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

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.

Yes, it’s true that Social Security benefits will likely provide less—or at least less value—for future generations than for present and past, putting even more pressure on our own ability to save for retirement.

But 401(k) and equivalent vehicles are still the best way for most Americans to create a tax-privileged reserve that is designed to generate future income when we’re no longer capable of doing so. Even justifiable criticism shouldn’t be an allowance for negligence on our part.

Step 2: Control what you can. Despite the many maladies likely infecting your 401(k) plan, we still have control over the elements that determine our investing success the most—the amount we contribute and the allocation of the portfolio.

You’ve heard the grandfatherly wisdom of saving 10%. Well, as it turns out, it just might work. A crude calculation suggests that if you save 10% of your income right out of college through retirement age, you’ll likely have saved enough to generate approximately 66% of your pre-retirement income in retirement. If you add Social Security benefits and subtract your annual savings, you’ll likely have more disposable income than in your last day of work.*

If you are able to increase your annual contribution amount to 15%, you’d have enough to generate 99% of your pre-retirement income, so anything you get from Social Security would be a travel bonus.

But life is not a linear Excel calculation. Life changes and tends to get more expensive in the middle when we’re supporting the 2.5 kids, yellow lab and the picket fence. Therefore, you’ll likely need to save more at the front end when you have fewer expenses and on the back end after the kids have moved out, so consider the 10% rule of thumb as less of a cap and more of a floor.

Saving more helps reduce the risk of falling short of your goals.  Saving more enables you to take less equity risk, thereby reducing the stress of bear markets, allowing you to sleep better and stick with your strategy.

Regarding the optimal portfolio allocation, the weight of evidence suggests that the bulk of our long-term returns are attributable to proper asset allocation, not security selection. That is, the proportionate arrangement of your mutual funds is more important than the funds themselves. And since the vast majority of actively managed mutual funds get beaten by the index they’re chasing, you’ll have probability working for you if you use passively managed index funds if they’re available.

Here’s a generic example of a model portfolio from Bill Schultheis’ Coffeehouse Investor model. Neither Bill nor I would suggest that this should be your portfolio, but it helps illustrate the concept of diversification through asset allocation.  Coffeehouse

Your portfolio should be customized based on your abilitywillingness and need to take risk and will likely include more or less exposure to these and other asset classes.

In the book The Only Guide You’ll Ever Need for the Right Financial Plan, co-authors Larry Swedroe, Kevin Grogan and Tiya Lim instruct that an investor’s ability to assume risk is largely determined by time horizon—when will you likely need the money? Your willingness to accept risk involves “the fortitude and discipline to stick with your predetermined investment strategy when the going gets rough,” while the need to bear risk “is determined by the rate of return required to achieve the investor’s financial objectives.”

Often, however, we are not the best suited to gauge our own ability, willingness and need to take risk. Instead, consider using risk tolerance tools available through your 401(k) plan, or better yet, talk to a financial advisor who doesn’t have a stake in the outcome of your risk analysis.

Once you have determined an optimal allocation for your 401(k) portfolio, it’s time to put the plan on autopilot, thereby reducing your personal tracking error. Adjust both your current allocation and your future contributions, and if you have an automatic rebalancing feature that will periodically bring your portfolio back into alignment with your new allocation, use it. If not, rebalance manually, selling high and buying low.

Step 3: Talk to your human resources department. Once you have done all that is within your power to make the most of your 401(k), it’s time to talk to company leadership about making the plan even better. If yours is one of the majority of plans that has high expenses, low transparency and poor investment options, suggest they consider a change. You might not think your opinion will carry any weight, but you’re unlikely to see the plan improve unless people like you are questioning its effectiveness.

Imperfect though they are, even bad 401(k)s can be made into an excellent tool for wealth accumulation by those who dedicate themselves to making the most of this foremost retirement planning vehicle.

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

 

*Assumes saving 10% per year on a $50,000 beginning salary at age 22 that increases with inflation at 3% earning 8% per year before retirement at age 67 (Social Security full retirement age) and 5% thereafter.

