Is A Million Bucks Enough To Retire?

“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.

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

Why Beating The Market Is An Uphill Skate

It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates.

Mt._Everest_from_Gokyo_Ri_November_5,_2012

It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit.

After 16 years in the financial industry and seeing countless great investors eventually humbled by market forces they could not control, I’ve finally relinquished my skates.

Allocating Your Most Valuable Asset—You

What is your most valuable asset? Your home? Not likely, even back in 2006. Your 401(k)? Doubtful, even when it was 2007. No, if you’re not yet glimpsing your retirement years, it’s likely that your biggest asset is you—and not just metaphorically.

Tim_01

Let’s say you’re only 30, with a degree or two and some experience under your belt. You’re making $70,000 per year. If you only get 3% cost-of-living-adjustment raises, you will crest a million in aggregate earnings in just the next 13 years.

Over the course of the next 40 years, over which you’ll almost surely continue working, you’ll earn more than $5.2 million.

Survey Shows Students Are Dumping Top Colleges Due To High Cost

The disproportionate rise in the cost of college relative to the cost of everything else is not news, but a new survey shows that college students are dumping their top choices for education based on price. Have we finally reached the tipping point?

800px-College_graduate_students

Well, I’m a planner—not a prognosticator—so I’ll defer judgment to those with functioning crystal balls, but let’s address the college cost crisis and a way to avoid becoming the next student or parent squashed by education overpayment.

Is there really a crisis?

The Chances Are Good That Your 401(k) Isn’t

We need not look far to learn that 401(k) plans are imperfect or worse, so instead of lumping on more criticism about how you and your employer have botched your 401(k), let’s discuss how to make the most of a not-so-great situation.

401k-Plan-300x246

 

Step 1: Don’t blame shift. There is a time for criticism, so keep reading, but too many people use the imperfections in, or a lack of understanding of, their retirement plan to feed the self-deceptive siren’s call to inaction.

Financial Advisors: Differentiate Yourself By Being Yourself

The most freeing day of my career was when I sold my golf clubs.

Different

Although the transformation had been under way for several years, it was a moment of symbolic importance. It signaled an official decision to permit myself to be something other than what I had come to believe the financial industry wanted me to be. I was officially granting myself permission to be myself.

Conformity

I apologize in advance for stereotyping, but the sales managers I had worked for had personified the industry for me. Not fond of nuance or implication, they simply had expressed that I was to be, among other things, a golfer. So I bought a set of new clubs outfitted with a nice bag, and I hired an instructor to help me master the gentleman’s game.

After several lessons, my laidback instructor told me he’d never seen anyone grip the club quite so hard. We discovered that I had complemented my less-than-elite athleticism with heavy doses of intensity and hustle to remain competitive in sports while growing up. Unfortunately, as it turned out, these traits were counterproductive to success in golf.

Instead of investing thousands of dollars in psychotherapy to try and loosen my grip on a golf club, I sold my clubs and bought a used road bicycle. I grew to love the sport, which rewarded my overcompensation of will and desire.

But I wasn’t just dumping golf at that moment. I was dumping it all—the notion that I should only wear dark suits, plain white (or light blue on Friday) shirts, power ties, hair that is neither too long nor short and a clean shaven face. Eureka—I could even wear a pair of jeans to the grocery store now!

Differentiation

Paradoxically, as long as I lived inside of the industry’s box, I was taught to differentiate myself professionally—to become “the guy” for orthopedists or cosmetic dentists or corporate attorneys. Everything I did in life, work and play was supposed to send a message that would presumably attract a specific niche of people who are known for making especially profitable financial advisory clients.

Of course, there is nothing wrong with golfing, differentiating yourself or serving a niche. In fact, each of these pursuits can be beneficial for you and your clients when practiced in earnest. What is wrong—or at least unhealthy and more than a touch manipulative—is becoming someone you are not for the benefit of purposefully differentiating or conforming.

What if the Holy Grail of finding your niche and setting yourself apart from the crowd was found simply in permitting yourself to be yourself?

Being Yourself

If you always wanted to be a Navy fighter pilot but got turned down because you’re too tall or your eyesight was worse than 20/20, you could develop a niche serving military officers. If you aspired to be a surgeon but threw up all over the cadaver on the second day of medical school, you could serve the medical community. And of course, if you’re passionate about golf and enjoy the simplicity of uncomplicated garb, you should be entirely free to live up to the stereotype of the financial advisor.

There’s only one caveat, but it’s a big one: When you give yourself the freedom to be exactly who you are, you might disappoint other people. It’s easier for companies and managers—even parents, spouses and, in some cases, kids—to put you in a predictable construct that may best serve their needs and wants.

What if you want to help social workers navigate the world of personal finance and thereby would likely have to take a pay cut? What if it means you’d be working with clients less and drawing more? What if becoming fully you means moving to Latin America to manage a micro-finance operation and teach English? What if it means educating advisors more than investors?  What if it means designing a practice that conforms to your family instead of the reverse?

