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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 to Protect Yourself From Identity Theft

In the weeks that followed the Equifax data breach, our office received about a dozen calls from clients about what should be done to protect themselves from the data breach.  It’s understandable given how much it has been in the news.  But the shocking issue to me is that I received 5 separate phone calls/emails from clients who experienced some sort of identity theft related to their email system.

While so much of the media is concerned about the big data breach – Equifax – there are many other vulnerabilities that could cause hours and hours of frustration.  Here are a few pointers to consider:

  • There is no simple solution to protect yourself.  Freezing your credit scores can help in some areas. Using LifeLock can help.  But there is no single solution to fully protect you.
  • It’s more than just accessing credit.  Email hijacking is a huge issue, where hackers pretend to be you.  Make sure your email password is secure.  Opt for two factor identification, if available. Be suspicious of every email, even ones coming from people you know. When in doubt, call to confirm that the email is valid.
  • Watch the IRS.  Don’t forget that hackers can file fraudulent tax returns on your behalf and collect a bogus refund.  You will only discover this problem when you file your own tax return. If you’ve had a cyber-security event, tell the IRS with Form 14039.
  • Protecting yourself needs to be thought of as an ongoing task.  How can you better protect yourself?  How can you make your information even more secure?  You need to stay one step ahead of the hackers and the bad guys.
  • Most of what I read over simplifies the issues that must be addressed to protect your Identity.  This is a great resource to stay on top of Identity theft issues and how to protect yourself…. And what to do if you become a victim.
  • For more on how privacy and cyber-security, see by Dick Eastman.

A Simple Strategy To Save a Million Dollars (And Why It Is So Tough)

Over the last few years, I have worked with a lot of young families to plan how they will save for retirement and fund education costs for their children.  Their problem was simple: they knew they needed to save more but they didn’t know where to trim their budget.  Or their budget was already trimmed if a spouse was staying home to raise children and they lived on one income.  They didn’t know how to get started.

One solution that I brought up was to earmark the majority of any future raises (or future income from the spouse not currently working) to be directed into savings (college, retirement, other).  On paper and in concept, it makes a lot of sense.  This post shares the experience of someone who carried out the same kind of strategy for many years.

The problem that ends up holding many people back from reaching their goal with this kind of strategy is a concept called Lifestyle Creep or Lifestyle Inflation.  This occurs when someone receives a raise and instead of immediately increasing their 401(k) contribution amount, they put it toward something to make their life more enjoyable.  It could be an improvement to the house, an extra vacation, a new car, or just eating out more frequently.  The “needs” of today end up outweighing the “needs” of tomorrow.

Turns out, there is an evolutionary reason for this mindset.  In the early days of our existence, it was feast or famine. Our ancestors adapted to their reality by consuming as much food as possible when it was available so they could survive when food was scarce.  Unfortunately, we have not yet evolved to shed that mindset from our thinking.  Short article here helps explain the concept.

The solution to this evolutionary crutch is to systematically and regularly increase savings rates.  I work with some clients where we are increasing the rate at which they save two or three times a year.  Mentally, it is easier to increase your savings rate by an extra $100/mo every few months rather than increasing the savings rate by $400/mo every year.

But even then, that solution doesn’t make up for good-old-fashion discipline.

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.


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.


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.


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.


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.



Critiquing a Financial Plan

The following article examines five young people and their financial plan (more like their lack of planning).  They are then offered some preliminary advice about how to improve their situation.  Unfortunately, in every case I found the advice to be overly simplified.  Here’s the article

And here are some overarching strategies that apply to all the case studies:

1)      Emergency fund.  Start here first and make it a priority to build an emergency fund that can cover non-discretionary expenses for 3-6 months.

2)      Save more.  If you can’t save more now, earmark any future raise toward saving.  When asked about a rule of thumb for how much to save, I’ll often respond with “Save as much as you can”.  Young people and millennials are unlikely to have pensions and with the questionable future of Social Security, the burden to save is placed on their shoulders much more than previous generations.

3)      Automate.  Make sure any savings are set to occur automatically.  The mental anguish of writing a check every month or year to a retirement account can be surprisingly difficult.  Many times it is our own biases that create obstacles to reaching our own goal and simple processes like automating our savings can have a huge impact.

4)      Disability.  Life insurance is commonly discussed when a couple has children.  But disability insurance is rarely brought up.  What’s odd is that people are more likely to file a claim for disability insurance than life insurance.  And it doesn’t apply just to physical injuries, either.  We’ve had several clients and prospects tell us about their long term disability that affects their ability to do a desk job as a result of a bad car crash.