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.


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.


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 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.

Your Path To Financial Freedom: Debt Elimination App

This is the fourth 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 find the backdrop for the exercise HERE or just jump right in with the instructions given below:

If you refer back to the Personal Balance Sheet you created, you will have already compiled your debt information in the liabilities section.  Next to each liability, put an “X” next to bad debt and a check mark next to better debt.[i]  Then, transfer the bad debt to the Debt Elimination App available on our web site and customize your Debt Elimination Plan.  List the debts in the order in which you will pay them off.  If you want to get that ball rolling faster emotionally, take Dave Ramsey’s advice and pay your cards off in order of smallest to largest balances.  If you want to save the most in interest payments, list the debts from the largest interest rate to the smallest.

When you make that last payment, celebrate!  Take your next month’s payment—a significant chunk of cash flow that you’ll now be able to plough into more generous budget categories and investment for the future—and throw yourself a party.  Invite family and close friends who’ve supported you throughout, and enjoy the peace of mind that comes with being debt free.

If you don’t have any Xs on your Debt Audit because you only have better debt, you need not put yourself through a financial boot camp, but deliberate over the debt you do have and consider whether or not a debt repayment acceleration plan may be right for you.  If so, use the Debt Elimination App to plan your course of action.

Click HERE to access the app!

[i] There is no “Good Debt”—just “Bad Debt” and “Better Debt.”  Bad debt is debt on ANY depreciating assets, including automobiles, but especially things like furniture, appliances and unsecured credit card debt.  Better debt is debt on appreciating assets, like homes, education and businesses…within reason.  If you’re curious how to differentiate between the two in your specific situation, email me at tim[at]timmaurer[dot]com.

Too Complex For Their Own Good?

This week on my Forbes post, “Don’t Outsmart Yourself Financially,” I took issue with an article written by Nobel-winning economist, Paul Krugman, for his rationalizing of the enormous debt load of our country.  But while economists have and will wax eloquent on the past, present and future utilizing brilliant theories well beyond the bounds of common sense (and often practical application), we have no such allowance in the realm of personal finance.  Indeed, YOU SHOULD NEVER PURSUE A STRATEGY YOU CAN’T UNDERSTAND.

Here are a collection of financial strategies that sound impressive but may be too complex for their own good:

  • Equity Indexed Annuities—EIAs are actually fixed annuities, but if you ask one of their passionate purveyors[i] how they manage to offer market upside with none of the downside, I hope you’ve set aside some time because you’re in for a very long conversation…if the agent even knows enough about their inner workings to  educate you.  In short, insurance companies buy bonds with your investment and use the interest payments to purchase stock options to materialize the upside of the stock market.  They hedge their bets—I mean, positions—by handcuffing you with some of the biggest (7%, 9%, even 12% and higher) and longest (10, 15 or even 20 years) surrender charges in the business.  Like too many financial products, these instruments are sold, not bought, and I don’t recommend tying up your money in one of these financial experiments.
  • Life Insurance As Primary Retirement Vehicle—There’s a wow-inducing sales system (called the LEAP system) that was built for life insurance agents seeking to increase their sales in one of the best-paying commission products on the market, permanent life insurance (whole life, variable life and universal life).   After an hour of mind-numbing chart-flipping, you’ll be ready to divert your 401k savings into a brand new life insurance policy![ii]  But unless you make over $250,000 per year or have millions in net worth, you simply don’t need to worry yourself with the variables in permanent life insurance.
  • “Option Arm” Mortgages—The landscape of mortgage products has dwindled significantly from the pre-crash days when you could literally pick the payment on your mortgage in the now infamous option arm mortgages.  A mortgage broker in Pennsylvania at one point pitched me on a joint collaboration in which I would lend financial credence to his recommendations for clients to take on these crazy mortgages and they would, in turn, invest all the extra money they didn’t have to pay towards their mortgage in accounts I would manage.  I laughed at first, thinking he was kidding.  Then I realized he wasn’t.  Especially with rates as low as they are today, there are very few reasons to take on any mortgage other than a fixed mortgage, but there is NEVER a reason to take on a mortgage that increases your debt instead of paying it off.
  • Exchange Traded Funds—This one may surprise you, and I should be quick to point out that ETFs can be very wisely and properly utilized in a diversified investment strategy.  But you’d better fully understand what you’re buying.  Much like a mutual fund, an exchange traded fund is a single investment representing a basket of securities.  For example, you can purchase an ETF that will track the S&P 500 index or commodities like gold or oil.  But the question remains, what exactly is inside of the ETF?  Sometimes it is actual investments, (like stocks in gold mining companies, for instance) but often the underlying properties in an ETF are derivatives—options or futures—and subject to market forces beyond the commodity or index itself.  If you don’t understand how the investment is built, you may be in for a surprise when you see how it actually reacts to market stimuli.