You might have to change ZIP codes, companies or professions altogether.

Unfortunately, being who you are—especially in the financial industry—may not be the easiest thing to do, but choosing to be yourself is simple because it’s natural, and incredibly liberating.

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

 

Time Is More Precious Than Money

As the Fed has taught us through the money-printing machine cloaked as quantitative easing, the potential supply of U.S. dollars is limitless. Even for most of us individually, we are capable, to varying degrees, of generating and regenerating money through work, investment and happenstance.

Time, however, is a different story.

Thanks to Emily Rooney for permission to feature her artwork

Thanks to Emily Rooney for permission to feature her artwork

It brings to mind these lyrics: “Where you invest your love, you invest your life,” croons Marcus Mumford in the song “Awake My Soul” on Mumford & Sons’ debut album, “Sigh No More.”

Sure, musicians are notorious for writing lyrics because they sound self-important, or maybe simply because they rhyme, but Mumford has earned a reputation for lyrical brilliance and offers us something deep and meaningful here to apply in our lives and finances.

No matter how much we strive, delegate and engineer for efficiency, there are only 24 hours in each day. We are unable to manufacture more time, and once a moment has passed, it is beyond retrieval.

Of these 24 hours each day, if we assume that we will sleep, work and commute for approximately 17 of them, that leaves us with a measly seven hours to apply ourselves to loftier pursuits. After an hour at the gym, an hour to eat and another hour to decompress with a book or TV show, we’re down to four hours to personally affect those for whom we are presumably working and staying healthy—the people we love.

Our human capacity to love also has its limits.

While not measurable, we can all acknowledge that our capacity to love, in the four hours each day that we have to invest it, is affected by how we’ve invested the other 20 hours. By the “end” of many days, we are just beginning our four hours, and we are already spent. Even if we wanted to, we have nothing left to give—no love left to invest.

I am a chief offender of misallocating my love.

I often allow the four hours I have to give to my wife, Andrea, and two boys, Kieran (10) and Connor (8), to shrink to three, two or even one. In whatever time is allocated, I often serve leftover love, having over-invested myself throughout the day. Then I steal from their time, interrupting it with “important” emails and calls.

I must acknowledge that these are choices I make.

We have the choice to order our loves, to acknowledge the limited nature of time and our own capacity, and to prioritize our work and life.

It’s entirely appropriate to love our work and the people we serve through it. It’s entirely appropriate to love ourselves and to do what is necessary to be physically, fiscally, psychologically and spiritually healthy. It’s entirely appropriate to love our areas of service and civic duty, and to serve well. Therefore, almost paradoxically, it’s entirely appropriate to spend 83 percent of our daily allotment of time in pursuits other than the direct edification of those we love the most.

But what would our lives look like if we engineered our days to make the very most of the other four hours?

Would we have a different job? Would we live in a different house or part of the country? Would we drive a different car? Would we say “no” to some people more and to other people less? Would we invest our time and money differently?

Would you invest your love differently?

I’m excited to be part of a contingent of financial advisors asking these questions of our clients (and ourselves).  We don’t believe that the only way to benefit our clients is through their portfolios, and we believe that asset allocation involves more than mere securities.

This isn’t a particularly new concept.  Indeed, the second phase of the six-step financial planning process, as articulated in the Certified Financial Planner™ (CFP®) practice standards, is to “determine a client’s personal and financial goals, needs and priorities.”  But thought leaders like Rick Kahler, Ted Klontz, Carol Anderson, George Kinder, Carl Richards and Larry Swedroe are persistently nudging the notoriously left-brained financial realm to reconcile with its creative and intuitive side for the benefit of our clients.

With statistics suggesting that as many as 80% of financial planning recommendations are not implemented by clients, it’s officially time to recognize that personal finance is more personal than it is finance.

If you enjoyed this post, I'd love to hear from you on Twitter via @TimMaurer.

The Only Lesson You Need To Learn From The Debt Ceiling Debacle

Executive Summary-01Few of us would argue that the government shutdown and this year’s debt ceiling debacle are issues of importance, but over the course of your lifetime, which do you think has a bigger impact—the decisions the government makes or your own personal decisions?

We tend to spend more time bemoaning the action and inaction of those with less of a direct influence in our lives—especially legislators and Presidents—than those who most directly impact our lives: US.

You are an entity.  You and your spouse (if you’re married) and your children (if you’re a parent) are certainly beholden in part to other entities, like companies, cities, states and countries, but you also enjoy a great deal of sovereignty.  You decide where to live, what to eat, whom to befriend and marry, how to derive an income and how to spend it.

