There's no magic to a million in retirement, but as the Baby Boomer generation begins making the transition, it's a question oft posed. In this Nightly Business Report clip, Sharon Epperson (CNBC) and I answer the big question: Is a million enough?

Date: June 5, 2014
Appearance: Is a million dollars enough to retire?
Outlet: 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, @TimMaurer.

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.

A Simple Retirement Stress Test

A simple way to conduct a retirement stress test is to apply some elementary school math:

Expected Annual Pension Income              _______________

Expected Annual Social Security                _______________

Retirement Savings _______________        

X .04 (4% withdrawal rate)                        +_______________

TOTAL EXPECTED ANNUAL INCOME =     _______________

If your total expected annual income is more than your expected income needs, you passed the retirement stress test. If you didn’t, you’ve got more work to do. While your catch-up method will be based on your specific situation, there are really only two basic ways to improve your retirement readiness:

1)   Increase your retirement income. As little as some want to hear it, working longer has a really powerful impact because you may be able to strengthen each of the three legs of the retirement stool—or at least two of them, if you don’t have a pension.

2)   Decrease your retirement expenses. No one wants to retire and then live like a pauper, so decreasing spending is typically even more unpopular than working longer, but it need not be. If you’re willing to alter your geography and go on an adventure, moving from an area with a higher cost of living to a lower one can transform a seemingly hopeless scenario into one that is more than comfortable. This is especially true when you’re able to buy a comparable house for less and add the proceeds to your retirement nest egg.           

Conclusion

The million-dollar retirement goal gets a lot of attention. Remember, though, that personal finance is more personal than it is finance.  Seeing one’s nest egg add another decimal place on the calculator may satisfy an emotional need, but there’s really no magic to it. A million is more than enough for some while lacking for others. The better question: What number works for you?

If you enjoyed this post, please let me know on Twitter@TimMaurer.

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.

Relinquishing its collective Abercrombie & Fitch flannel shirts for suits and ties, Generation X was buying its first homes just as the Farrelly brothers—directors of "There's Something About Mary"—were hitting the movie scene and the real estate market was warming up.

These initial purchases were greeted with solid gains and falling interest rates, so when Scott and Ann—as we'll call them—were ready to move up from their starter home to make room for their growing family, they decided to refinance and rent their first home. They got good renters, made a monthly profit and saw their net worth begin a sharp upward climb.

Since it worked so well the first time, why not do it again? Scott and Ann took meaningful chunks of their ever-expanding equity from their growing real estate portfolio to fund new home purchases. After all, the banks wouldn't lend them this money if they actually thought it was dangerous, would they? In their early 30s, Scott and Ann were poised to become millionaires soon, at least on paper.

This strategy worked great—until it didn't.

They lost a renter in one house and started having less amiable phone calls with lenders, soon resorting to unsecured credit cards for excess expenses. Their equity shrunk, seemingly overnight, and kept shrinking until it ceased to exist. Adjustable mortgage rates started adjusting in unfavorable directions, while their net worth accelerated into the red.

Scott and Ann's household income—more than $150,000 annually but comingled with their real estate "business"—could no longer support their family, until all was eventually lost in a dual personal bankruptcy that shattered them personally and threatened them professionally.

Plagued by guilt and embarrassment, Scott, who'd shielded Ann from most of their financial woes until they were impossible to hide, had trouble sleeping through the night, until he woke one morning with a freeing picture in his mind.

He saw the number zero preceded by a dollar sign. "$0," he told me, "is the amount of money and material possessions we take with us when we leave this world." His vision provided a valuable lesson, indeed, but one I'd have preferred Scott to learn in a book.

Scott and Ann's story is 100 percent true, but sadly it's not unique. The intense compounding of leverage-fueled rates of return on seemingly safe hard assets wooed entirely too many Gen Xers into part-time landlord gigs that eventually failed. For many more, home equity dwindled, thanks to cars, vacations and even more noble uses, landing vast numbers of 30-somethings among the millions still underwater on their homesteads.

As a generation, however, we've learned several lessons that will serve us well into the future:
Real estate can be a good investment, but it is not a safe investment, made even less safe because it is typically bought with leverage.
Without leverage, the most you can lose is your initial investment. With leverage, you can lose substantially more than your initial investment.
In order to benefit from rental real estate, you must be willing and able to be a landlord. Most aren't.
Owning more of a good thing is not always better. Concentrating is gambling; diversifying is investing.

