New Report on the Cost of Kids: Reading Between the Lines

Originally in ForbesThe U.S. Department of Agriculture (USDA) recently released its annual “Cost of Raising a Child” report. The news from it is really no news at all to us parents—kids are stinking expensive and growing even more so. However, if you read between the lines, there are three extremely important points that don’t show up in the executive summary:

My family outside of the South Carolina Aquarium in Charleston

1)   Parents still have a choice. The USDA estimates that households with less than $61,530 in income will spend a total of $176,550 per child. Meanwhile, “middle-income parents” making between $61,530 and $106,540 each year can anticipate spending $245,340 per kid. Those blessed with household income over $106,540 should expect to spend $407,820.  

Here’s how I read these numbers: It likely costs approximately $175,000 to care for a child’s needs in today’s dollars. Beyond that, it’s our choice as parents if and how we spend additional money on our progeny. When your household income jumps from $106,000 to $107,000, the USDA isn’t holding a gun to your head and demanding that you spend an additional $162,480 per child.

It’s completely up to you, and you may choose to spend more or less than some of the USDA estimates. For example, you may choose (wisely) to spend more on one child than another for various, justifiable reasons, including each individual child’s own gifts and weaknesses. If you choose to put even one child through private school, from kindergarten through a graduate degree, you could easily spend a million bucks just for education—and college isn’t even included in the USDA’s numbers.

It’s not how much you spend but how you spend it—and whether you can afford it—that’s important.

2)   It’s important to introduce children to the realities of money early. The cost of being parents shouldn’t be a taboo topic with our children. In fact, children should be introduced to the reality of money and the cost of living as early as they can comprehend it.

As they age, we should give our children more and more information and put more control in their hands. Money was—and still is for many—a taboo topic, and that needs to change. I’m not suggesting you share everything about your financial world with your kids. But find a way to help them understand that they are their own ecosystem, albeit one that resides within your family.

I recently discussed this topic on the Nightly Business Report.

3)   Couples who avoid this topic do so at their peril. More than 50% of marriages end in divorce and more than 50% of those couples list financial disagreements as the primary reason for their breakup. The emotionally charged decisions we make, and specifically those decisions related to our children, provide the perfect context for serious disagreement. So, if you want to give your marriage a sporting chance, openly discuss and specifically plan for child-related expenses.

I’ll never forget having coffee with a mentor of mine about 11 years ago and discussing this topic. On a personal level, my wife and I were ready to begin a family, but as a financial planner, I didn’t feel like we were prepared.

“You’ll never feel like you’re ready,” my mentor told me. “No matter when you decide to do this, it will be a leap of faith.” Our boys, Kieran and Connor, just started the fifth and third grades, respectively, and I must say I’m forever grateful that I followed the advice of my mentor.

Choosing to start a family is about a great deal more than financial readiness and planning, but your marriage and your children will be better for it.

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The Top 10 Places Your Next Dollar Should Go

Originally in ForbesThere is no shortage of receptacles clamoring for your money each day. No matter how much money you have or make, it could never keep up with all the seemingly urgent invitations to part with it.

TOP 10 DOLLAR

Separating true financial priorities from flash impulses is an increasing challenge, even when you’re trying to do the right thing with your moola — like saving for the future, insuring against catastrophic risks and otherwise improving your financial standing. And while every individual and household is in some way unique, the following list of financial priorities for your next available dollar is a reliable guide for most.

Once you’ve spent the money necessary to cover your fixed and variable living expenses (and yes, I realize that’s no easy task for many) consider spending your additional dollars in this order:

  1. Create (or update) your estate planning documents. Your estate planning, or lack thereof, is unlikely to make headlines like that of the rich and famous. But the frightening implications of not planning for your inevitable demise lands it in the top financial priority slot, especially for parents of minor children. With extremely rare exceptions, every independent adult should have the following three documents drafted, preferably, by an estate planning attorney: a will, durable powers of attorney and advance directives (health care power of attorney and a living will).
  2. Ensure that insurance needs are met. Don’t become the next heart-wrenching 20/20 segment because your family was left destitute after you died or became disabled without adequate insurance for such catastrophic events. Please note, however, the difference between insurance needs and wants. Surprisingly, most insurance needs — especially regarding life insurance— are sufficiently covered with policies that are less expensive than the all-inclusive, bell-and-whistle products often recommended by insurance agents.
  3. Pay off any high-interest consumer debt. It’s hard to build assets when you’re dragged down by liabilities. A new report out from the Urban Institute indicates that one-in-three Americans have debt in collections — you know, that’s when you get nasty calls from unforgiving call centers that purchased your debt for pennies on the dollar from credit card companies and medical care providers, among others. That’s roughly 77 million people! The economic and emotional toll of consumer debt, especially at astronomical rates, makes it financial enemy number one (or, in this case, number three).
  4. Build at least one month’s worth of living expenses in emergency savings. Savings is the first line of defense against cancerous consumer debt. Yes, of course I’d like you to have more than a month saved, but the next priority is just too good to put off …
  5. Earn free money by taking advantage of your company’s 401(k) match. Many companies offer to incentivize employee retirement savings by matching, up to a certain amount, the percentage of your salary that you contribute to the company retirement plan. They may match 100% of the first 3% of your salary that you elect to save, or 50% of the first 6%. In any case, give yourself a guaranteed rate of return by gobbling up those matching contributions from your employer. If not, you’re leaving money on the table.
  6. Contribute to a 529 plan for education savings. Education should not be prioritized over retirement, and merely contributing the matched amount to your 401(k) is not likely to secure your future retirement. But once you have checked off numbers one through five, it’s time to consider opening up 529 accounts for children you intend to help through college. Contribute what you can and invite loving relatives to do the same.
  7. Contribute the maximum possible to your Roth IRA(s) if your income level allows you to. Nothing’s better than free money, but tax-free money comes close. By contributing to a Roth IRA, you’re filling a bucket of money that should never be taxed (as long as you wait until after age 59.5 to take gains). And, if you are hit with an emergency that runs through your reserves, you can take your principal contributions back out of your Roth IRA at any age for any reason without taxes or penalties. In 2014, you can contribute $5,500 per person or $6,500 per if you’re age 50 or older. The ability to contribute to a Roth IRA goes away entirely, however, if your income level is above $191,000 in 2014.
  8. Return to strengthen your emergency reserves. If you really want to sleep well at night, I like to see most households with stable jobs amass three months of reserves, households with more volatile income sources put away six months of savings and the self-employed stockpile a year’s worth of expenses.
  9. Come back to your 401(k) and cap it off. If you still have money left after taking advantage of numbers one through eight, you probably have a fairly high income. Maxing out your 401(k) or other corporate retirement plan will not only further pad your retirement savings, but will also reduce your taxable income for every dollar contributed. You may contribute up to $17,500 per person — and a whopping $23,000 for investors 50 or older — in 2014.
  10. Set aside excess savings in a liquid, taxable investment account for mid-term needs and projects. Emergency savings helps protect you in the short-term. 401(k) and Roth IRA investments help secure your financial future. But if you’re only taking care of the short- and long-term, it leaves nothing for the mid-term. Therefore, opening a regular, taxable investment account will help you set aside money for a boat, excess education costs, a closely held business investment or the down payment on a second home or a rental property. This money should be invested in accordance with the time horizon for its use.

Conspicuously missing from this list are non-deductible Traditional IRAs, annuities, all forms of permanent life insurance and hundreds of other marketed repositories for your money. These products have their uses, but they simply don’t take priority over these ten financial initiatives. In all, I estimate the “cost” of checking off each of the listed priorities to be more than $70,000 annually, surely requiring combined household income of $250,000 or more. That means you can likely free yourself from worrying about any of the additional pitches that come your way until you’ve mastered each of these.

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A study by the Urban Institute uncovered a shocking statistic, that 35% of Americans have some consumer debt in collections.  I discussed this with Tyler Mathisen on PBS's Nightly Business Report, produced by CNBC.

Date: July 29, 2014
Appearance: Discussing Shocking Consumer Debt Stats on Nightly Business Report
Outlet: The Nightly Business Report, on PBS
Format: Television

The 3 Keys to Surviving Major Life Transitions

Originally in ForbesYou might think that the most important work a financial advisor can do is related to allocating a client’s investment portfolio, or perhaps helping secure a timely insurance policy or drafting the optimal estate plan. In fact, their most important work is done when clients are in the midst of navigating life’s major transitions.