Please allow me to disabuse you of a few “It’s their fault!” self-deception anthems especially common in the realm of personal finance:

  • The arc of your career is not your boss or company’s responsibility. Good bosses and companies create environments in which good employees can flourish.  Bad bosses and companies inspire good employees to join better companies or create new businesses.  Bad employees play lots of video games.  At work.
  • Regardless of your levels of income or net worth, your financial success or failure will be predicated primarily on the effectiveness of your cash-flow management system.  This is most commonly and disdainfully referred to as a budget.  I recommend YNAB to college students and millionaires alike.  You can never be too rich or poor to budget.
  • Your long-term success in investing is not the responsibility of your financial advisor or investment manager (although they can help or hurt).  There are innumerable (good and bad) variations on the portfolio creation and management theme, but if all you ever did was establish a reasonably diversified, indexed, balanced portfolio (call it the “minimum effective dose”), you’ll likely outpace most of your peers and many professional investment managers.
  • Your ability to retire comfortably will be impacted by many factors—especially the three you just read—but none more so than your willingness to make regular contributions equal or greater to 10% of your annual income.

Although politicians and pundits may attempt to convince us otherwise, the long-term trajectory of our lives are more a consequence of impulsion than compulsion—UNLESS we give someone or something else that control. If you rely more on outside influences than those within your control, you have ceded too much.

If we worry more about that which we can’t control (governmental bumbling, short-term volatility, the outcome of the World Series) than acting on that which we can, we do so only to our detriment.  And maybe—just maybe—the reason we gripe so much about that which is holding us back is that we fear the consequences of being held accountable for our own decisions, our own lives.

Control what you can, and worry far less about that which you can’t.

 

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

Don’t Forget To Update Your Financial Operating System (OS)

ios-7

Android die-hards can tell you everything that is wrong with iOS7, Apple’s recently released operating system for iPhones, iPads and iPods.  Those who gripe every time something changes are also among the early detractors.  Everyone else—that is, those of us who’ve gone back for a second or third helping of tasty iKool-Aid—loves it.  The exclamation that I hear most often regarding the new iOS is, “It’s the same phone, but it seems like it’s brand new!”  What struck me even harder than iWorship last week, however, was recounting the number of individuals who, with unchanged exteriors, have undergone noticeable overhauls in their Personal Operating System (POS)—for the better.

“I’m bad with money.”

Don’t you love the way we label ourselves as predestined for failure?  “I have a bad temper.”  “I have no willpower.”  “Exercise and I don’t mix.”  “Oh, I have ADD.”  “I’m not a good listener.”  “I have a sweet tooth.”  Or the one I hear often as a financial planner and educator, “I’m just bad with money.”

It sounds like self-deprecation—even humility—but it’s actually self-justification.  We’re giving ourselves permission to behave badly in the future.  Before you get angry with me for hurling accusations, let me confess that I am one of those people who have used this tactic, unknowingly and sadly, knowingly, at times.

What all of these expressions of inability or ignorance have in common is that they’re simply inexcusable.  Not only are they not rocket science, they are not even changing the oil in your car.  They are more like brushing your teeth or putting gas in the tank.  Even if you’re predisposed to flying off the handle, it’s no excuse for being mean.  Even if you’re prone to indulgent spontaneity, you must own your decisions.  Even if you’re not a gym rat or naturally fit, as a human you weren’t designed to be sedentary.  Even if your attention migrates easily, you can’t use it as an excuse for intellectual laziness.  Just because you like chocolate, it doesn’t excuse gluttony.  Lastly, you don’t have to understand the Alternative Minimum Tax or be able to articulate Modern Portfolio Theory to spend less than you earn and plan for the unknown, the two categories into which the vast majority of financial planning recommendations fall.

“Completely new and instantly familiar”

The great news about overcoming self-deception is that we can turn on a dime once we recognize it.  While some of us may need to do a deep dive with a counselor to target more systemic self-denial, many are free to simply choose the alternative path of wisdom and act accordingly, almost immediately.  Especially regarding our dealings with money, we can upgrade our financial operating systems right now.  Like our phone updates, it may take a little time to install the new mindset, but in dealing with behavior that is not tied to a compulsive diagnosis, we can look the same on the outside with a completely new perspective internally in a very short period of time.  Two of the life-changing tools that I’ve seen dramatically reboot people’s financial programming are Dave Ramsey’s book, The Total Money Makeover, and You Need A Budget, cash flow software created by former accountant, Jesse Mecham.

Jony Ive, Apple’s SVP of Design describes the new iOS as “completely new and instantly familiar.”  The best part about acquiescing to our own personal evolution is that it too will feel oddly familiar, because it’s how it ought to be.  Adults aren’t supposed to throw temper tantrums.  We’re designed to overrule our basest instincts with self-control.  It feels great when we expend the calories we take in through physical activity.  We’re capable of being present in a world full of distractions and applying our attention to those who most deserve and need it.  Sweets taste better as treats than as main courses.  And with a little guidance—but primarily common sense and intellectual honesty—we can choose to be good managers of money, and then do so.

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