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My Take On “What I’ve learned after 14 years at the most ‘depressing’ job in America”

This article has been shared widely since it was published a few days ago.  I appreciate the perspective the author shares as a journalist who’s covered personal finance topics for 14 years.  He has had to share many sad truths with his readers about how the majority of Americans are not saving enough for retirement, and how an increasingly complicated field of products and services leaves many Americans confused.

I agree with many of his comments and a lot of his lessons.  I have a different takeaway from the article.  It’s more proof that personal financial planning is more challenging than ever before and a trusted financial advisor is needed to help navigate the obstacles and set a proper course for people to reach their goals.

With all the tools and products that exist in the market, it is now possible to build a truly customized one-of-a-kind plan to help a client reach his or her financial goals.  Annuities may be a bad idea for most investors, but for some, an annuity is exactly what is needed.  Same goes for a reverse mortgage.  Most people will never have a need for one.  But for a select group of people, it may be a much-needed lifeline.

When someone gets their paycheck, they have lots of decisions on how to spend it.  As a society, we spend too many of those dollars in the present and save very little for the future.  Americans, in general, opt for things like a daily cup of coffee without realizing how much it adds up in the future ($3 a cup every workday for 30 years totals $23,400).  They make these decisions all day long without realizing the kind of impact this has on their future.

This, again, is where a financial advisor can help.  We often help to coach our clients in deciding how to pay off debts and nudge them into saving a little more for retirement.  In a sense, we are advocating on behalf of their future self.  And when market volatility returns, we are there to coach them to stay the course with their investment strategy.

To summarize, Roberts article provides a great perspective. I just wish he talked about how a financial advisor can help to provide guidance on many of these decisions that most Americans struggle to solve on their own.

How Retirement Planning Goes Off Track

Money Magazine’s August issue had a very good (but perhaps too short of an article) on five common reasons someone’s retirement dreams never actually become a reality or become a reality much later than originally planned.  I have summarized the major derailing actions (or inactions) from the article but have added my own perspective for each:

 

  • No periodic check-ups.  We have seen clients with large portfolios, a clear indication that they have saved a lot over their working career, but may be making some other large mistakes.  They range from concentrated stock positions and uncoordinated investment strategy to unrealistic expectations about spending in retirement and life expectancy in retirement.   We liken the financial planning process to a ship leaving port.  When a ship leaves port, it has to exert a lot of effort to get the ship pointed in the right direction, just like one does when starting a financial planning process.  During the voyage, the ship must make hundreds of course corrections along the way to arrive at the destination. The same goes for a financial plan which may require tweaks each year.  The key to a successful financial plan lies not in the initial planning process, but in the periodic check-ups that occur.
  • A lack of a disciplined portfolio strategy.  This brings to mind two different issues that we see.  First, we see clients who think they have a diversified portfolio of mutual funds.  But in digging into the funds themselves, we see a lot of overlap of the underlying investments.  There was one case in which the client had two investments and thought he was well diversified.  When we looked at the two positions, we quickly realized that they were each a passive index trying to replicate the exact same index.  There was no diversification at all and served as a big wake-up call for the client.  The second issue involves clients who cannot stomach the down turns in the market and sell out when the markets become volatile.  I’ve written about that at length HERE.  To help, we have begun using special tools to quantify a client’s risk.
  • Plan to delay retirement.  The recent trends show people working longer and longer into retirement.  The benefit is that the retiree will not have to tap his investments as much as he might if he retired at 65 (or earlier).  But in some cases, clients put off saving knowing they will work later into their retirement years.  What happens if an injury or illness forces them out of work sooner than they planned?  We see this happen all the time.  In fact, the article suggests about half of all retirees leave work earlier than planned.

