True story: Many years ago, I was meeting with a married couple for an initial data-gathering session. Halfway through the three-hour meeting — the first stage in developing a comprehensive financial plan — the husband excused himself for a bathroom break. As soon as the door shut, the wife turned to me and said, “I guess this is as good a time as any to let you know that I’m about to divorce him.”
Since 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|
I’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.
Historically, 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.
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:
“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:
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.
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.
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.
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.
Yes, it’s true that there is systemic as well as plan-specific dysfunction in many 401(k)s—and 403(b)s, TSAs, TSPs, SIMPLEs, 457s and whatever other “defined contribution” retirement plan you might have at work.
Yes, it’s true that 401(k) plans are often needlessly complex and confusing, often filled with a seemingly endless array of choices, designed more for plan sponsors than for participants.
Yes, it’s true that 401(k) investment options are notoriously poor and over-weighted with fees.
Yes, it’s true that defined benefit pension plans—when the company you dedicated yourself to for many years would continue to pay a stream of income through your retirement—were helpful but are now largely extinct.
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.
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.
Few 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.
[tweetable]Control what you can, and worry far less about that which you can’t.[/tweetable]
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.