The title of a Wall Street Journal article from 17 Feb 2017, shouted “Retiring Baby Boomers Face Crushing Debt.” The article peaked my interest because it neatly dovetails with another theme I have written about concerning an oncoming retirement predicament. The predicament that soon-to-be-retirees don’t have enough assets to fund several decades of living as a retiree. Together, these issues paint a picture that many people are not financially prepared to retire.
For those of you on the verge of retirement and facing these issues, there are no magic solutions. You know it comes down to working longer and reducing your living standard to address the debt and lack of assets. You should get professional help so you can map out a plan to reduce debt and build assets.
My objective is to present insights to prevent the scenario above by eliminating debt and ensuring you have enough funds for retirement.
Often after our financial classes, participants approach me about their difficult financial situations. From these conversations, I’ve outlined some of the basic issues facing people today that may lead to the situations in the opening paragraph.
I listen carefully to these conversations. People think they are doing everything correctly in the application of their financial knowledge. Yet, they have issues. With my financial ear, I hear one financial misconception after another which led to the behaviors that led to their troubles. Some overestimate their financial sophistication and others are just too close to the situation to see the mistakes they are making.
The need to work should not be in your retirement future. For those of you with time and still in the work world, your working lifetime is your one chance to get this right. Based on my class conversations, here are things we can do to head off problems and better ensure future financial success.
This first insight is tough but necessary. When you find yourself in financial straits, have the courage to face the possibility that you are the source of the problem; obviously excepting catastrophic situations that are truly beyond our control. I always start by assuming the blame for my issues until proven otherwise. I consult trusted people to validate my objectivity.
Too often we want to blame outside forces before ourselves. “That stupid stock market screws you every time.”…“We deserved a big house.”…“That college cost a fortune but we’ll make it happen.” “I’ve earned this (insert favorite adult toy).” Usually it is not outside forces behind our troubles because these could have been managed with a solid plan. Only by being open to finding the root cause of problems can we confirm we are not just tinkering with the symptoms.
Next, establish a plan. Review your family’s cash flow as though it were a business. Revenues come in. Expenses go out. Some revenue is kept for savings and investments for specific objectives. Control the cash flows to ensure expenses don’t overwhelm your revenues and you are able to meet your needs for the future.
You wouldn’t establish a business without a business plan. Your family is no different. Winging it is not a strategy. This one idea, a plan, helps in so many ways. It gives you a structure and logic behind your actions. It builds in discipline. It takes the emotions and guess work out of your financial management. Creates visibility to identify problem areas. It sets outcomes or goals so you can track and measure your success.
Communication. Continuing with the business metaphor above, how can you run a business, your family operation, if the two partners don’t discuss, plan and run the operation as a team? You can’t have the partners running off in different directions. Lack of cooperation between partners leads to organizational failure.
Each partner has a role. Each partner needs visibility into the process and understands the plan. As partners, you have to agree on the management of the cash flow. Because you will not always agree, you must be willing to compromise and build consensus to find workable solutions you will each carry out.
If one partner prefers to remove them self from the financial management role, the partner with total control needs an outside consultant. Having all the financial decisions under the command of one person creates an opportunity for a breakdown as described in the first insight above— “Power tends to corrupt, and absolute power corrupts absolutely.” per Sir John Dalberg-Acton. Not to say you are corrupt but have that objective third-party consultant on standby for regular reviews.
Those are some big issues. Now for some specific issues that trip some folks along the way to retirement.
Not saving enough for the future. We underestimate how much it takes to retire. Retirement is funding 40 years of unemployment. Confusion is part of the problem. There are so many ways to measure your potential financial need for retirement how do you know what’s an appropriate amount?
Have a goal to invest 15% of your earned income. This is a good base line but you should regularly recalculate your total retirement income requirement. How much monthly income will you need to retire based on your retirement expenses per month? Hint, you can control your retirement income needs by planning to enter retirement with no debt.
Say you need $6250mo/$75,000yr. Starting with $75,000yr, subtract out military retirement and Social Security and any other form of known income sources to get your actual invested asset need. Say you are left with $45,000yr after other retirement income sources are subtracted. Divide $45,000 by 4% and you need roughly $1,125,000 in assets.
The sooner you start these projections, the better. You see how time is your greatest asset given the amounts involved. You also see the importance of a plan. This level of assets doesn’t happen by accident.
Secret accounts. I am not typically privy to the reasons behind secret accounts. However, secret accounts decrease visibility enabling potential problems to fester as bad things usually happen in the darkness. Do secret accounts indicate a problem by their nature?
My experience is that these accounts are either the cause or a symptom of a problem. A cause; a secret credit card gets maxed out. A symptom; a secret savings account. The savings account is a good thing but the reason for the hidden account (the cause) is a bad thing…“If my spouse knew, he would spend it.” Or, “I’m saving the money to escape a bad relationship.”
On the other hand, if you are secretly saving for your spouse’s surprise birthday party, more power to ya!
Individual stock portfolios. I’m not anti-individual stock portfolios. But people I meet with financial challenges shouldn’t have portfolios of individual stocks. Even people without financial challenges but are in the process of building a foundation of assets, shouldn’t have an individual stock portfolio. They pose too much risk for someone who needs to get their financial house in order. In fact, the individual stock portfolio tends to be a reason behind some families’ financial problems. Individual stocks are better suited for people who have established a solid financial status.
Lacking a sound investment strategy. An investment portfolio requires a proven strategy based in sound research and history to succeed. Too often I hear of people shooting from the hip with their stock selections and their buy and sell processes. Their selections are based in hot tips, uncle Joe and Jim Cramer. Throw in some greed and fear and you have a recipe for failure. It’s not the stock market’s fault you have issues with your investment status. Money and our emotions go hand and glove. Your investment strategy requires objective thought and action. Emotions, media, and lack of financial knowledge make for a toxic cocktail.
Of course, too much debt. Too many credit cards or loans. Having too much debt indicates a lack of cash flow management. A lack of financial discipline. Lack of visibility. A possible emotional weakness tied to spending. Other than an emotional weakness, all these issues can be fixed and prevented by having a plan. Credit is not a substitute for income. Overextending for a car, boat, house, vacation, education, kids toys, electronics is obvious trouble. Debt negates income. No extra income means no assets. Which all equals no retirement.
I hope these insights cause you to rethink your situation. Do not be ashamed to seek help. We are all experts in our specialties but outside that, things get sketchy. We don’t practice veterinary medicine on our pets. Is the need for a financial specialist any different?