Retire Like These Guys…Not These Guys

Executive Summary2While most of the commentary these days regarding retirement is about the math and “science” of cash flow and portfolio management, there is also an art to retiring well.  Making a graceful transition from the vocation that marks your life into whatever follows helps form your legacy—for better and worse.

Led Zeppelin was the best rock band of all time—at least in their time, and for many of us, still. Jimmy Page was the musical mastermind behind this super-group of savants, but it’s hard to imagine that they could’ve reached legendary status without Robert Plant.  Every generation since has attempted to replicate Plant’s voice and stage presence.  Although the band’s retirement was unplanned after drummer John Bonham’s death in 1980, Plant and Page’s work since is a fascinating case study in retirement.

Retire like Robert Plant…not like Jimmy Page

pageplantRobert Plant has explored, experimented and remade himself several times since retiring from Led Zeppelin.  As I write, I’m listening to one of my favorite albums, Raising Sand, a Grammy-award winning collaboration between Robert Plant and Alison Krauss, a legend herself in the realm of bluegrass.

Maybe since it was his baby, Jimmy Page has struggled to ever let go of Zeppelin, a fact that was evident in his 2012 Rolling Stone interview.  He’s struggled to retire well.  He seems to have lived between a handful of attempted (and certifiably mediocre) Led Zeppelin reunion gigs, and implies Robert Plant is at fault for resisting a full-out remarriage.

It’s not easy to retire from the best gig you’ve ever had, but unwillingness to acknowledge that it’s over can be even more painful.  Loosening your grip on the past, however, can free you up for a fulfilling and rewarding second act.

Retire like Michael Strahan…not like Brett Favre

07-1t107-kelly-300x450I had to recuse myself from using my beloved Ravens’ Ray Lewis as the favorable example in this gridiron comparison to preserve objectivity, but objectively speaking, Michael Strahan’s exit from the winning New York Giants in Super Bowl XLII may indeed be a better example of one of the very few NFL players who managed to truly go out on top.  Strahan capitalized on the Giant’s surprise win over the New England Patriots to position himself for a second and third career that now pits him against the less-than-menacing Kelly Ripa.

Brett Favre, on the other hand, who was the most exciting quarterback of a generation, couldn’t let go.  He leads the NFL in retirement threats, retirements and comebacks, finally ending his career in a concussive fog as a Minnesota Viking.  Favre wisely turned down a request from the St. Louis Rams just this week to replace injured Sam Bradford, citing his many concussions and subsequent memory loss.  He can only hope to forget the sexting scandal that marred his good-old-boy reputation at the end of his career.

When you excel at your craft and you’re competitive, it’s hard to let go, but holding on too long can destroy your reputation, damage your legacy and hamstring the team you leave behind.

Retire like Sallie Krawcheck…not like John Thain

Sallie Krawcheck’s retirement was involuntary—she was fired from her position at Bank of America—but she still managed to do it gracefully.  Krawcheck is the former lots-of-things Wall Street, having been at the helm of major divisions at Citi and more recently Bank of America, as the head of Global Wealth and Investment Management (including Merrill Lynch and U.S. Trust).  But she doesn’t talk or act like most Wall Street execs, and not just because she’s a woman.  She’s taken surprisingly principled stances on conflicts of interest, like the “cross-selling” mandate pushing Merrill brokers to sell banking products, and the touchy topic of regulatory reform within the industry.   While maintaining her principles may have led (in part) to her forced departure from Wall Street, in retirement her striking combination of competency and transparency have earned her respect that few of her scandal-ridden colleagues enjoy.

John Thain has handled himself, well, differently.  He’s the former Merrill Lynch head who infamously gave his office a $1.22 million dollar upgrade and paid out billions in bonuses to country club cronies as the American financial system came crashing down.  Even the financial industry couldn’t stomach him and he was “tossed out on his ear” by then CEO of Bank of America, Ken Lewis.  Thain is Wall Street excess personified and an easy target for the 99%, but don’t feel too bad for him; while he may have traded a $35,000 in-office toilet for “plastic and Formica,” he’s back on the scene with the $2 billion bailout beneficiary, CIT.

