success of others as you are about your own.
5. Promise yourself to be so strong that nothing can disturb your peace of mind.
6. Promise to forget the mistakes of the past and press on to greater achievements in the future.
7. Promise to wear a cheerful appearance at all times and give every person you meet a smile.
8. Promise to give so much time improving yourself that you have no time to criticize others.
9. Promise to be too large for worry, too noble for anger, too strong for fear and too happy to permit trouble to press on you.
John suggested everyone should recite these every day and he believed that you will have lifetime happiness. John is now deceased but I can still say…Thanks, Coach.
“You cannot win if you do not begin.”
How a person spends money is far more important than how he or she invests it. It is much easier to reach retirement goals by deciding how to live, rather than how to invest. Deciding what to do with the money we earn – how to spend it – is what brings about peace of mind, not how much we make or how much we have.
The late Loren Dunton, founder of the non-profit National Center for Financial Education in San Diego, wrote about his lifestyle decisions to buy new cars and spend weekends in Reno, instead of investing a hundred dollars each month in a mutual fund when he was in his late twenties. That fund would have been worth over a million dollars today.
AN EXPENSIVE CAR
Perhaps you think the difference between a full-sized car, fully-equipped, and a compact is only about $10,000. Actually, it is more like a million dollars. Consider this, borrowing $25,000 for a new car over four years will cost about $634 a month, while borrowing just $15,000 will cost only $381 a month.
If one saved the difference of $253 each month for 35 years, earning an 8% average rate of return, it would swell to $580,352. However, that is just the accumulation of the funds. What about the earnings as the funds are withdrawn during retirement?
If one were to get monthly payments of $4,479 from that sum from ages 65 to 90 (and some predictions say there may be over 250,000 people over the age of 100 in America in the 21st century), the total amount collected would be $1.3 million.
This is the magic of compound interest. However, it is not retroactive! One must save now to enjoy the benefits of compound interest in the future.
WAITING TO INVEST
For instance, if the difference in the example above were saved for only 25 years it would grow to just $240,000. Paid out at $1,857 a month, the total would be $557,000. It is amazing that the difference in saving an additional ten years is about a half million dollars. However, the monthly difference in payments of $2,622 monthly shows how today’s lifestyle decisions can be worth a million dollars in retirement years.
When should people begin saving money? Never soon enough. If ten years could mean a difference of $2,622 in retirement income each month, can you imagine what 15 or 20 additional years of savings would mean when you reach age 65?
JUST A LITTLE POSTPONEMENT
For some, no doubt saving now would be easier if there was more current income. People 17 to 23 years old may think: “Me save? Are you kidding? I am just getting my education and besides I want to have a good time. When I get out of college and start my career, I’ll start saving.”
People 24 to 30 may be tempted to think: “You don’t expect me to save now? I have only been working a few years. Right now, it is important to dress well. I’ll save later.”
From 31 to 42, the reasoning may go something like this: “How can I save now? I am married with small children. Perhaps when they are older I can think about saving.”
Those 43 to 55 wish they could save now. However, many just do not, saying they cannot because of children in college and education loans to pay.
From 56 to 65 most recognize the urgency to begin saving now. However, money is tight. It is not easy for people that age to better themselves. It is tough to break years of over-spending habits. “Maybe something will turn up,” many say.
At age 65 and older, it is too late to begin saving money. You cannot save when there is no income. Many older people live with their children and are dependent on Social Security, which is inadequate, since Social Security was only designed to be supplemental.
If the choice between cars can impact retirement income, imagine the possibilities when applied to lifestyle choices such as a home, vacations, dining out, entertainment, wardrobes, furnishings, etc.
Try to develop the art of money accumulation now. Begin by saving every day. Start today!
The segment of the American public that has been oversold and underserved can be defined as the mass affluent. This group has unique characteristics. Do you fit the profile of this group?
The mass affluent are people who:
• Save more than they spend.
• Seek to invest for the future.
• Worry about funding their children’s college education, but in most cases won’t impoverish themselves because they can cover costs through savings strategies, loans or personal income. In addition, many are not opposed to their children paying some part of their education costs.
• Worry about how they will replace their paychecks when retirement approaches, but in most cases will need to be encouraged to spend more money in retirement.
• Desire to leave a legacy to their children, not to charity.
• In retirement, seek to spend between $4,000 and $10,000 per month.
• Will have between $500,000 and $1.5 million in investable assets upon retirement.
• Would never consider calling themselves high-net-worth investors or millionaires.
Consider the following research: Russ Allen Prince and Associates just published a book entitled The Middle Class Millionaire, based on surveying middle-class Americans with investable assets between $1 and $10 million.
The mass-affluent community seeks advice on a wide array of planning issues. While they generally have investable dollars, they also want to explore how their money will affect their lives. However, many of the financial relationships they maintain are built on investment strategies, performance comparisons, technical analyses and tactical repositioning. These people feel the planning element of the relationship is missing, yet they struggle to articulate it, since their current advisor calls the existing narrow relationship financial planning.
Too many of these people visit our office with stories of how they felt like small fish in a big pond. They felt an initial sense of security aligning with a big-name firm, but when it came to having their financial planning needs addressed, the relationship would fall short.
The mass affluent seem to be stuck in a world where they want financial planning advice, yet what they buy is primarily investment advice.
When I work on retirement planning for my clients, they rarely consider their health costs in retirement. Since most employees are covered by an employer plan and are only charged a small percentage of the true costs, well, they think this will continue forever.
As of this writing, Medicare and Medicaid are available to seniors but it is not cheap and the costs to individuals continue to rise.
A recent study by the Employee Benefit Research Institute found that a 65 year old man, who retires this year, will need $68,000 to $173,000 in current savings to have a 50-50 chance of covering health premiums and out of pocket costs in retirement. If he wants a 90% chance, then, the amount of savings needed jumps to $134,000 to $378,000. The variance depends on whether a former employer subsidizes health costs in retirement.
The cost outlook is worse for women because they tend to live longer and need more health care. A 65 year old- woman who retires this year will need between $98,000 to $242,000 in savings for a 50-50 chance and $164,000 to $450,000 in savings for a 90% chance.
The study found that health care costs in retirement rose 9% for men and 16% for women over the past year.
These estimates do not include savings needed for long term care or for basic living. As I have stressed with my clients, you need to begin planning now. Remember these two items (health and long term care) are in addition to normal living expense.
Start today or you know the outcome… discipline or regret.