The definition and expectations of a working life and retirement have shifted through the years. They continue to shift, both out of our changing desires and out of necessity. When the safety net of the Social Security system was introduced in the US, unreduced benefits were available at age 65, but life expectancy was only a few years beyond that. The changes in that system, at least partially, reflect the broader shift in retirement. People are living longer, which is good. But that means that we need resources to support us for a longer period of time. That means we either need to work longer, save more, or a combination of both.
An important issue that’s related to the financial issues is what to do in retirement. If you’ve got a stressful job or work in an unpleasant environment, you’re probably saying to yourself that you’ll have no problem deciding what to do with all the time you’ll have on your hands in retirement. But, like many aspects of life, sometimes we tend to romanticize things.
Barry LaValley, founder of Retirement Lifestyle Center, has noticed some trends in the emotional reaction people have to retirement. The two or three years immediately prior to retirement are full of excitement, but often the first year of retirement is stressful. Work gives structure to our daily lives, a sense of identity and purpose, and often a social network. After the first year, people find things to do and develop new structure resulting in a honeymoon phase with retirement that lasts a few years. They’re still healthy and have found things they enjoy doing. The retirement activities become routine after a while and after a few years of the new schedule, people tend to be disenchanted. After a few more years, people re-orient over several years, then become content.
One wild card that impacts many people is poor health. For this reason, doing many of the desired retirement activities in the early years makes sense. Travel, golfing, and being with young grandchildren might not be possible if there are health concerns. The spending patterns in retirement tend to follow these stages. The first few years tend to be big spending years. Then spending declines for several years, but increases again when the cost of declining health become an issue.
Consider a new retirement approach. Phasing out of the workforce rather than an abrupt end to working – what financial professionals sometimes call a “cliff retirement” – can be a less stressful transition and ease the financial burden. It can enhance the sense of fulfillment, keep ties with professional people, and allow a flexible schedule for travel, golf, and other retirement activities. If you’re interested in reading more about a phased retirement, look at The New Retirementality by Mitch Anthony. Open your thought to the possibilities of changing the way people retire.
When there is a big world event – especially one that seems to have an impact on economic markets – many people wonder what they should do in response to protect their financial well being.
The best time to protect yourself from a financial downturn isn’t when the downturn happens. It’s before it happens. If you live in the part of the country that regularly has tornadoes, you don’t start building a storm shelter when you see the sky getting dark. You build the shelter during good weather and keep it stocked with the things you’d need if a storm hits – food, water, batteries, flashlights, candles, and blankets. To prepare for financial storms, have a balanced financial situation. It’s good to have some money for long term goals invested in the stock market – in the US and abroad – and to have some money in more stable accounts like certificates of deposit, bonds, or bond mutual funds. You also need savings in something stable like a bank savings account or a money market fund. The point of the money in savings isn’t to make money, it’s to avoid losing money and to have if you need to pay for an unexpected expense or for your living expenses if your income is interrupted.
Next, recognize what impacts you and what doesn’t. A worldwide financial catastrophe impacts everyone. And some big financial events have ripples that can touch us all. But a negative event that happens thousands of miles away doesn’t necessarily impact you directly. When there are effects, go back to the planning you did ahead of time. If needed, tap into your savings. But don’t react in a panic to something that doesn’t effect you. It can have the self-fulfilling negative impact of becoming a bad incident for you if decisions are made out of emotion, instead of well thought-out conclusions.
In making short term and long term decisions about your financial situation, be realistic about what you can control and what you can’t, then plan accordingly. You can’t control the weather, but you can control if you have insurance to cover weather damage to your home or vehicle. You can’t control if your boss is always in a bad mood, hiring and firing people on a whim. But you can look for a more stable job if you find yourself with an irrational employer.
If you are surrounded by negative or uncertain news, look for stability and for opportunities. If you’re in a store with some items on sale, you don’t run from the sale items in fear. You look to see if there are some bargain items you can use. Is a slump in the stock market a bad event or an opportunity to buy good quality mutual funds at bargain prices?
You can’t always control world events, but you can control how you plan for them and how you react.
Just about everyone gets surprised by a month that has more expenses than income. As with any unpleasant surprise, how we handle it can determine whether it turns into a long term problem or just a short term bad situation that we learn from. Here are some ways that might help with cash flow and, depending on the next steps you take, keep it from causing you angst in the future.
