HOW MUCH $ IS ENOUGH? TIPS ON GETTING THERE
By MARY LYNNE DAHL, CFP®
January 23, 2017
Mary Lynn Dahl
(SitNews) Ketchikan, Alaska - I write a lot about retirement and investing. This is because they go hand in hand, and retirement is generally the biggest financial goal most people have while they are working. I hear people say over and over again that they want to retire early. However, I see the evidence in many cases where those people who do retire early hit the wall a few years later, often because the amount of income that they started out with is no longer enough to live on comfortably. When this happens, early retirement has turned out to be a bummer, not a joy. This can be avoided.
In planning your financial future, whether at retirement or prior to that, it is helpful to study other people who have been successful with their money. Keep in mind that “successful” will mean different things to different people; it does not necessarily mean to become rich. For most people, it is better to be comfortable than truly rich, since being truly rich can be pretty stressful, requiring a lot of ongoing work and responsibilities that most folks want to avoid. Let’s assume that your goal is to simply be comfortable, with a lifestyle that allows you to live the way you want to, doing the activities that you want to do during the rest of your life. Here are some useful tips to consider; they may be exactly the right strategies for you, regardless of whether you want to retire early or not.
TIPS ON ACHIEVING FINANCIAL SUCCESS:
- Maximize your ability to earn income; invest in yourself
This is key to everything that follows. If you do not earn enough, you need to improve your work value, with new skills, better education and more training. In an age when technology is being used more and more, higher paying jobs require being more skilled than ever. Invest in yourself so that you are worth more and can move up the salary ladder. Your ability to earn more income is the engine that will drive the entire train.
- Live below your means
What? Are you serious, you say? Yes, I am. Spending every dime you earn is a sure way to poverty, stress and debt. Spending less allows you to create an excess that you can save and invest for the future. It allows you to build a rainy day fund for emergencies or major purchases. It creates breathing space and financial security. Studies of successful people who achieve financial wealth show that they have this trait in common; they live below their income level, as a matter of habit. Living paycheck to paycheck leads to the day when you retire, whether you want to or not, with nothing more than Social Security, which for most people supplies about 1/3 of what they actually need to survive.
- Save and invest the excess
There is no magic in this concept. Save the excess so that you have enough to live on in case you lose your job or have a long illness during which you cannot work; the amount depends on the type of employment you normally have and your basic living expenses. Once you have enough in savings, begin to invest the excess for retirement and other long term goals. Savings should be in a bank or credit union account, but investments should not. Investments should be in the stock and bond markets, using mutual funds, exchange traded funds and other investment securities available to the investing public. Investments can also be directly made in real estate, assuming it is being purchased for investment, not as your home.
- Get out of debt
It is no secret that debt is a killer, of dreams, of goals and of the best of intentions. You must reduce and eventually eliminate debt if you are going to ever achieve any measure of financial security. As long as you owe more than you can pay in one month, you are in bondage to your banker, your credit card company and the family or friends who are supporting your habit of overspending. If you cannot get out of debt by the time that you retire, you are not totally secure. Work out a plan to get rid of each debt, one at a time, starting with either the smallest debt or the one with the highest interest rate. Either method works. Make up your mind to do this, and stick with it. You will not only be out of debt at some point, you will feel great!
- Get informed and develop a plan
If you go on vacation, you need a destination. It isn’t really a vacation if you just wander from place to place. The same principal holds true with your money. You cannot reach your financial destination unless you have a roadmap for getting there; this is called a financial plan. It can be simple, or complex, but it must exist. People who plan reach goals. People who shoot from the hip do not. Planners plod along, slow and steady, towards their goals. Slow and steady does win the race! Begin your planning with as much information as you can find. Be careful about what you read in the media, though, as some of it is good information and some is pure bunk. Stick with reputable sources that do not sell advertising and do not require that you buy their book. The public library has plenty of good places to start. Be cautious about information obtained on websites, too. Not-for-profit sites that end with .org are more trustworthy generally. Get started, read up, listen, make notes, do research, ask questions, write down your goals and start planning!