There are many other examples out there, and I’d love to hear what you’ve run into in your financial journey.  Please share your good or bad experience, or ask any questions, in the comments section!

[i] Why so passionate, you ask?  These products have some of the biggest commissions in the business.  Up to and over 12%!

[ii] I worked with one agent in a prior professional life who regularly pitched a “Roth Look-A-Like,” an alternate retirement savings vehicle designed to give you all the tax advantage of a Roth IRA, and more…except that it was nothing more than a whole life insurance policy.  I saw one unfortunate 20-something guy who wasn’t even married and had no dependents buy a look-a-like when his money would’ve been better served in a true Roth.

10 Ways Budgeting Saved My Marriage

Eleven years ago, my wife and I sat across the table from an experienced married couple squirming in their seats uncomfortably as though they feared we were about to deliver some terrible news.  But the source of their discomfort was the bomb they were about to drop on us.

You see, we were not yet married, but engaged, and the couple across the table was our mentor couple in our pre-marital class.  Upon review of our personality profiles and piles of personal baggage, they felt it their duty to discourage us from further pursuing the sacred vows of matrimony.  They’d never seen a hopeful couple more innately disparate, more inevitably destined for failure.

We are indeed vastly different, but one thing my wife, Andrea, and I share in common is a penchant for resisting authority.  So with the blessing and support of family and friends, I’m thrilled to report we’ll be celebrating our eleventh anniversary this April with our two wonderful boys, Kieran and Connor, ages six and eight.

We have never forgotten, however, the well-intended admonishment of our mentor couple; indeed, we see much of life from vastly different perspectives, foremost among them our view of things financial.  And apparently, we’re not alone. Over 50% of marriages end in divorce.  Over 50% of those splits cite financial disputes as the primary reason for the break-up.

100% of marriages deal with money as a daily necessity.

This thought occurred several times when preparing my recent posts on budgeting on Forbes.com (How To Spend $1 Million At Starbucks) and TimMaurer.com (A Burdensome Yoke…Or A Path To Peace?).  It struck me that budgeting ranked right up there with prayer and counseling as a precious few factors that have helped keep us together.  Here are the top 10 ways budgeting has saved, and continues to save, our marriage:

10)  Budgeting forces us to collaborate.  It seems that as parents of young children, the level of commitments between work, school, church, sports and the arts leaves us functioning more as independent business partners than spouses.  We’re almost always in short supply of adult conversation and genuine collaboration, and (strange as it may seem) budgeting gives us the context for both.

9)     It offers healthy accountability.  Ronald Reagan famously said, “Trust, but verify,” and while 100% verification of trust in our marriage would be stifling, we’ve found periodic accountability to be a healthy way to build faith and trust in each other.  Our joint budgeting effort means all of our expenditures are accessible to the other.  Scrutinizing every penny spent would be unfair (a-hem, note to self), but knowing everything is visible is likely to encourage us each to spend more responsibly.

8)     It humbles us.  I’ve not found a more helpful tool in the pursuit of a successful marriage than humility, and since the use of money is so pervasive in our lives, small mistakes are the norm, not the exception.  Rarely a weekly cycle goes by in which we don’t each humbly acknowledge that we erred in some capacity, humbly submitting our mistake to the other.  And of course, a good budget is designed to withstand these small mistakes.

7)     It provides an opportunity for reconciliation.  The prevalence of small errors in our budgeting, however, provides fertile ground for a destructive tendency: that we’d develop a scorecard, real or implied, and shame the more regular offender (because there normally is one in most households).  So for us it’s very important that a humility ground-rule is established: Any time an offending spouse submits in humility to an irreversible mistake, forgiveness and reconciliation is the only way forward.

