“Retiring Baby Boomers Face Crushing Debt.” So said the Wall Street Journal in a February headline. That might sound dramatic, but it confirms what I've learned presenting financial classes to servicemembers across the country: Many people don't have enough assets to fund several decades of retirement.
Those of you on the verge of retirement know there are no magic solutions. A financially secure retirement simply comes down to working longer and reducing your standard of living to minimize your debt and build your assets. Those of you who have more time in the work world have more time to get this right.
A financial professional can help you map out a plan to reduce debt and build assets. Don't be ashamed to seek help. You wouldn't practice veterinary medicine on your pets. Is the need for a financial specialist any different?
Often, after one of my classes, participants approach me with concerns about their own monetary situations. People think they are doing everything correctly in the application of their financial knowledge, but I hear one financial misconception after another; misconceptions that led to the behaviors that led to their troubles. Some overestimate their financial sophistication, while others are too close to the situation to see their mistakes.
Based on those conversations, here are seven things you can do to head off financial problems at the pass and ensure financial security for your retirement.
1. Accept responsibility
Too often, we want to blame outside forces before we hold ourselves accountable: “That stupid stock market will get you every time,” “That college costs a fortune, but we'll make it happen,” or “We deserve a big house.”
When you find yourself in financial straits - with the exception of catastrophic situations that truly are beyond your control - you must face the possibility you are the source of the problem.
Only by being open to identifying the root cause of problems can we be sure we are not just tinkering with the symptoms.
2. Establish a plan
Winging it is not a valid financial strategy. You wouldn't establish a business without a business plan, and your family's finances should be no different.
A financial plan gives you structure and logic to inform your actions. It builds in discipline and takes the emotions and guesswork out of your financial management. It sets outcomes or goals, so you can track and measure your success, and creates visibility to identify problem areas.
Review your family's finances as though they were for a business: Revenues come in and expenses go out; some revenue is saved and invested for specific objectives. Control your cash flow to ensure your expenses don't overwhelm your revenues, and you'll be able to meet your needs for the future.
3. Stay out of debt
Debt negates income. In the short term, no extra income means no assets, which equals no retirement fund. In the longer term, you can reduce your retirement income needs by planning to enter retirement without any debt. Finally, too much debt - whether credit card balances or loans - doesn't just indicate a lack of money, but more significantly a lack of cash flow management, financial discipline, or visibility.
Credit is not a substitute for income. Overextending your credit for a house, car, vacation, education, or electronics will land you in trouble. Fix or prevent these deficits with a plan.
You can't run a business if the partners don't discuss, plan, and run the operation as a team; lack of cooperation between partners leads to organizational failure.
Your family is no different. Each partner has a role; each of you needs to understand the plan, agree on the management of the cash flow, and have visibility into the process. You won't always agree, so each of you must be willing to compromise and reach a consensus if you're going to find workable solutions.
If one partner isn't comfortable taking any sort of financial management role, the partner with total control should seek the expertise of an outside consultant. In the famous words of Lord Acton, “Power tends to corrupt, and absolute power corrupts absolutely.” This is not to suggest you are corrupt - but having an objective, third-party consultant on standby for regular reviews reduces the opportunity for a breakdown.
Secret accounts usually indicate a problem, whether they are a cause (maxing out a secret credit card) or a symptom (saving the money to escape a bad relationship). On the other hand, if you secretly are saving for your spouse's surprise birthday party, more power to you!
5. Save enough
Many people underestimate how much money they will need to save for their retirement. Think about funding 40 years of unemployment: That's retirement.
How do you know what's an appropriate target amount for your retirement savings? There are many formulas to calculate your potential financial needs in retirement - and the number of methods only adds to the confusion.
As a baseline, strive to invest 15 percent of your earned income. Regularly recalculate your total retirement income requirement. How much monthly income will you need in retirement, based on your projected expenses each month?
Suppose you need $6,250 a month, or $75,000 a year. Subtract your military retirement pay, Social Security benefits, and any other known income sources from that total to determine what you'll need to earn from investments.
Say you are left with $45,000 a year; divide that $45,000 by 4 percent (0.04), and you'll find you need roughly $1,125,000 in assets.
6. Invest with thought
Building enough assets to fund a secure retirement doesn't happen by accident. The sooner you start making projections and developing a plan for your retirement, the better. Time is your greatest asset in this process.
Building a successful investment portfolio requires a proven strategy based on sound research and history. Too many people shoot from the hip with their stock selections and their buy-and-sell processes, basing their choices on hot tips, Uncle Joe, and Jim Cramer. Throw in some greed and fear, and you have a recipe for failure. Mixing emotions, media reports, and a lack of financial knowledge makes for a toxic cocktail. A good investment strategy requires objective thought and action.
7. Be wary of individual stock portfolios
I'm not opposed to investing in individual company stocks (as opposed to mutual funds), but I typically advise against them for anyone dealing with financial challenges - and even for investors without financial challenges who are in the process of building up their foundation of assets.
Individual stock portfolios pose too much risk for someone who needs to get their financial house in order. In my experience, individual stock portfolios can even be the cause of some families' financial problems. They are better suited to people who already have established a solid financial status.
Illustrations by James Boyle