Monthly Archives: July 2007

Secret to Abundance – The Answer is Within You

Many people are searching to find the answer of how to become a millionaire. Maybe it is with the “hot” stock pick for the week. Maybe it is with shopping for the best bargain. There have been success stories, however many more Americans are still deep in debt and feel that it is harder to get ahead. We have gotten stuck in an endless cycle of looking yet not finding the solution. Part of this is that we do not know what we really want. We may believe that we really want a new television, a $1 million or a house on the ocean. However, once we get this, will it be enough (what we really want)?

The answer is no. Money and things do not satisfy our soul, long-term. These things may bring us temporary happiness, yet over time the effects fad. Look at how electronics have evolved recently. You can be very happy that you got the top of the line television or computer a few years ago, only to be disappointed now because it is a technological dinosaur. Thus, we need more and more to have the same effect.

The secret to abundance is not that we should work hard, invest wisely and find the best deals so that we can keep up. Rather, we need to look within to find the real solution. We already know the answer to lasting happiness and abundance because it is already within us. Knowing how to invest and budget can help, yet the real answers to what we want (peace, love and joy) is not in money, it is in us.

1) Happiness starts within – When we look for happiness outside ourselves, we tend to need more and more to keep up. If the answer is “out there”, our happiness diminishes as what we have becomes obsolete. We may dream of having a small cottage on the lake and feel great as it is within our reach only to see our friend have a 3 bedroom house on the ocean beachfront and become envious. The key is to find what really makes us happy. It is not with things, rather what we believe these things we want can give us (such as house on the lake will bring peace). If living on the water brings you peace, you can find peace anywhere, whether or not you can afford the lakefront property. We may think that peace and happiness start with the lakefront property, when it really starts within us first.

2) Financial answers are within – We keep on reading financial books to try to find that missing link on why we just can not get ahead. However, many of the financial tips we already know. In particular, many people know that we should not live beyond our means. We would not work 22 hours a day (consistently) because we would be overcommitted and not have enough time to sleep. So, why do we spend more than we have? Spending beyond our means will just over commit ourselves where we will have no time to relax (or sleep) because we are worried about how to pay the bills. Just like over committing our time is a no-no that we quickly learn in life, why have we not learned as quickly that spending does the same? It is because we want to be happy. The answer is not in having more money to spend what we want, rather we need to find the answer to what it will take to be happy (see first step above).

3) Serving is the key to abundance – When we try to find ways to give less and have more, it is disrupting the “give and receive cycle”. When we give, we receive. Thus, if we give less, we receive less. People have not become abundant by sitting on the sidelines. They have become abundant by being of service. It is in being of service that we receive. The better we serve others, the more we tend to be rewarded for it. When we have more to give, we are more valuable to others.

What happens though is that we try to limit what we give (either in school, at work or other situations), only to limit what we receive.

4) Inner peace – When we are struggling to live day-to-day and stressed how to pay the bills, our energy is going to survival instead of abundance. When we are at financial peace, we can create an environment where we are creative and find the right opportunities. However, when we are stuck with a pile of bills a mile high worried about the bill collector coming, opportunities seem to pass us by.

5) Gut reaction – When we see something that is too good to be true, our gut tells us that it probably is. However, we can ignore our gut when we are desperate to find our prosperity in something out there (money) only to end up deeper in trouble by being conned.

When we search for abundance, we usually miss it because we are looking outside ourselves. When we realize our abundance where we are at, we become more efficient with what we have and receive more. What I mean is that we are not looking for the next gadget to make us happy because we already have what we need. We then are able to put money away for a rainy day (or retirement) and receive back more than we invested (due to compound interest). We are more peaceful and rested that we perform better in the work we do and receive more for our service. We are also able to evaluate opportunities in a relaxed manner where we are not rushed or desperate to jump on the next big thing that we make foolish decisions.

There is no big financial solution that is not within your reach because the solution is already within you.

Annuities – Longevity Insurance Is It Worth the Costs?

There has been increased press about a new type of annuity, longevity insurance. It is designed to pay benefits starting at a later age, like age 85. Thus, if you plan for your assets to last for a normal retirement (20 years or so), the longevity benefits can kick in to pay benefits in case you live longer than expected. So, is this a good idea or not?

The idea sounds good because it reduces one of the larger risks in retirement, mortality (expected lifetime). Thus, if you can find a cheap insurance to cover an additional 10 to 20 years in retirement (from 85 to 95 or 105), it, in theory, could help reduce the money you need to save for retirement.

In a BusinessWeek article, it states that a 65 year old can invest $250,000 and expect to receive $210,000 per year at age 85. So, if you can live on $50,000, then this amount would be significantly less (maybe $60,000 to $70,000), right? Before you go out and jump on this opportunity, there are a few things to consider.