6)     It gives us reason to celebrate.  For each mistake, there are several successes in each budget cycle.  The long-term success of our marriage is often built on a series of small victories, and we should never withhold an affirmation for completing a project under budget or enjoying the security of a buffer when an emergency arises.

5)     It cuts down on surprises.  So many aspects of our life are subject to variability and volatility.  We can’t necessarily reduce the number of those surprises, but we can certainly reduce their negative impact by being financial prepared for them.  Financial strain, and especially shock, pushes many marriages to (and over) the brink.

4)     It makes us better parents.  All of us parents could probably agree that it’s possible to spend too little OR too much on our children, right?  We’re responsible to determine what the right levels of spending are for our children, and budgeting allows us to deliberately set aside appropriate levels of funding for education, clothing, sports, music and fun.

3)     It shows our dependence on each other.  Andrea and I do think very differently, and this inevitably leads to divisive thoughts like these: “You know, I think I could do this better on my own!”  But this decries the very essence of marriage as an institution in which each partner’s primary objective is to serve the other.  The process of budgeting puts our (literal and emotional) dependence on each other on full display.  That makes us vulnerable, but it’s good.

2)     It preserves a healthy level of independence.  The income production in most households is almost never perfectly equitable.  Andrea sacrificed a successful career in the financial industry when she chose to stay home with our young children.  This has been an incredible blessing in our family, but it’s also a breeding ground for insecurity and manipulation as I might have a tendency to overestimate my contribution to the family’s finances and underestimate Andrea’s.  It is imperative, then, that part of our budget is the preservation of a certain amount of financial independence for each spouse.  To offset this income inequity, we’ve established “His and Hers” accounts with unilateral privileges.  Many shun budgeting as too restrictive, but properly implemented, it actually gives us room to breathe financially, and we all need room to breathe.

1)     It preserves date night!  One of the interactions I’ve enjoyed most throughout my career was with a client who is a generation or two my senior.  He and his wife have five kids(!) and appear to be more in love today than they’ve ever been.  So at the close of one meeting, I got up the nerve to ask this gentleman what his secret to marriage and parenting was.  His answer?  They never fail to set aside time—and money—for each other as a couple.  He made a convincing case that we are better parents when we deliberately setting aside time to be together, away from the kids, and not just for date nights, but also long-weekends and even week-long vacations to remind ourselves that before we were parents we were lovers.  This proved especially difficult for Andrea and me because by the time we got to the end of most months, we’d already spent our discretionary cash on the rest of life and felt like we were taking funding away from other things to line-up a babysitter and enjoy a night or weekend out.  So now, much as we have preserved His and Hers accounts, we also have an Ours account.

Budgeting is not the slightest bit romantic, but it has the ability to promote and preserve the romance in our marriages and keep us on the right side of that daunting 50% divorce statistic.  There are as many good ways to manage this process as there are couples, and I’d love to hear some of the ways budgeting has helped preserve YOUR marriage also, so please share your story in the comments section!

A Burdensome Yoke…Or A Path To Peace?

Well, it wouldn’t be the New Year if we weren’t reminded that one of the top resolutions that will be made and inevitably abandoned is financial in nature.  “Improve financial condition” is once again the number two resolution for 2012 in the annual Franklin Covey New Year’s Resolutions study, and the only surprise is that it’s not number one!

But no matter what year I’m asked the question, “What’s the most important thing I could do to improve my personal finances?” the answer is never going to be about tactical asset allocation, navigating the alternative minimum tax or conducting a Roth IRA conversion.  Regardless of your income, your net worth, your age or employment status, the clearest determinant of a successful financial plan for ALL of us is the implementation of an effective cash flow mechanism, or its less sexy if not diminutive synonym—the budget.

So in my first Forbes post of 2012, I shared the shocking story with which you may already be familiar, about my affluent friend who found himself on a path to spending over $1 million at Starbucks, to rebut the common misconception that rich people don’t have to budget.  But here I’d like to address the more honest, unspoken question that I believe leaves most people among the ranks of the NON-budgeters:


The short answer: NO.

The less short answer: MAYBE.