Help

I have very recently undergone two of these major life events — a job change and a move — in the span of five months. Crazy, right? Who would willingly subject themself to two of life’s most stressful changes within such a small window of time? Fortunately, I had at my disposal three keys to surviving major life transitions, and I’d like to share them with you:

Key #1: Flexibility

“Blessed are the hearts that can bend; they shall never be broken.” — Albert Camus

In February, I left the company I loved after seven years of life-changing work to lock arms with a national alliance of financial advisory pioneers dedicated to the practice of “building relationships by doing the right thing.” But in order to build a new and rewarding relationship with them, I had no choice but to sever some relationships with others.

I had to tell colleagues at my former company — good friends — that I was leaving, knowing that our work was the primary basis for our friendship. I also had to forgo working with some clients whose financial plans I’d helped craft, and in whom I’d invested personally.

I had to impose myself on new colleagues as I fumbled through onboarding. I had to learn new systems, protocols and personalities. I had to wonder if, at the conclusion of a probationary stretch of forgone forgiveness, my new colleagues would still want me on their team!

So much change in so little time.

You’ve heard that death and taxes are life’s only guarantees. But I’m still holding out for an Elijah-style exit, and half of Europe pays taxes little mind. No, it is only change that is a guarantee in this life, and flexibility is its only effective counteragent.

We can and should envision and plan for major life transitions, but we should also expect our path to be diverted by unknown variables. We must be willing to flex our plans in these dynamic times of change.

Key #2: Margin

“Everything takes longer than it does.” — Ecuadorian proverb

In the  first week of June, my family moved from our beloved Baltimore — leaving behind our close-knit families, community support systems and favorite sports teams — in an experiment to see what life would look like from a different vantage point. We chose Charleston, South Carolina, as the backdrop for our adventure, pinpointed for its promise of a slower pace, higher quality of life and lower cost of living.

Major life transitions, however, are necessarily taxing on our time and money, at least initially. And because of the elements unique to every major life event, it is virtually impossible to accurately forecast the necessary allotment of time and money that will be required.

This can be maddening to me as a financial planner. I strive to forecast every expense one could anticipate, but change invariably costs more money and consumes more time than expected.

The only solution is to plan for the unexpected by leaving a reasonable margin of time and money — a buffer — that can be consumed by the inevitable surprises that arise. Expect that it will take 20% longer and cost 20% more. This is the only defense against heaping more stress on an inherently stressful event.

I’ll also add that our move was, in part, an exercise in the creation of margin. Despite Charleston’s great reputation as a city that offers  a high quality of life, the cost of housing, especially, is still lower than in the Mid-Atlantic. We were able to reduce our overall monthly housing costs, our biggest single expense, by 20%.

We also added a significant margin of time to our calendars. We effectively wiped clean our slate of commitments, decades in the making, and now we get to choose exactly what, where, when and to whom we’re willing to dedicate ourselves.

Key #3: Grace

“Failures are finger posts on the road to achievement.” — C.S. Lewis

Failure is inevitable, especially in the case of major life events. Grace is unmerited favor in the face of failure. This brand of grace is most often discussed from the pulpit on Sundays, but I raise the topic here more for its practical benefits than its spiritual.

The nature of life’s major transitions — specifically the changes and surprises that come with them —are a breeding ground for failure. Some are inconsequential while others come with great risks, but most come as a result of our limitations.

We err, and in order to move forward we must extend grace to ourselves and to the others on our journey.

It must be said that not all major life transitions are equal. The benefit of my recent life events is that each of them, while taxing and stressful, led to something new and exciting. You may be facing another brand of life event — a death, a divorce, an injury or a loss not of your choosing. Your situation is different — it’s harder — but that makes the use of these three keys even more vital.

When we employ flexibility, margin and grace in navigating life’s biggest transitions, we have the opportunity to not only survive them, but to thrive in and through and even because of them.

If you enjoyed this post, please let me know on Twitter at @TimMaurer, and if you'd like to receive my weekly post via email, click HERE.

 

Mint.comSince shortly after its inception, I've been a fan of Mint.com and have recommended their powerful budgeting tool to anyone willing to listen.  The tool has changed so many lives that Mint.com has become a reputable personal finance source of news and information as well.  So when they asked if they could do an "Expert Interview" with me on the topic of human behavior and personal finance, it was an easy "yes" response.