It’s much better to make a graceful early departure than to be thrown out in disgrace.

Three Keys To A Successful Retirement

What retirement lessons do Robert Plant, Michael Strahan and Sallie Krawchek teach us?  Three keys to a successful retirement are to know when to leave, leave well and retire to something meaningful.  You don’t have to be a rock star, a professional athlete or Wall Street royalty to model and benefit from these practices.

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.

Unloc(k) The Mystery Of Your 401(k)

401k Lock-01Last week, in my review of the Frontline program, “The Retirement Gamble,” I promised to follow-up with a short blog series giving concise direction on how to demystify some of the more confounding elements of personal finance, beginning with the foremost culprit of “The Gamble” (aside from J.P. Morgan Chase, of course)—the 401(k):

Recent action by the Labor Department requires more transparency in the reporting of fees in 401(k)s.  “While the intent and spirit of the legislation was good, I’ve found the implementation was pretty ineffective,” says Josh Itzoe, author of Fixing the 401(k).  “It’s possible to be compliant from a regulatory standpoint and still make the information totally confusing and unclear.  I think that is where we are."  While you’re overcoming your shock that the government has failed to simplify the regulation of [anything] to a satisfactory degree, consider taking these three steps to unlock the mystery of your 401(k) or other employer sponsored retirement savings plan:

1. Educate yourself on the structure of your 401(k) and the associated fees.  Yes, I know this likely falls just below rolling in poison ivy on the totem pole of ways that most of us would like to spend our time, but we sacrifice the privilege of voicing our displeasure with the state of our primary retirement savings vehicle when we don’t even understand its basic structure.  Start with what you already likely know: Do you get a company match, and if so, how much do you have to contribute to reap its full benefit?  Then, move on to the fine print describing your company’s requirement to actually follow-through on its match (they can likely skip matching in certain circumstances) and when it is paid.  Review your investment options and their short-, mid- and long-term performance.

If you’re not satisfied with the amount of information provided, plug your mutual fund options into the “Quote” box in the top-center of Morningstar.com to see what they think of the fund.  Theirs is not the last word, but their findings can add to the context of your decision-making.  And while I believe that it can be worth it to pay truly gifted fund managers for outstanding work, 401(k) mutual fund options are notoriously mediocre.  This means that finding the lowest cost funds in your composition of a diversified portfolio is of paramount importance.  Emily Brandon’s article, “What You Need to Know About 401(k) Fee Reports,” offers a process designed to enlighten us on making the most of the new fee disclosures, which unfortunately are cryptic enough to render them nearly useless without guidance.  If you end this journey of discovery just as (if not more) confused as when you began, get some help; preferably from someone who won’t turn your confusion into a sales opportunity.

2. Speak up!  It’s a tiny minority of us who can go into the office the next day and restructure our employer-sponsored retirement plan, but wheels don’t squeak unless you turn them and we all know which wheels typically receive oil and in what order.  “You may not have the power to change the plan, but you can and should provide feedback to your employer about the plan,” says Roger Bair, director of retirement plan services at the Financial Consulate, Inc.  The chances are also good that your employer would benefit just as much from improving your 401(k) as you would, but it won’t be easy to affect change for numerous reasons.  (Among those reasons, your boss might lose a golf buddy if the plan is replaced!)  I wouldn’t necessarily recommend going quite as far as Maya in Zero Dark Thirty, writing the aggregate number of days you’ve been waiting for action on your boss’s office wall every morning, but pleasant persistence can go a long way.