Budgeting may indeed be little more than a burdensome yoke destined to be cast off if you don’t dedicate yourself to it wholly.  For example, if all you ever do is track your spending after the fact, which can be quite depressing.  (“Yup, I spent more than I should’ve…again.”)  Many mistake a monthly review of spending with a glance at the bank and credit card statements for budgeting, but a spending review is barely the beginning of a genuine cash flow system.  The process is really about setting forth a desired level of spending for the future and tracking spending at frequent enough intervals that your course can be reasonably adjusted.  A half-hearted effort at budgeting is likely to net you even less-than-half the benefits.

Although I recommend you find the rhythm that works best for you, my preference is a monthly budget that is reviewed weekly.  Each of my budget categories—food, housing, charity, entertainment, and many more—are given a monthly allotment and then we (yes, if your household is a we, it’s almost impossible to make budgeting work solely as an I) review spending weekly and make course adjustments for the month’s remainder.  If you’re able to maintain a weekly rhythm of review, the process is relatively painless in the short run and you’ll save yourself more heartache (heartache is not an overstatement for many people) than you could imagine in the long run.[i]

But what really takes budgeting from routine to revelation isn’t merely mastering the mundane, but planning for the unexpected…with margin.  With the exception of bills that are identical every period, each variable budgeting category should have a built in buffer designed to weather slight variance.  Then you should also have a separate miscellaneous buffer category for emergencies, auto repairs and other occasions that fall outside the bounds of your expectations.

You’ll fall head over heels in love with the boring process of budgeting when the unexpected becomes inevitable, but you’re prepared in advance.  No wondering where the money’s going to come from.  No turning to debt.  No personal financial crisis.  Just peace.

Speaking of love and budgets, stay tuned for an upcoming post on How Budgeting Saved (And Continues To Save) My Marriage.

Wishing you personal and financial peace in 2012!

[i] The not-so-secret to any habit I’ve ever maintained successfully is that it has to be in some way enjoyable, so every Saturday I take a cup of green tea upstairs with the wooden box dedicated as the receptacle for our household receipts to my office, choose some good music to suit my mood and run the numbers.  WHAT WORKS WELL FOR YOU?

Chasing Tomorrow

A couple days ago, I tweeted[i] a question that received some interesting responses:

“Is it possible that financial advisors’ bent towards long-term saving strips clients of joy today?”

The responses I got were vociferous, both in support and opposition of the implied comment in my question.  Interestingly, all of these responses were from financial advisors.  Here was the first grenade lobbed back in my direction:

“It’s just not possible; it’s a fact. We’re in the business of selling deferred gratification.”

That comment came from a good person who is no doubt an excellent financial advisor.[ii]  But, this faulty mindset is, without a doubt, the majority opinion of the estimated 500,000 plus who refer to themselves as some form of financial advisor or professional in the lower 48.  So, financial advisors are in the business of selling deferred gratification, knowingly stripping our clients—YOU—of joy today?  How do you feel about that?  Does that make you want to run out to hire a financial advisor?

This faulty premise leads to a number of mistaken presumptions and results.  First, many financial advisors DO see themselves as the protectors of their clients’ futures, an ostensibly noble mission until we’re reminded most financial advisors also just happen to get paid more when you defer more.  There’s no way around this blatant conflict-of-interest, and any advisor caught obscuring this truth behind a veil of self-righteousness is deluding himself or herself.

There is no question that the job—even the duty—of a financial advisor in almost every case is to encourage clients to consider and establish a reasonable plan for deferring some of today for tomorrow, and to occasionally protest an attempted withdrawal spurred by a temporary urge in spite of better judgment (like the time a 20-something client wanted to take an early withdrawal from his Roth IRA to buy a jet ski).  But I believe financial planning focused too heavily on the future is little better than planning encouraging an “eat, drink and be merry, for tomorrow we die” approach.

While I absolutely believe we, as humans, do have a tendency to overvalue that which is seen or imminent over that which is unseen and seemingly distant, there is no denying the “one-in-the-hand-two-in-the-bush” adage either.   We must repel the urge to make a comprehensive financial plan the protector of only the future—stripping funding from today for a tomorrow not promised.  The ideal financial plan (some might say, The Ultimate Financial Plan…ha, ha, ha…that wasn’t planned…) helps manage the short-, mid- and long-term, balancing money and life.