Studies have shown that Generations X and now Y are more conservative than their predecessors, which is completely understandable after they saw the financial crash of 2008 follow the real estate crash of 2006, which has been preceded by the tech bubble bursting in the early 2000s.

Some say younger generations are being too conservative, but I think it's a good lesson to learn: No investment is likely to make us, and therefore it shouldn't be put in a position to break us.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

My bad! I was wrong about rising rates and bonds

Originally published CNBC

"I was wrong."

There are few words strung together that possess such power to free us. In less than a second, we're able to reconcile the inconsistency between our previous conviction and the apparent truth. Humbling, yes, but also strangely euphoric.

Well, I've earned the opportunity to claim said euphoria, as I must confess that I had bought into the most prevalent myth du jour surrounding bond investing. You'll forgive me, I hope, because this misconception—like all of the most powerful ones—is especially deceptive because it's grounded in half-truth.

bondpit

Let's be quite clear: Rising rates simply do not guarantee negative bond returns.

So the myth is that bonds will lose a ton of money when interest rates rise.

It is absolutely true that bonds and interest rates have an inverse relationship—that when they move, they often do so in opposite directions.

Here's why: This issuance of bonds is a common way that companies, municipalities, governments and other entities borrow money. They issue new bonds, becoming indebted to bondholders, their new creditors.

Bond issuers pledge to pay a stated rate of interest and to return the investor's principal upon the maturity of the bond. Let's say, for example, that General Electric wants to build new jet turbines, and it chooses to finance the project through a new bond issue, offering a 5 percent interest rate for those willing to lend GE money for 10 years.

Let's say you lend GE $10,000 and collect your 5 percent rate of return in the first year.

At the beginning of the second year, GE starts a new project, requiring a new bond offering. Only now, prevailing interest rates have risen, forcing it to offer 6 percent over the forthcoming decade.

Well, if your neighbor can loan GE $10,000 and receive 6 percent instead of the 5 percent you are receiving, you can see why he surely wouldn't spend $10,000 to buy your bond that only pays 5 percent. A year later your bond might be worth only $9,500, or even less, as a result of a rise in interest rates.

This is why rising interest rates tend to push down the value of bonds on the open market. The inverse is also true, though. When the whole world was gripped with fear in 2008 and 2009, the proverbial "flight to safety," when everyone wanted to own the only presumably default-free investment—U.S. Treasurys—the demand for Treasurys rose, forcing the yields down.

Then the Federal Reserve delivered on its promise to maintain lower rates, effectively and unprecedentedly, by "printing money" and buying U.S. debt instruments, creating artificial demand to keep rates down.

As the storyline goes, this is the perfect storm that demands higher rates, and soon. They could spike at any time, we hear, resulting in massive bond losses across the board.

Rise they will and spike they could, but here's where the rapidly-rising-rates-equals-deep-losses narrative loses steam: It presumes that the highly liquid bond market is unaware of all these factors.

It presumes that none of this anticipation and all the hype—which has actually been building in one form or another since the late 1990s—is baked into today's prices.

It's simply not true.

"A significant uptick in interest rates is already built into the pricing," said my colleague Jared Kizer, director of investment strategy at the BAM Alliance, a collective of more than 140 independent registered investment advisory firms across the U.S.

In fact, Kizer's models estimate that the market expects one-year Treasurys, four years from now, to pay 12 times what they're paying today.

"So the only way investors will see prices fall is if rates go up more than expected or quicker than expected," he said.

Neither Kizer nor I would suggest this means you won't necessarily lose money on your bonds when interest rates rise, but it does portend that you're not guaranteed to lose money, and indeed you may not.

As I stated earlier, rising rates do not guarantee negative bond returns.

How, then, could this myth have promulgated so successfully if it's not entirely true?

Well, Wall Street gets paid to transact. News travels faster when it's sensationalized. And when we hear something repeatedly from reliable sources, we tend to believe it's true until presented with stark evidence to the contrary.

At that moment, we have a choice. We can ignore the evidence, temporarily preserving our crumbling rightness, or we can utter those gratifying words: "I was wrong."

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

The financial industry has a reputation for being an "old boys club," known for paternalism and the marginalization of women.  Unfortunately, there's a lot of truth to it.  I enjoyed talking to Kim Palmer at U.S. News and World Report in preparation for her article, Where Are The Female Financial Planners?

Women financial advisors

Date: June 4, 2014
Appearance: Where Are The Female Financial Planners?
Outlet: U.S. News & World Report
Format: Other