- Start as early as possible
Studies have shown that starting early can double and triple the amount you can accumulate with just small monthly amounts invested. For example, investing $500 per month at age 55 until age 65, earning 6% per year, would accumulate to approximately $83,830. However, if you started at age 45 and invested $500 per month for 10 years at 6% to age 55, then simply left the money to continue to earn 6% for another 10 years, to age 65, with no more contributions, it would accumulate to approximately $233,956. Waiting costs a lot! Get started as early as you can! It is true that late is better than never, but early is always better than later.
- Get professional advice for your financial plan
There are a lot of things I would not attempt to do for myself, because I know that I lack the skills to do them right, so I happily pay for professional help when I need it. For most people, making investment decisions is one of those things that require professional help. A competent, unbiased investment professional who isn’t trying to sell you some product can give financial advice that will answer your important money questions, put you on the right track, get you started on a financial plan that is customized to you and which will greatly increase your chances of reaching your financial goals in life. A good financial planner will give investment advice, provide you with the discipline to stick with a good financial plan and be a great resource to go to when it comes time to making really important financial decisions. It is generally recognized that the best financial advisors are Certified Financial Planners ™, all of whom will adhere to a strict code of ethics and are recognized as fiduciaries acting on your behalf in all cases. It is also generally accepted that a fee-only financial planner is the most objective when it comes to giving advice, since fee-only planners do not accept commissions for the sale of investment or insurance products that they sell to you. It pays to get good advice when it comes to finances, and these are your go-to professionals to seek out and hire. Almost all financially successful people report using financial professionals for advice throughout their lives and studies reported on in Financial Advisor and Financial Planning magazines indicate that people who hire financial professionals to help accumulate and manage their investment portfolios, as well as give financial planning advice, end up with substantially more wealth than people who are do-it-yourselfers.
- Contribute the maximum allowed to you retirement plan(s)
The contributions that you make to a company sponsored retirement plan is not money gone. It is money that goes from the “spend it today” pocket to the “spend it when I retire” pocket. It grows and grows over time, too, untaxed, which makes it grow even faster. Every dollar you move from the spend-today pocket to the spend-at-retirement pocket will save you from 15% to 38% in federal income taxes. Why would you send $1,000 to the IRS when you could put it in your own retirement account? For somebody in the 25% tax bracket (most of us), a retirement plan contribution total of just $4,000 over one year saves $1,000 in taxes, so the real actual cost of contribution is only $3,000 because the other $1,000 would have been sent to the IRS if no contributions were made. It is so sensible that the only valid reason not to do this is that you have so much debt that you cannot pay your current bills. If this is the case, GET OUT OF DEBT and start contributing as much as allowed to your retirement plan. You cannot retire on nothing. When you stop working, your pay check stops, too, and Social Security will only provide about 35% of what you need if you are like most Americans. You have to do the other 65% yourself. Your retirement plan is your ticket to a comfortable and secure retirement. Contribute the maximum for as long as allowed. If you do not have a company sponsored plan, set up a ROTH account, and IRA, a self- employed plan or some combination of these. Do it today!
- Get the employer match, if available; do not leave money on the table
Not all employers will contribute a match to your retirement plan, but if your employer does, take advantage of it. Generally, you have to participate in the plan and contribute at least a certain minimum percentage of your pay in order to get the extra benefit of the employer matching contribution. Most employers will match that minimum. Some go even further and exceed it. Let’s say that your employer will match up to 4% of your pay if you contribute at least 4%. Then let’s say that you contribute the 4% minimum, which is $2,600 per year on a $65,000 gross wage. With 26 paychecks per year, you are contributing $100 per paycheck, AND so is your employer. That is a return of 100% even before your money gets invested and earns whatever your retirement fund choices produce. $100 per paycheck (26 paychecks per year), at a return of 6% for 30 years is approximately $217,884, BUT if you get the match as in this example, the amounts ends up being about $435,769. The incentive being provided to you is so good that it absolutely does not make sense not to contribute to your retirement plan. Do not leave this additional money on the table. Get the employer match!