While dealing with the cash flow crisis, rethink your needs and wants for the short term. Trimming some spending around movies, restaurants, weekend trips, and other niceties for a while may get you out of your tight financial spot. Then you can have some of these luxuries go back into your spending patterns. Look in your pantry and freezer. Most people who grocery shop regularly have some canned goods and frozen foods that can be a good meal at home. Cooking instead of eating fast food or living off heat-and-eat foods can also save money. An entrée or meal with a few different food groups that you make in bulk from scratch may feed you for several meals of leftovers, cost less than the convenient pre-made items, and actually be better for you.
Don’t let sunk costs trick you into spending money. A sunk cost is a business concept that is basically money that was spent that you can’t recover. Let’s say you’d planned a weekend trip to the mountains and have already put down a non-refundable deposit on a condo or hotel room. You’re hit by a surprise budget crunch and are trying to decide if you should go on your trip or not. While there might be some variations of a right answer, don’t let the deposit weigh too heavily in your decision. If that lodging payment is a small piece of the entire cost of the trip, you might be better off seeing if the money can be applied to a future stay or accepting the loss, rather than spending several times the amount of the deposit to avoid having it go to waste.
If you work at a job where there is an opportunity to pick up some extra income, do it. Two things that can generally be traded are time and money. We pay extra to have someone do our laundry, yard work, or prepare meals. If we need money, using some of our leisure time to get extra money is a practical trade off.
All these austerity measures, of course, assume that you don’t have enough in savings or credit card availability to take care of the financial crunch for the month. This is evidence of a bigger financial concern for the household. While getting through this short term problem, take a close look at your income and expenses. And be willing to make major changes to avoid tight financial times in the future.
Views about money come from our upbringing, our personal experience, and the people who influence our opinions. When these financial feelings become extreme, they can lead to dysfunctional decisions, so making yourself aware of any severe money attitudes can help you achieve your financial goals. The Klontz Money Scripts were developed to identify some common negative financial scripts to help financial professionals assist clients in meeting goals.
Money Avoidance is the belief that money is bad or undeserved. Money avoiders feel fear, stress, or anxiety. Their concerns may lead them to be their own worst enemy in regard to finances. Their beliefs include that money corrupts people, that there is virtue in having little or no money, and that it’s not likely that rich people are good people often mean that they don’t make decisions that will have good financial outcomes.
At the other extreme is the money script of Money Status. This attitude relates a person’s self-worth to financial worth. Rather than concentrating on goals of the greater good or personal satisfaction, these people concentrate on acquiring financial things, to the detriment of their happiness, well-being, and sometimes even their health. They are aware of socio-economic class and are competitive with those around them in regard to acquiring financial status. Ironically, many people with this outlook are not very wealthy.
Money Vigilance is a state of mind in which people feel shame and secrecy about money. It doesn’t matter whether or not these folks have a lot of money or not, they cannot comfortably discuss or share information about money. While an individual’s money situation isn’t generally a topic for public discussion, the money vigilant aren’t able to even share information about finances within their immediately family. They are unable to spend without guilt or enjoy financial benefits available to them.
Money Worship is a belief that money is the solution to everything, which is a common belief among Americans. People who believe this also often believe that money is the source of happiness, that they can never have enough money, and are distrustful with people in regard to money. Many people with this attitude have low income and tend to carry credit card debt that they can’t pay off each month.
Like so many areas of life, balance is a good way to make goals realistic and manage day-to-day finances. Extreme actions and beliefs, especially ones that are harsh and judgmental about a life necessity like money, make achieving accomplishments difficult. In regard to money, it can be something that is part of your life without becoming the driving force, a source of stress, or a cause for shame. You can earn money in a career you love, and spend and save with your financial resources. Keep your finances in perspective, giving money neither too much nor too little control over how you see yourself and those around you.
Many of us look to professionals to give us valid financial planning and investment advice. This seems reasonable. People choose to have a professional help them with many aspects of their lives. It may be having a competent attorney write or review your will or having a professional auto mechanic change the oil in your car. In some areas, their is really a need for professional help to guard against making costly mistakes and protecting the interests of the ones we care about, including ourselves. Other times professionals are more a matter of convenience. (I never wash and iron my cotton dress shirts. It’s not that I can’t, I just don’t want to take the time and the folks I take them to do a better job.) Financial planning and investing are areas where many people choose to have some degree of professional help. Lots of times professional qualifications can pay a big role in deciding who you ask to help you. All of the designations and initials that can get thrown at you can be confusing. Here is a basic primer on what some of those designations entail.