3. Control what you can.  My biggest concern with Frontline’s “The Retirement Gamble,” as well as other notable critiques of the financial industry’s retirement plan mismanagement, is the less-than-subtle implication that the financial industry is so bad and 401(k)s are so complex and the effort of saving enough is so monumental that the majority of Regular Joes can do little more than raise the white flag and give up on retirement savings.  I agree with almost all of the criticism, but I’m unwilling to concede that the battle is lost.  Bair guides that “you should use the best investments and make the best asset allocation you can given the tools that you have.”  Itzoe encourages that the primary determinants of successful nest egg building—the amount saved, being globally diversified and choosing the best available funds with the lowest possible costs—still fall within our control.

In the 401(k), we see the mess created when corporate self-interest, profit motive in the financial industry and regulatory bungling collide, but for most of us, the 401(k) is still the best gig going for increasing the probability of a comfortable retirement.  So get to know your plan.  Better.

Retirement Doesn’t Have To Be A ‘Gamble’

Retirement Gamble-01If you missed the well-documented, artfully produced PBS Frontline program, The Retirement Gamble,” here’s the nutshell version: You’re screwed and it’s the financial industry’s fault.  This is a piece that is absolutely worth your time to watch if you haven’t yet, but I will warn you that it takes on a bit more of a sensationalistic tone than I’d hoped for from PBS (maybe because the chief correspondent is also one of the protagonists in the story?).

Yes, it’s true that the financial industry deserves the vast majority of the criticism it receives, but I’m pretty sure that if you watch the video in reverse, you hear the words, “J.P. Morgan Chase is Beelzebub.”  Outright demonization is a stretch, even if only a tiny one.  And Jack Bogle, the father of passive investing, may be the closest thing to a saint in the financial industry, but he’s so deified in this program that by the end I thought I was watching a Vanguard commercial.  And most importantly, if you’re going to take an hour to scare the crap out of people—telling them what’s broken and what doesn’t work—I’d like to see a bit more on what works and how we can mend what’s broken.  And yes, PBS, that’s an implicit challenge to follow-up “The Retirement Gamble” (TRG) with a part two: “Retirement Doesn’t Have To Be A Gamble.”  But just in case they’re not already filming and don’t read this post, let me attempt to paint a slightly more balanced, if not hopeful, scenario:

YOU still play the primary role in the success of your retirement planning.  You still choose how to spend your income and how much to save.  I can’t have been the only one to notice that one of the aggrieved “nobodies” featured in TRG is shown working on an Apple laptop at her kitchen table equipped with a flat-screen TV, sitting in front of stainless appliances.  I’m not judging her and I’m not sermonizing you, but most of us have limitations placed on our income that require us to make decisions to endure some form of sacrifice today in order to provide for tomorrow.  While compounding gains may be the engine propelling us toward a comfortable retirement, it’s not going anywhere without the fuel—our contributions.

YOURS is not as hopeless a situation as TRG makes you feel.  Crystal Mendez is one of the regular Janes featured in the program.  She’s 32 years old and making $70,000 per year, decent money for a teacher, and she’s saved $115,000 already for retirement.  According to a recent Fidelity study that judges our retirement readiness based on multiples of current earnings at different phases of life, Crystal is well ahead of the curve.  The study suggests she should have approximately 70% of her current salary saved—and she’s already at 164%.  (Nice job, Crystal!)  Furthermore, if she saves 10% per year until she’s 67 years old (when she’ll be eligible for full Social Security benefits), she’d then have $2,442,544—17 times her salary if we estimate she earns a 7% annual average rate of return and her salary increases only 2% each year.  According to Fidelity, she’d only need eight times her salary for a comfortable retirement at the age of 67.