Saving and spending mindset.  Someone may save all her life for retirement.  It takes years of dedication. It becomes a habit to save.  But then comes the day when she no longer needs to save. Upon retirement, she must learn to switch gears and turn savings into a stream of income.  Not knowing how that 401(k) will impact her income, or when to turn on social security are serious issues that must be decided.  In my experience, the transition from saving to spending will take a few years to adjust to with proper guidance.  In some cases, we have seen retirees came to us with unrealistic expectations of how long their savings will last in retirement. The difficult conversations must begin about what must be done.

How To Retire Early: A Critique of A Widely Shared Article

Recently, an article has been floating around the internet that presented a simple strategy to retire early.  It seemed too good to be true.  The gist of it is  “Even by simply upping your savings rate from 10% to 20%, you could shave off over 14 years from your retirement timetable.”  But what really caught my eye was the a simple chart that accompanied the quote suggesting the more aggressive you saved, the earlier you could retire:

If interested, you can read the full article here.

I couldn’t find enough details on how these figures were determined.  There was no complete list of assumptions used to arrive at these calculations.  Was Social Security factored into these calculations?  What about inflation? How did they define success?  I decided to do my own analysis and critique the findings on either end of the chart.

 

Save 10% for 51 Years

For the analysis that follows, I assume a 21 year old saves about $10k a year (10% of a $100k income) and does so for 51 years. And then in retirement, he would live off $100k. Social Security is not factored into this equation.  When we model this scenario, the results are very underwhelming.

The Result:

This scenario is not promising.  There is an extremely high chance that the portfolio would last for only about 12 years in retirement.  When we run through a 1000 market simulations, only 9% of the time will the portfolio last until age 95.

A Modification to Consider:

Let’s add social security to see how this affects the probability. Assuming social security of $30k per year, we can see that probability has jumped from 9% to 74%.  That means that in 74% of the 1000 market simulations, the portfolio lasted at least until age 95.  By leaning on social security to partially fund retirement, the investor doesn’t have to take as much from his savings.

We are getting closer to success, but I would not be comfortable with this plan.  I want to see a confidence level in the 90% range.  To get to a confidence level that I would feel comfortable with, I see three options to consider doing in addition to factoring in social security:

  • Increase savings to $1000/mo
  • Retire three years later
  • Live off $1000/mo less in retirements.

An Even Better Approach:

Let’s go back to our original scenario (without factoring in social security).  Let’s assume that the investor would increase the amount he saved each year by the rate of inflation.  In year one, he saves $10,000, but by year 5 he is saving $10,510.  Now this produces an interesting result:

That small change of saving a little more than the previous year had a profound impact when spread over five decades.  And the best part is that social security is icing on the cake.

Conclusion:

With modifying the assumptions a little bit, this scenario is very realistic.  This closely matches a lot of rules of thumb out there, so I’m not surprised that this scenario is workable.

Save 70% for Nine Years:

Let’s move to the other end of the spectrum and see how we can make the more aggressive goal possible.  Here is a hint: it’s a real stretch.

The obvious issue:  A client earning $100k per year would save $70k in this scenario leaving $30k for taxes and living expenses. That’s simply not enough to live on and pay taxes upon.  Under normal circumstances, I’d stop right there in my analysis. But to make this scenario at least plausible, let’s assume that he works for a company that provides food and that he camps in the parking lot.  You may be laughing, but it does happen. Basically, he has no living expenses and that $30k is used to pay taxes.

Result:

If we take the same client situation as we outlined in the previous example and accelerate retirement to begin in 9 years, the client has absolutely no chance of having the portfolio last through our planned life expectancy of age 95.  I’d be happy if the portfolio lasted for 10 years.

 

A Modification to Consider:

To make this scenario even remotely possible, the investor would need to slash his retirement income to about $1900 per month if he wants to have a good probability of retiring in 9 years and living off his portfolio until age 95.

Conclusion:

We may find it comical to consider the premise of only working for 9 years and saving the rest, but if this hypothetical person had an extremely modest lifestyle, this modified scenario could be considered.  The author of the chart referenced at the beginning of this post is a proponent of these kinds of retirement strategies and has even retired early himself.  His blog captures his thoughts and strategies and a few months back, I even wrote about this growing extreme retirement trend.