- Do not be too conservative with your investments
Being afraid of all investment risks can cost you dearly. It is a form of greed, too. It means that you are so attached to your money that you cannot bear the thought of losing any of it for any reason under any circumstances. This is a dangerous attachment. Money is just a tool and you should view it as such. When you do, you begin to realize that taking the right amount of risk, which varies per person depending on their circumstances, is part of any good investment strategy. Being overly conservative, which usually means choosing investments with a guaranteed return, carries the most overlooked risk of all, which is inflation risk. If you are so conservative that you only invest in CDs and annuities that have a guaranteed interest rate, you can be sure that inflation will so dramatically erode their value that at retirement, you will be far short of having enough to secure a comfortable retirement income. Your investments should average a long term return that is greater than inflation, not less. If they do not, you are actually going backwards, not forwards, because you will still have to buy most of the same things after retirement that you bought while you were working, except maybe a mortgage (I hope you have paid that off). Inflation is a silent thief and too many people are so conservative that they do not realize that their guaranteed interest rate investments are guaranteed to be inadequate just when they are needed the most, at retirement.
- Do not be too risky with your investments
Just as you should not be too conservative with your investment choices, you should also not take too much risk. This, too, is a form of greed. No serious investor expects to get rich overnight, despite the jokes about doing so. No serious investor expects to get returns that are way more than the norm, at least not without enormous risk, which is not suitable for a retirement plan or long term investment plan in almost all cases. There may be a few investors out there with more money than they know what to do with, and they probably can take a lot of risk, but for most of us, we need to be careful that we do not do this. Risk is measurable, and can be managed, but not avoided entirely, so the key is to use it to your advantage by making sure it is reasonable and can be managed. One of the best ways to manage risk is with diversification, which is just a fancy term for not putting all of your eggs in one basket. For example, do not invest your entire retirement plan in the stock of a brand new startup company that has no profits; you stand a pretty good chance of losing a lot, or all, of your money. There are other ways to manage risk, too, which are usually key points to discuss with a professional. Do not take too much risk but recognize that you cannot avoid it entirely; manage and reduce it as much as possible by choosing a balance between risk and potential rewards.
- If you have to choose between college funding and retirement, choose retirement.
You love your kids, right? So you sacrifice. I understand that. But I do not advise that you sacrifice your retirement plan contributions for college contributions. I know many people are doing so, and I think it is very wrong. Here is why: once you retire, unless you go back to work, you cannot contribute to a retirement plan; you are done. You have whatever you have, your income is whatever it is, and you are finished accumulating for retirement. College is different, however. You can fund it with cash from your own income, or with loans, or with scholarships, or with contributions you made earlier, with contributions from other family members (like grandparents or estate bequests) and the student can work his or her way through college. Most college educations end up being some combination of all of these. College funding is pretty flexible. Do the maximum retirement contribution first, then, if there is any leftover, fund a college plan.
- Stick with the plan
It should not be necessary to say this, but I will do so anyway because I continue to see people develop a perfectly good financial and investment plan that they sabotage. This destroys the plan and usually causes people to make the classic money mistakes I write about so often. Why does this happen? I think it happens because we are, by nature, emotional beings. We hear something in the media, read something, talk with a friend who warns us of something, and we react emotionally with a new strategy, a new direction, and a new idea for how to make more on our money or avoid some pending disaster that is being predicted. In most cases, no change to the plan was the right move, but emotions get in the way and the individual making a change shoots himself or herself in the financial foot, so to speak. The financial habits of successful people prove over and over again that sticking with the plan works out better in the long run in almost all cases. This presupposes, of course, that the plan is a good one, not some goofy idea for a get-rich-quick scheme; that goes without saying. Stick with the (good) plan.