A Chartered Financial Analyst (CFA) is someone who has completed an extensive set of examinations on ethical and professional standards, tools and input for investment valuation and management, asset valuation, and portfolio management. There are also professional experience requirements. CFAs often work as institutional money managers or stock analysts.
A Certified Financial Planner (CFP) is predominantly involved with individual clients. A CFP is required to have educational expertise and pass a test covering estate planning, income tax, retirement, insurance, and investments. Also, they must have applicable work experience and subscribe to a code of ethics. A CFP may or may not hold licenses to sell investments or insurance.
Chartered Life Underwriter (CLU) is a designation held mostly by life insurance agents. They have completed a college level curriculum of 10 college level courses, have at least three years of professional experience, and subscribe to a code of ethics. With 3 more courses, they can become a Chartered Financial Consultant (ChFC).
A Certified Public Accountant (CPA) has an extensive education in accounting, has passed an extensive exam, received from state accountancy boards, and qualifying work experience. The knowledge and experience of CPAs about investments will vary. The American Institute of CPAs issues the Personal Financial Specialist (PFS) designation also. A PFS designee has passed an additional test and has professional experience in personal finance.
Enrolled Agents (EA) must pass a test on tax law. They are authorized to practice before the IRS. Like CPAs, the knowledge and experience of independent EAs about investments will vary. If you want financial planning from an EA, look for additional designations.
This is a graduate degree in business, a Master of Business Administration (MBA). The degree will vary with whether or not there is a specialization to their degree. It may be a general degree which covers a broad base of business issues or it may have a special focus. You may find a great deal of comfort in working with an MBA in Finance, but do you want to take financial advice from someone with an MBA in Marketing?
These professionals are also often referred to as stockbrokers or investment representatives. These people are generally licensed to sell some type of securities. They are generally versed in the types of investments for which they are licensed, but their experience and training in regard to financial planning varies with the individual.
A Registered Investment Advisor (RIA) has registered with the Securities and Exchange commission or a state securities agency to be able to charge for investment advice. The registration requires a listing of qualifications and business practices. The appropriate regulatory agency can perform examinations of RIAs to see that they are complying with applicable laws and record keeping requirements.
In choosing your financial professional, look at the qualifications that meet your needs. If you expect them to help you with financial planning as well as the actual investing of money, you should get a sense of their qualifications in both areas. Also, an understanding of what they are licensed to do will sometimes explain why your planning and investments take a given turn. For instance, if your financial professional is only licensed to sell insurance and is not licensed to sell securities, that may have something to do with the fact that your retirement plan, your kids’ college fund, and all your other long term goals are funded solely with life insurance. Also, if your professional is not licensed to sell insurance, that may explain why they think you don’t need any.
You should also have a sense of how your professional gets paid for their services. Many consumers are now seeking out fee-only advisors. Even in that arena, there are differences. Some charge hourly, some charge a flat fee for specifically agreed upon advice, some are paid a percentage based on assets you own that are held by them. If you want a fee-only planner, don’t be confused by someone who says they’re fee based. They could charge fees or they could be paid through commission from products sold or some combination of the two. If your questions about how they are paid aren’t answered well, you might want to consider another professional. Answers like “It’s all built in”, which refuse to specify how and how much are red flags. Most financial professionals are not one person non-profit agencies, so you have a right to know how they’re paid. As a consumer, it’s not an area where you should be too stingy either. Someone who helps you meet a long term financial goal shouldn’t make more money than you do from the advice, but they should be compensated for their work.
Don’t ever forget to follow your gut reaction to someone. Working with someone you trust is one of the most important criteria. All the credentials, degrees, and fast talk in the world can’t outweigh the need for honesty.
Very often, retirees or people almost in retirement don’t want to hear about issues involving their money if it suggests any type of long range view of things. Often I’ll talk to someone in that category about the long term performance of something relevant and they’ll reply that they don’t even want to look at long term issues and that they “don’t even buy green bananas”. While that makes for a great come back, it may be more short term in nature than is in the person’s best interest.
The biggest problem with a “no green bananas” attitude is that it assumes one of two things of which you can’t be sure. One assumption is that inflation and whatever you currently have your money in will cooperate so that you will have as much money as you need for the rest of your life. The other assumption is that you aren’t going to live long enough for it to matter. Both premises are pretty risky.
There’s good news in retirement planning and it’s that people are living longer. That means more time in retirement than your parents and grandparents had. It may mean that instead of having 10 years or less in retirement, most of you will have 20 or even 30 years. What can be bad news is outliving your money. It doesn’t take a Harvard economist to figure that if you’re going to be in retirement longer than your predecessors, you need to save more money and make it work harder to have the lifestyle you want in your Golden Years.