Crystal's Path

YOU don’t really want the good ol’ days anyway.  We have a habit of painting the days of yore as an idyllic time, when everyone joyfully punched a time clock for the same benevolent company for 40 years straight; the same company that then subsidized a blissful 20 year retirement spent golfing and sipping lemonade on a wrap-around porch attached to a Cape Cod house unencumbered by debt.  But guess what, even if that sweetheart deal existed then, and more importantly today, we wouldn’t want it!  According to CNNMoney, “…by the time they reached their forties, the boomers worked about 11 jobs—equivalent to a job change roughly every two years.”  Generations X and younger hop jobs slightly more.  And is it possible that the employers of former generations weren’t solely offering pensions out of the kindness of their hearts, but also because they wanted to make it very difficult for employees to consider leaving their job—and their pension?  It is true that the once fabled “three-legged stool” of retirement—pension, Social Security and personal savings—is now down to a pair of stilts for most baby boomers and likely no more than a pogo stick for Gen X and younger; but a minority of us would trade a lifetime of occupational freedom for the continuation of a portion of our paycheck in retirement.

Yes, the odds are stacked against us.  And no, the financial industry does not exist for the benefit of its customers.  Yes, that’s a shame.  And no, despite a movement of well-intended zealots and justified outrage in the media, we’re not likely to see the Masters of the Universe unseated in less than a generation (although that won’t keep us from trying).  BUT, your chances for a comfortable retirement are still better than a roll of the dice, as seemingly purported in “The Retirement Gamble.”

Over the course of the coming weeks, I’ll be bringing you a collective of wisdom from numerous sources on how you can demystify decisions regarding not only your retirement, but specifically your 401(k) or other retirement plan, mutual fund selections and a couple of the most complex personal insurance products.  That way, regardless of whether or not the fallen angels of the financial industry clean up their act, you’ll be able to make informed decisions.

The Most Stressful Event Of Your Financial Life: RETIREMENT

I don’t mean to strip you (or anyone else) of your idealized view of retirement that may have helped you overcome Lord knows how many miserable days—or years—of perpetual, slave-to-the-grind ladder climbing throughout your career.  But, the first stretch of your much anticipated retirement is likely to be one of the most stressful events of your life.

I admit that this phenomenon was a surprise to me, initially.  I began my career with a partial mission to help clients reach and enjoy financial independence, so it wasn’t until I began walking some of them into and through the transition that I realized how nearly-traumatic it can be for so many.  But if you doubt my hypothesis on its face, please consider this reasoning:

Most of us Americans, fortunate enough to enjoy a middle-class or higher upbringing, are born into environments—households, churches, schools, sports teams and other associations—that breed into us a sense of independence and empowerment.  We are set on a trajectory of productivity and accomplishment, aiming less toward our vocation or calling—more toward our occupation.  We may hear or read, “You can do anything you want to do!” and “You’re special.” and “Dream big!” but by the time we enter the work force, many of us realize we have been set on a course designed to capitalize financially on our most marketable skills.

We are trained to be do-ers, but not, so much, be-ers.

And for many (although not most), it works.  We become “productive members of society,” producing enough income to reach the penultimate goal of financial independence, a visual snapshot nicely captured for us in the high-def, beach-front commercial renderings lathered on by banks, brokerage firms and insurance companies.

It’s our lives’ work to be voracious do-ers until we can afford to be aristocratic be-ers.

So even if we are financially prepared for retirement by every tangible measure—certified by the most certified of financial planners—the transition from do-er to be-er is an exceedingly difficult one, and most of us don’t entirely understand why because the rhythms of our lives have become part of us.  The real difficulty is not in dealing with the visible, but the invisible.

What, then, would life, work and retirement look like if we:

  • Placed a greater emphasis on be-ing, prior to retirement?
  • Were more deliberate about do-ing, in retirement?

We might cultivate ourselves more as individuals who are part of a community and less as employees who are part of a company.  We may allow the question “Who am I?” to precede “What am I going to do?” and certainly “How much am I going to make?”  This self-analysis might lead to a path more akin to finding a calling than a job and would be more relational than transactional.  It would be more others-oriented than individualistic, ensuring that those we labor with and for would remain a priority over the work itself.  Instead of establishing, arriving, cashing-in and checking-out, we might see our progression as perpetually evolving, even into and through retirement.

“That sounds great,” you say, “but it wasn’t my path…so what should I do now?”