- Do not financially support adult relatives who should support themselves
This is another tip I should not have to put in writing, but here it is. Giving financial support to adult children is a serious, major no-no. It simply enables them to stay dependent, which is crippling and counter-productive, especially when you are gone from this earth and they are left without the experience of taking care of themselves. I do not mean, of course, that you should not support an adult child who is truly dependent, such as one with cognitive or functional disabilities, but even those folks deserve the right to contribute to their own care by doing some kind of work, however simple, and providing for themselves to whatever extent they are able. I am referring to support for able-bodied, capable, working-age adults who should be expected to support themselves, work extra jobs if necessary, make their own sacrifices when sacrifices are needed and solve their own financial problems without your help. A wise woman told me many years ago that “the only real obligation we have to our children is to raise them to be independent of us”. She was right. None of us will be here forever, so do not handicap your adult children by making them dependent with rescues, handouts and loans they won’t repay.
- Delay taking Social Security benefits until age 70
If you read my articles regularly, you know that I advocate for waiting until age 70 to start your Social Security benefits, particularly if you are a married couple, but 40% of Americans say they plan to start collecting benefits before their full Social Security retirement age, according to recent polls. In my view, this is a mistake, because age 70 is fast becoming “the new normal” or “the new 65”. This is true because Americans are living longer and are healthier as they age, leaving them needing income for much longer than in prior generations. The biggest advantage you get by waiting until age 70 is that Social Security benefits increase by 8% per year for every year that you wait, up until age 70. So, if you would be eligible for full benefits at age 66 but wait until age 70, your benefits increase by 32% (8% X 4 = 32%). A full age 66 benefit of $2,000 becomes $2,640 at age 70. That is significant and can be the difference between being comfortable or not. In addition, if you continue to work for those extra 4 years, you can continue to contribute to your retirement plan, which will increase those payouts as well. And, if you are married, your spouse, who may survive you, is entitled to a higher spousal benefit than if you had taken early retirement benefits. Further, if you start benefits early, at age 62 and do not continue working, you will have to purchase medical insurance, because Medicare, which is tied to Social Security, is not available until age 65 (unless you become disabled). This one is a no-brainer, despite the belief that early benefit payments over time end up being more paid out. This is not true once you reach the break-even age, which generally falls within a few years of the average person’s life expectancy. Don’t file early unless you really do have lots of money accumulated and know for certain that it will be more than enough for you and your spouse for your entire lifetimes. Wait until age 70 and reap the extra benefits, for you and your spouse.
- Work part-time, flex-time or seasonally after retirement.
Americans are living to much older ages now than we did a couple of generations ago. One big issue, then, is that our retirement incomes do not keep pace with inflation for such long periods of time. A few generations ago, living past 85 was quite an achievement. Today, more and more studies indicate that a lot of people will live into their 90s and many more will make it to 100+. The problem is that the income these people will have retired on 35 or 40 years prior will not be enough to cover their routine expenses, especially health care and long term care costs. Even home health care can be expensive, so it is a real issue to have an income that is not totally eroded by the long term effects of inflation over so many years. Keep in mind that even if inflation is only 3% per year, after 20-25 years, it is only worth about half what it was in the beginning of that 20-25 year period. Since prices generally rise rather than fall over time, having an income that does not keep up with inflation is really tough. Many people will opt to work part-time, seasonally or in a flex-time job to make up for this shortfall, and studies show that it is actually healthy to do so. It seems that having purpose trumps the notion of being fancy-free and able to relax all day, every day. In addition, people report that work, even if it is not “meaningful”, allows a retiree to stay engaged with other people, which they report as very satisfying personally and emotionally. The health, emotional well-being and financial well-being that results from part-time, flex-time or seasonal work after formal retirement may be one of the best ways to achieve financial success, so do not overlook this as an option. Many people report that they have no plans to retire, ever. They enjoy working, they love their jobs and their businesses, they want to stay busy and engaged and they like having the income security it provides. Some retirees start a small business and become self-employed after retirement.
This is a lot of information, but you can always learn from others how to achieve some type of financial success, however you define it. Take note of what others have done to be successful so you can get there, too.
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©2016 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2017
Mary Lynn Dahl can be reached
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