Enjoy the interview here: "Expert Interview with Tim Maurer on Human Behavior and Personal Finance for Mint"

Date: July 23, 2014
Appearance: Interview with Magnetic Personal Finance Site, Mint.com
Outlet: Mint.com
Format: Other

Here’s Why People Ignore 80% of What Their Advisor Tells Them

Originally in MoneyI’ve heard it estimated that out of all the financial and estate planning recommendations that advisers make, their clients ignore more than 80% of them. If there’s even a shred of truth in this stat, it represents a monumental failure of the financial advice industry.

To explain why, let me tell you a story about a financial planning client I worked with a few years back. In one of our first meetings, she and I were reviewing her three most recent tax returns. As I discussed them with her, it became clear that the accountant who had prepared those returns — an accountant who had been recommended to her by her father — had filled them out fraudulently. A bag of old clothes that she had donated to charity became, on her Schedule A, a $10,500 cash gift. She also deducted work expenses for which she had already been reimbursed.

Pogo Stick Retirement Planning for Younger Generations

Originally in ForbesHistorically, retirement planning has been likened to a three-legged stool — consisting of a corporate pension, Social Security and personal savings. Baby boomers saw the pension fade from existence, leaving them to balance on retirement planning stilts. For younger generations, however, the retirement situation can seem even worse. Sometimes, it feels like it’s all on us. We’re left with only a retirement planning pogo stick.

three legged stool

Further complicating matters, doctors suggest that the length of life Generations X, Y and Millennials can expect may exceed that of our parents and grandparents. We’re likely to live a long time, but our quality of life — to the degree that it is improved by cash flow — is in question because of the heightened savings burden.

Last week, I shared two “silver bullets” — MOVE and WORK— for hopeful boomer retirees who may fear that a 14-year stretch of economic uncertainty has put their goal for a comfortable retirement out of reach. Here’s how these two concepts can be applied to younger generations:

Is A Million Bucks Enough To Retire?

Originally in Forbes“Wow, those guys must be millionaires!” I can recall uttering those words as a child, driving by the nicest house in our neighborhood—you know, the one with four garage bays filled with cars from Europe.

The innocent presumption, of course, was that our neighbors’ visible affluence was an expression of apparent financial independence, and that $1 million would certainly be enough to qualify as Enough.

Now, as an adult—and especially as a financial planner—I’m more aware of a few million-dollar realities:

Retirement Stress Test Graphic - v3-01

1)   Visible affluence doesn’t necessarily equate to actual wealth.  Thomas Stanley and William Danko, in their fascinating behavioral finance book, The Millionaire Next Door, surprised many of us with their research suggesting that visible affluence may actually be a sign of lesser net worth, with the average American millionaire exhibiting surprisingly few outward displays of wealth. Big hat, no cattle.

2)   A million dollars ain’t what it used to be. In 1984, a million bucks would have felt like about $2.4 million in today’s dollars. But while it’s quite possible that our neighbors were genuinely wealthy—financially independent, even—I doubt they had just barely crossed the seven-digit threshold, comfortably maintaining their apparent standard of living. To do so comfortably would likely take more than a million, even in the ’80s.

3)   Wealth is one of the most relative, misused terms in the world.  Relatively speaking, if you’re reading this article, you’re already among the world’s most wealthy, simply because you have a device capable of reading it. Most of the world’s inhabitants don’t have a car, much less two. But even among those blessed to have enough money to require help managing it, I have clients who are comfortably retired on half a million and millionaires who need to quadruple their nest egg in order to retire with their current standard of living.

The teacher couple, trained by reality to live frugally most of their lives, don’t even dip into their $400,000 retirement nest egg or their $250,000 home equity because they have two pensions and Social Security that more than covers their income needs.  Their retirement savings is just a bonus.

But the lawyer couple, trained by reality to live a more visibly wealthy existence, aren’t even close to retiring with their million-dollar retirement savings. In order to be comfortable, they’ll need to have at least $4 million.

A million bucks, then, may be more than enough for some and woefully insufficient for others.

Real Estate Quagmire Sinks Gen X, Y Fiscal Hopes

Originally published CNBC

Throughout the course of my career, I've heard a lot of financial horror stories. The majority of these stories are told by baby boomers whose aggressive stock market strategies went bust, often at the behest of a transaction-oriented "advisor."

foreclosure-1

The most pain—yes, even marginally greater than that of former Enron employees and Bernie Madoff scam victims—has been felt by a younger generation, however, in America's suburbs, far from Wall Street.