Don’t retire from something; retire to something.  Even if you conceded the last 20 to 40 years of your life to the big hamster wheel, it doesn’t mean you’re relegated to settling into a meaningless, unproductive retirement.  Ask the questions you wish you’d have asked yourself at the onset of your education or career and answer them.  Envision your transition into retirement less as an encore and more as act two of a three act play.

Retirement STRESS Test, in 90 Seconds

If you think that a comprehensive analysis of your retirement plan readiness is complex enough to require more than 90 seconds—you’re right.  Considerations of spending patterns, flexible withdrawal rates, increased healthcare costs, tax preference and investing style require a bit more time.  But a Retirement Stress Test, to give you an indication of whether or not you’re in the ballpark?  That we can handle in under 90 seconds.  Take a look!

[youtuber youtube='http://www.youtube.com/watch?v=TdKO5ljseHc&feature=youtu.be']

3 Ways To Spend Your Social Security “Bonus”

Yes, it’s that time of year again, when the air becomes cool and crisp; when football, jeans and sweaters are back in season; and when many working Americans blessed with higher incomes find more of their hard-earned dollars in their paychecks.  Why?  Because the maximum taxable earnings for Social Security (OASDI) taxes is capped at $110,100.  Everything you make over that number is still reduced for federal and state income taxes as well as Medicare, but the 4.2% Social Security tax is avoided.

So what to do with this “found money”?  We’re talking about amounts worthy of deliberation here, so the only real sin would be to do nothing—to be knowingly (or unknowingly) ignorant of the bonus and allow it to slosh around in your checking account earning .0000001% only to get incidentally gobbled up by the discretionary cash monster that is life.  I don’t care so much how you use it, but that you use it for a purpose.  Consider, then, applying your bonus to one or all of the following: SAVING, SHARING or SPENDING.

Sound elementary?  Like the advice your grandfather gave you when you were seven or the advice you’ve given your kids?  Simple, yes, but it’s not easy.  One of the timeless truths of personal finance is that a balanced approach to these three objectives benefits everyone, regardless of the number of zeros on your personal balance sheet or income statement.

Saving

The inverse of savings is debt, and in an interest rate environment where your cash savings is almost certainly earning less than you are paying on any debt, the primary goal of your Social Security bonus should be to accelerate your debt repayment on any bad debt.  There is no “good debt”—only bad debt and better debt.  Bad debt is a loan on a depreciating asset—like a car, couch or TV—and worse debt is that which is revolving, like credit cards.

If you’re fortunate enough to not have any bad debt, how are you doing on liquid savings—savings that is either in pure cash or invested in stocks, bonds and mutual funds outside of retirement accounts?  If you’re in a dual-income household with stable salaries, consider maintaining three months of living expenses in pure cash.  If you’re a single income household or your income is volatile, consider six months; and if you’re self-employed, I’d like to see you sitting on a year’s worth of expenses.  If you’re falling short in this category, your Social Security bonus is a great way to pad the financial margin that you WILL need at some point.

Sharing

Giving is without a doubt the most underrated financial to-do on most of our lists.  Despite the inherent personal benefits, we tend to see giving as something that moves us backward financially, but the benefits of giving are not merely enjoyed by recipients.  Anyone who’s ever engaged in mindful giving can likely speak to the proverbial truth that “it is better to give than receive,” but this ancient saying is now growing toward consensus within the realm of financial pros and the medical community, as Carl Richards articulated so well in his recent article (and drawing), “Spending Your Money to Make Someone Else Happy.”

But in addition to the evidence that “it’ll make you feel good,” giving also has financial benefits.  When we better acquaint ourselves with the needs of others, we have a tendency to treat ourselves to fewer $6 coffees and $5,000 suits, and find more cash in the coffers.  But in the case of your Social Security bonus, spending some of that found money on a worthy charitable cause could—in addition to doing some good—put dollars back in your pocket around tax-time thanks to a deduction.