In terms of making your money work harder, you’re more likely to get higher returns over the long haul with some type of equity. CDs and money market funds are safe, but don’t really pay much – especially these days. And what little money you make in interest is subject to income tax. So even with low inflation, you might not even be breaking even.
The other important factor to consider is that you should not have all your money in the same place. There are a couple of reasons for this. One is that you probably need your money to do different things. Some of it needs to be available for emergencies, some needs to produce income, and some needs to grow for the long term. (There are those green bananas, again.) The other main reason is that almost any investment will have good years and bad years. Some years bonds have performed better than stocks. Most years stocks have performed better than bonds. Some years, the money in your mattress may be your favorite investment. If you have your money spread around in a variety of places short term events should not cause you major problems. Being willing to look into different alternatives can certainly help you get where you want to be financially and actually help reduce some of the risk of having all your eggs in one basket.
One of your biggest financial assets is you and your professional potential. Part of how you make the most of your ability to earn at your desired level and have a fulfilling career is your social capital, which is the academic term for your personal and professional network. You may have natural social capital. That’s your family, as well as the people you meet through work and other activities, past and present. You can develop your social capital.
There are three primary aspects of social capital – obligations and expectations, information channels, and social norms. Obligations and expectations involve the give and take of relationships within the network. Think of this in the vein of the old fable of stone soup. Someone puts a rock in a pot of boiling water and everyone who wanted some soup had to bring something to share – a potato, some meat, spices. The stone and water alone aren’t even a meal. But individual contributions and strengths make it good for everyone who participates. So with social capital, you need to give what you can and be respectful of other people’s contributions. Think of a networking event. If you listen to what people tell you about their business, what type of services they offer, and what type of clients they’d like to meet, you’re making the right steps toward your obligations. It’s also reasonable to expect people to listen to your offerings and needs. But you can’t be a viable participant only by selling your services.
Information channels allow appropriate communication. In the example of a networking event, you might exchange business cards with the folks you spoke to. You establish regular communications to make those relationships grow and prosper. That doesn’t mean that everyone you meet needs attention. But concentrate on the people where you have something to offer each other.
Social norms in social capital can be as general as common courtesy or as specific as what constitutes appropriate attire. One way to ascertain the norms for your social capital is observation. See how people interact, what they wear, how they keep in touch. Another is to ask someone you trust. And different groups in your social capital might have different norms. You probably don’t need to wear professional attire to meet with your neighbors, but wearing the clothes you wear to mow your lawn when you’re at work is probably not a good idea.
One of the best ways to make the most of social capital is to listen more than you speak when you’re with someone who’s a good contact for you. Ask thoughtful questions that can help you decide the direction you want to take your career, express respect for the person’s expertise and experience, and ask for their opinion. If your social capital is going to pay big dividends, nurture relationships and do your best to contribute what you can.
There are good, kind people who don’t have any desire to have a pet in their lives. And there are people who consider a pet a part of the family. If you’re a Pet Person, it’s a good idea to think through the financial impact of bringing a non-human animal into your life. Even if someone gives you a pet or you find a stray animal and decide to keep it, there’s no such thing as a free pet. The first year cost of owning a dog can vary from $500 to over $6,000, with ongoing annual costs running $200 to $2,500.
If you don’t find a stray on the street, the initial purchase cost can vary from a few hundred dollars to well over a thousand if you go through a pet store or specialized breeder. If you’re not looking to breed or do competitions with your pet, you might be very happy with an animal from a shelter. The adoption cost with these will range from $50 to $600 for cats or dogs, based on the web site for the Humane Society of Pikes Peak, where the adoption fee includes a discount on an initial visit to the vet, a discount on spaying or neutering, the first year license (required by the county), some vaccinations, and microchipping.
The biggest costs after acquisition are food and veterinary costs. Experts generally recommend that dogs and cats eat pet food, not people food, and buying pet food can run $250 to $750 a year per pet, depending on the size of the pet and the type of food. In regard to veterinarians, the first year of ownership should include a complete physical, vaccinations, and spaying or neutering if needed. These necessary services can cost $75 to $1,000 during the first year, but may decline if there are no health issues. Pet insurance isn’t just for the eccentric pet owner. Premiums will vary based on the pet, breed, size, and age. If your pet ends up in a terrible accident or with a medical condition that needs extensive treatments, insurance can save you a bundle. To search companies, check out consumersadvocate.org.