 

How to Plan When You Don’t Know Your Goals

Defining one’s goals isn’t easy for some people. Trying to envision what your life will look like at some point in the future can be difficult.  There are so many emotional and financial variables and so many unknowns in life that it can leave you feeling stuck or in a holding pattern until you find clarity.  We know that because it is a relatively common issue that we run into with our clients and an issue we try to help resolve for them. Retirements, illness, or the death of a family member can be very disruptive.

We help clients find clarity by trying to quantify the financial impacts of their situation and model other scenarios they are considering.

To illustrate what we do, let’s consider a typical client situation.  A couple with two college-age children have come to us looking for guidance in planning for their future.  They have very good incomes and a vacation property, but there expenses are high and they have not saved as much as they should have in the past.

Here is our process to help get this client out of their holding pattern:

  1.  We model their current financial situation and extrapolate those results out through their retirement.  Every conceivable financial variable is used to model the current situation: income expenses, accounts, assets, social security, etc.  The result is some perspective on the likelihood of maintaining the current lifestyle assuming nothing changes.  The model is summarized in a simple graphic, an example of which is below.
  2. The graphic above is presented to the client. The big circled number at the top provides a probability of success for the client to reach their financial goals.  The calculation uses Monte Carlo Simulations to imagine sequence of returns risk.  Basically, the model runs 1000 simulations to imagine how rates of returns affect a client reaching his goals.  What happens if there is a big recession early in retirement?  What happens if there is a big recession later in retirement?  What happens if the markets are flat for several years?  These are all scenarios that are modeled and considered and shows that of the 1000 simulations, 77%  result in their goals being met:
  3. In the first example above, it shows that their annual savings of $27,500 is used to successfully fund college education for two children as evident by the two green bars.  But it comes at an expense -their retirement is not fully funded as seen by the yellow bar.  This is where the conversation begins.
  4. We can begin to model changes on the fly to see how certain changes will affect their future in retirement.  In this example, the client has been wondering if they should sell their vacation property and use the savings for retirement.  We can quickly quantify the long term impact of that decision:
  5. Then we can see how that change will affect the probability of success.  We can see below that by making this one change, we have increased the probability of success from 77% to 93%.
  6. Sometimes, this gives the client enough clarity to make a decision and move on.  But that’s not always the case.  After the client has thought about making a major decision (such as selling a vacation home), they may come back saying they can not actually sell their vacation property and need to consider other options.  Below is a comparison of their current situation compared to a scenario in which they delay retirement for two more years.  The result is almost the same as if they sold the vacation property.

After this exercise, the client has two viable options to consider to get them on track for retirement.  By seeing certain scenarios modeled, it can make possible decision more real to them and hopefully more achievable.  The illustration we provide help them make better decisions.

There are lots of emotional decisions that revolve around major life decisions, like retiring, changing jobs/careers, and moving.  We believe that by addressing the financial impacts of these decisions, we can affect the emotional considerations that may be holding our clients back.  Our goal is to provide that nudge to get them moving in the right direction and to keep them from making mistakes.

If you feel like you are stuck or need help laying a clear path forward, please reach out to us:

 

Effects of Saving an Extra $20 Each Week

Saving just a little bit extra each year can have a profound impact over the long term.  Investor’s Business Daily ran some pretty interesting numbers showing the impact on one’s retirement if an extra $20 is saved every week.  Here is some of the findings based on certain age ranges:

Recent College Grad: invest $20/wk earning 6% and by retirement, that pot of money will be about $330,000.

Someone in their mid-40s:  invest $20/wk earning 6% and by retirement, that pot of money will be about $40,000.

Someone in their mid-50s:  invest $20/wk earning 6% and by retirement, that pot of money will be about $14,000.

The results are pretty clear – consistently investing over many decades can have exponential benefits on your financial situation.  Even small amounts can add up to have a big impact when time is on your side.