Spending

Spending is only listed last among these seemingly more virtuous options because of its relative alphabetical standing, not for lack of importance.  Indeed, spending is like fine wine, craft beer and single malt Scotch—overindulgence brings pain, but wise application is downright blissful.  Planned spending, some argue, lacks a certain exuberance that accompanies spontaneity—but not if you plan for spontaneity.  I recommend establishing a slot in your budget specifically designated for spontaneous expenditures for you and your family.  Then, in addition to the rush of impulsiveness, you can avoid the hangover of having to find a way to pay for it.

And remember, that time of year when many of us increase our spending on ourselves and others is fast approaching.  Your Social Security bonus is a great way to sock away money for gifts, Fraser Firs and holiday parties.

If you’re fortunate enough to have sufficient income to cross over the Social Security threshold, you have reason to be thankful.  Interestingly, some assume that the need for budgeting erodes as our income rises, but I do believe that “to whom much is given, much is expected,” and what better way to satisfy that maxim than knowing where your money is going.

Fulfillment Plan App

This is the 13th exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can read the backdrop for the exercise HERE, or just jump right in with the instructions given below:

This chapter’s Timely Application has three parts.  The first part is for all readers of any age, and it is an exercise to give you the opportunity to define what the optimal retirement looks like for you.  After defining retirement on your own terms, you’ll conduct some self-analysis placing your own personal tendencies on a continuum ranging from “spendthrift” to “hoarder.”  (It’s always interesting to revisit your Personal Money Story to pinpoint events in life that may have helped create these tendencies.)  After examining your strengths and weaknesses regarding short-, mid-, and long-term planning, you’ll articulate what your Fulfillment Plan would ideally look like.

The second and third parts of this exercise are for readers within striking distance of a transition toward some form of retirement.  The Retirement Income Sources tab will help you determine what your sources of income will be in retirement.  Then, contrast your expected income with a Retirement Budget to complete this chapter’s exercises.

Click HERE to access the Fulfillment Plan app!

Annuity Audit App

This is the 10th exercise in a series designed to walk you through an entire financial plan.  The exercise is embedded in an Excel spreadsheet you can download and save for personal use.  You can read the backdrop for the exercise HERE, or just jump right in with the instructions given below:

It is my hope that this is an extremely brief exercise for you, but many people who have long-term relationships with folks in the insurance, brokerage, or banking industries have a lifetime of annuities built up.  If that is your scenario, it is very important that you do this exercise to get a handle on where your money is and what it is doing (or not doing).

When you did your Personal Balance Sheet or Mutual Fund Audit App, you probably pulled together the statements for any annuities you own.  These statements often lack the information you’ll need for this exercise, so I also want you to pull together each of the contracts you received at the inception of your annuity policies as well.  Then, using the App (link below), fill in the information cataloging the following: owner[i], annuitant[ii], beneficiary[iii], contract value, surrender value, cost basis (the sum of your contributions), and the surrender schedule.  Some of this will be on your statement, but the remainder will be in your policy contract. You may have to do some digging.

Once you’ve collected the information, the analysis should start with a diagnosis of the investment value.  If it is a fixed annuity, you’ll know very quickly if the rate is competitive with today’s rates.  If it is a variable annuity, examine how it has performed versus the various benchmark indices.  If it is an equity indexed annuity, the chances are very good that it is not a phenomenal investment, but it also probably has a very long and steep surrender charge which may make it prohibitive to move at this time.

If you determine you’d prefer to be out of an annuity contract, here are the questions to ask:

  • What, if any, surrender charge exists?
  • Is the surrender charge cost prohibitive?
  • How much longer will the surrender charge last?
  • How much have you contributed (what is your cost basis)?
  • How substantial would the tax impact be (would you have to pay a lot in taxes)?
  • Is there a gain on which you would have to pay a penalty if you are under age 59½?

Again, remember to make these decisions slowly because there are many moving pieces with annuities.  It is best to speak with a fee-only Certified Financial Planner™ practitioner AND a Certified Public Accountant prior to making any final decisions.

Click HERE to access the Annuity Audit app!