Encouragingly, I believe there is a movement among financial planners awakening to the reality that in order for a plan to be relevant, it must positively impact more of life’s timeline.  In response to my tweet, Nathan Gehring, a Wisconsin cheesehead (and financial planner and blogger), called for balance and Dr. Carolyn McClanahan, a physician-turned-planner in Florida, noted she feels a duty to provide a plan more relevant to today.  Interestingly, Dr. McClanahan and I both share near brushes with death, personally, that likely impact our insistence on this issue.  But it doesn’t take a near-death experience to grasp this important truth.

(By the way, the biggest mistakes planners and clients make regarding deferred gratification are not in our saving and investing patterns, but in our choices of vocation…how we choose to spend the estimated 101,568 working hours in our lifetime.)

In 1902, Alice Morse Earle wrote, “The clock is running. Make the most of today. Time waits for no man. Yesterday is history. Tomorrow is a mystery. Today is a gift. That’s why it is called the present.”

How much of life do you spend chasing tomorrow?

[i] Yes, it’s true.  I’ve embraced the social medium that took me the longest time to “figure out” or in which to find any redeeming value.  I’m officially a tweeter…or twit, if you will.  If you’re into that sort of thing, you can follow me via @TimMaurer.  And, if you’re like me, reluctant to see the value in Twitter, in next week’s post I’ll be sharing how Twitter has become my #1 source for financial news—if you can believe that—and why I think it could really benefit you too.

[ii] Please also be mindful, if you’re not a Twitter aficionado, that the medium restricts questions and comments to no more than 140 characters (as my regular readers gasp in amazement that I’m capable of articulating anything in so few letters!).  As a result, tweeters often do take short-cuts to get right to the point, sacrificing context that may help substantiate a point.

Bad Advice for Younger Generations

Young couple I read a Wall Street Journal article recently written by a reporter for whom I have a great deal of respect, but who acted as a conduit for a fundamentally flawed (supposed) majority opinion on the part of some financial advisors—that risk taking in investing and financial planning naturally leads to reward.  The article is entitled, “Take some chances, Gen X,” and chides 30-somethings for making capital preservation an investment priority, warehousing cash in defense of a job loss and eyeing debt elimination as a goal.


I’m not denying the relationship between risk and return.  But while it is true that higher returns are accompanied by a greater degree of risk, the inverse is not promised.  It’s a classic investing blunder to presume taking higher risks will naturally result in a higher rate of return.

Is it possible that while the boomer advisors were pining over outdated investment “science” and Monte Carlo retirement simulations, they missed the simple math their younger clients discovered—that it’s easier to lose money in the market than it is to make it?  If you’ve lost 10% in your portfolio, it will take 11% to get back to where you started.  If you’ve lost 20%, you’ll need to make a 25% rate of return.  If you, however, get slammed by a 50% loss, you need to make a 100% rate of return to recover your losses.  Is it possible that youth and a stomach for losses isn’t actually the optimal investing posture?

The article wisely captures the reasoning behind the financial common sense of younger generations—“Many Generation X and Y investors have watched plunging financial markets destroy their parents’ retirement plans.”  That sounds eerily similar to words spoken by Gen X’s grandparents, the Depression Babies.  While it certainly is true that the intense, deep pain of the Great Depression may have created a syndrome in which some were too conservative, the Greatest Generation’s aversion to debt, skepticism of equity-heavy investing and penchant for emergency cash reserves may be exactly the foundation young investors need for a fruitful future.

The apparent concern of the "advisors"?  (And I’m sure it has nothing to do with the fact that they can’t charge fees and commissions on cash stored for emergency reserves or used to pay down debt…) They’re “…concerned that the low risk tolerance of some of these investors may ruin their retirements too, by leaving them short of funds when they get there.”  Again, the advisors miss the mark.  The point of financial planning and investing is not to retire, but to live a better life now and in the future.  Gen Xers, realizing they may be working indefinitely, thanks to companies and a federal government that raided their retirement promises (pensions and Social Security), are choosing jobs they love over those that pay the very most and seeking the nuanced balance between saving for the future and the present and everything in between.

Maybe the article should have been headlined, “Generation X shows more financial wisdom than financial advisors.”

Tim Maurer, CFP®

Financial Planner and Gen Xer