The odds and ends of getting set up with a pet can add up, too. A collar, leash, grooming, a kennel, and obedience training are important for just about any pet. You can bargain shop for some of these items, but they can still run $100 to $1,000 if you get everything. Some of the indirect costs can also add up. Animals can have mishaps that result in replacing shoes, cleaning carpets, or reimbursing neighbors for ruined landscaping. The cost of a good fence may be one of your best investments relative to becoming a pet household. A Pet Person is certain that, financially speaking, having a pet in the family is well worth cutting back in other areas.
Managing your finances has many aspects. It’s good to have an emergency fund, spend less than you make, and save for the future. But there’s a big financial asset that many of us take for granted and it’s worthy of your attention. It’s what academics call human capital and what you might call your talent and skill. This is basically what you could use to make money, now or in the future. Some of this is specific to who you are. It can include your great looks, sense of humor, or natural ability to fix mechanical things. The other type of human capital is what you acquire. Two common ways of acquiring human capital are through formal education and job experience.
So if you feel that you’d like to have more potential resources to enjoy life and have more financial options, work on your human capital. There are several ways you might approach this. Getting more education can help you change your career path. That might seem like a lot of trouble to make more money. However, the Department of Labor data show that, on average, higher levels of education seem to result in higher income. Even if you borrow a reasonable amount in student loans and take time away from a full time job, an education could have a positive impact on your long term earning capacity and result in a brighter financial situation.
If going to school doesn’t seem like a good approach for you, a job that gives you training and develops skills is also an excellent way to make good use of your capabilities. Many of us get a job when we need income and follow where it takes us, without realizing we can make choices around our work that can provide more than just a paycheck. General skills we might get from work can be things like negotiation techniques, supervisory skills, and project management. Specific job skills apply specifically to your current or future job. It’s great to have these skills to give you more job security where you are and, hopefully, you can take those skills with you to another job if needed.
You can manage your human capital. Find work that you enjoy that pays what you need to live. If you need additional skills, explore how you can acquire those skills. If your employer is willing to send you to training or provide the skills in the workplace, pursue that and repay the employer with your loyalty.
Even if you’re about to retire, there may be ways to use your biggest asset that are financially rewarding and interesting. Having a change in career or a continuation of career beyond your planned retirement age can be personally as well as financially worthwhile. We all spend so much of our waking hours in life at work. Doing something you enjoy can also have a gratifying financial impact.
There is financial advice that falls into the same category as advice that our moms gave us growing up. Standard advice from moms includes making good choices, dressing and acting in an appropriate manner, and being nice to others. Here’s some basic financial direction that a mother could love.
If it seems too good to be true, it probably is. Investments that promise fabulous returns and low risk need careful scrutiny. Often more conservative and diversified investments like mutual funds and exchange traded funds might be better suited for you than a hot stock tip or a packaged investment with high fees. There certainly are people who make money from high risk investments. Those results may be from skill or they may be from luck. But either way, high risk investments sometimes result in big losses.
Save something for a rainy day. This is simply a financial safety precaution. Put your emergency savings in something unexciting – a bank or credit union savings account, a money market account, certificates of deposit. When it comes to emergency savings, you don’t need a high yield. You need to know that if you need the money, it’s there.
Pay yourself first. It’s good to start out saving 10% of your gross income, which is your income before taxes and other deductions. This is how you can get that emergency savings going. It’s also how you can save some money for retirement. The best retirement accounts are usually your employer retirement plan. But if you don’t have a retirement plan through work, then an IRA will do the job.
Share your good fortune. Support the financial causes you care about. If they are qualified charities, get receipts and see if you can itemize deductions on your tax return. You can make donations by writing a check or, in the case of charities with thrift stores, you can donate used clothing, furniture, and other items.
Have a good attitude. What you expect can impact what you accomplish. That doesn’t mean that you can just pretend to have money and have it magically appear. But assuming that you can make good decisions and that you can live within your means will help you achieve that.
Don’t be greedy. Whether or not someone can live on what they have isn’t just a matter of money. It’s also a matter of what a person decides to do. There are plenty of people who have lots of money, but it never seems to be enough for them. There are also people who have very little money, but have a great life and everything they need.
Do a good job. Find a career path that you enjoy. Learn to live on what that career makes. It’ll be more rewarding than doing something just for money.
Everyone has the ability to follow these basic credos. They’ll make your life simple – and your mother would be proud.