[i] The person who made the investment in the annuity

[ii] The person upon whose life the actuarial calculations in the annuity policy were based (this is often the same person as the owner)

[iii] The person or people to whom any annuity proceeds will be directed upon the death of the annuitant

The Three Guarantees In Financial Planning

Not much in the realm of financial planning can be guaranteed.  Even the best projections and technical analyses are filled with disclaimers noting, among other things, that “Past performance is no indicator of future results.”  You can lose money.  The company you’re counting on could go out of business.  But of this you can be sure:  Three sure-fire guarantees in financial planning are SURPRISES, CHANGE and FAILURE.

Reassured?  I was afraid not.

But fear not, these three guarantees do come with counter-agents that we can systematize in our financial planning to minimize any negative impact:

Surprises require MARGIN.  Change requires FLEXIBILITY.  And failure requires GRACE.

Margin is a lost art and missing in nearly all phases of life in our all-too-hurried, uber-productive, stressed-out lives.  We don’t leave enough empty space on our calendars, so if we get stuck in traffic or stop to help a stranded motorist, we’re likely to be late for something else.  We can’t do anything spontaneous because every minute is already filled.  And because all of our time is spoken for, we also don’t have much in the way of blank canvas in our, and all too often our hearts.  And this is especially true of our finances—because every dollar is already spent or pledged, often even small emergencies or organic opportunities can’t be absorbed or funded.  There’s no margin for error.

Our lack of margin feeds our inflexibility.  We often don’t even consider the possibility of change because we don’t have the time.  Change, therefore, is inevitably also a surprise, compounding the discomfort.  But we often struggle to accommodate even predictable change.   Can your finances adapt to another child—even if the pregnancy was planned—or the reduction of income in an industry-wide change that was anticipated?  That which doesn’t bend, breaks.

For most of us, so much of our life is spent protecting ourselves from failure that it can be devastating when it arrives.  And it will.  Failure is simply a natural byproduct of our human imperfection.  And if you’re unable to view it as the most successful people often do—as an opportunity for invaluable education and personal growth—please consider diminishing failure’s grip, if only for pragmatic purposes.  Remember the major-leaguer who qualifies for the all-star team when he only succeeds a third of the time (a .333 average in Major League Baseball isn’t bad).  That’s where grace comes in.  Grace isn’t for the guiltless; that’s called vindication or acquittal.  Grace is being forgiven—or forgiving ourselves—when we’ve screwed up, slouched, squandered or slandered.  You don’t have to deserve it to receive it.

So what on Earth could this possibly have to do with Roth IRAs?

I love the tax-free growth and retirement distributions available with Roth IRAs.  I love that you’re not forced to take Required Minimum Distributions after age 70 ½, and I think there’s no better gift you could give your heirs than a Roth.  But my very favorite element of the Roth IRA is its LIQUIDITY, and liquidity is the key to navigating the three guarantees of financial planning.

In case you’re not following me, Roth IRAs are unlike any other retirement investment bucket, for lack of a better term, as you’re allowed to back money out of the account for any reason at any time at any age and without any tax consequences or penalties.  There’s only one caveat: you can only take back your principal—what you contributed to the account—unconditionally.  Your growth is subject to all those typical conditions (taxes and penalties) you’re accustomed to in the realm of retirement accounts.  But if you put $10,000 into a Roth and it grows to $12,000, you can take back your $10,000 whenever you please and for whatever reason.

I’m not encouraging you to take the money out, forfeiting a lifetime (and maybe multiple lifetimes if you pass it to heirs) of tax-free growth and distributions.  But hey, “stuff” happens.  LIFE HAPPENS.

So allow a Roth IRA to become part of your strategy.  Use it as an extension (not the primary source) of your MARGIN, the foundation of which should be pure cash reserves in a bank savings account.  Allow it to facilitate your FLEXIBILITY to change, if and when it’s necessary.  And if you have to dip into it, give yourself GRACE.  Learn from the experience so that you’re better prepared for the next surprise and the inevitable change to come.