1) Inflation – Even with 3.5% inflation, the amount you need at 65 will more than double by the age 85; $50,000 at age 65 will be equivalent to $100,000 in 20 years (and more the longer you live). If you get a longevity annuity indexed for inflation, expect to pay at least double what you would pay without inflation protection.

2) Married – If you are married, the cost of a policy paying benefits as long as either one of you is alive past 85 could almost double (if not double) the price policy again. What good is a policy if it only pays a benefit if you are alive and not your spouse? Thus, a hypothetical $60,000 policy (for $50,000 of benefits) could easily be worth $200,000+ if married and indexed for inflation (note, this is very dependent on your spouse’s age and time when the policy is purchased).

Yet, the benefit of having a policy that covers benefits after age 85 is a lot cheaper than buying a $50,000 annuity that starts immediately at age 65 which can easily cost $1 million (indexed for inflation and payable as long as either spouse is alive).

The key for longevity insurance is that it is suppose to lower the amount you need to save for retirement. If you are factoring in a 30+ year retirement (age 65 to age 95+), you will need to save $1 million or more to receive ($50,000 a year). Yet, to save for a 20 year retirement (age 65 to 85), the amount is reduced.

20-year annuity (6% investment return and 3% inflation) = 15.2 times the amount you need (e.g. $760,000 for $50,000)

30-year annuity (6% investment return and 3% inflation) = 20.1 times the amount you need (e.g. $1,000,000 for $50,000)

You will need to save an additional $240,000 by age 65 for the additional 10 years of retirement and more if you live past 95 where the longevity insurance can guarantee this for life. The key is if it is worth the price and that depends on how much the insurance policy will cost (remember the $60,000 policy may be $200,000 or more once inflation and marital status is reflected).

So, maybe the price of the policy is not as good as we once thought. It is still good if you live past age 95, yet not so good if you die before age 85 and thus receive nothing. Yet, the difference between a

Yet, before you make a decision, there are a few other things to consider:

1) Expense Load – With all insurance, there is a commission paid to the agent who sells the policy and to the insurance company for profit and administrative expenses. Be cautious of expenses called longevity benefit expenses. In one prospectus, there was a 1% charge of the premium each year until the longevity benefits commenced. Thus, if you buy the policy at age 55 and start the benefit at age 85, 30% of the premium could go towards paying this expense, in additiona to the standard mortality and administrative expense (which was an additional 1.35% per the policy that I saw). So, it seems there is an expense for the “benefit” of delaying the start of the annuity which can wipe out part if not all of the benefit of a longevity insurance policy.

2) Death benefit – Some policies come with a rider where you can get your initial investment back, called a cash refund. However, in getting the rider, you are reducing your monthly benefit to pay for this death benefit. I never like these cash refund because the $200,000 you invest now is worth a lot more than the $200,000 your heirs get back when you die in the future. So, is it worth it? If giving money to your heirs is important you should reconsider your financial plan because this cash refund rider is an ineffective way to provide an inheritance because too much of it goes to the insurance company.

3) Expenses later in life – Some people say a lower cost option is to buy an annuity for the fixed living expenses (needs) and use savings for your wants (travel, eating out, etc.). Thus, you would not need to buy insurance for all your expenses, just the necessities (to reduce costs). However, as you age, your fixed expenses grow (e.g., prescription drugs and home health care costs) while other expenses decline (e.g., vacations). Thus, what fixed expenses do you cover, the expenses you have now or the expenses you may have later? You may find that most of your expenses later in life are fixed.

In addition, if you have long-term care insurance, longevity insurance may add some overlap that you end up paying twice. Do you really need an annuity payment if you are in a nursing home that is covered for? It is not like you are going on vacations or eating out, if you can not even feed yourself or go to the bathroom without assistance that the long-term care facility is providing.

I bring this all up to put some questions in people’s mind before rushing out to buy a longevity policy. At first, I thought this was a brilliant idea, which it may still be under certain situations that you should review with an independent financial adviser (one not selling you the policy). However, I started to have second thoughts about the cost of the insurance when I saw a policy illustration showing the benefits of longevity insurance. In the example, a $100,000 policy to a 40 year old showed a $4,960 benefit at age 85 that would accumulate to $892,800 if the policy holder lives to age 100. However, $100,000 invested at 6% from age 40 to age 85, would grow to $1,375,000 at age 85, which can covers 23 years of a $4,960 monthly benefit even if it is not invested after age 85. Where did the extra $½ million go ($1,375,000 – $892,800)? Note, the insurance policy may have other aspects to it that the illustration is not reflecting (e.g., having the ability to invest in more aggressive assets which could increase the monthly annuity significantly, dependent on market performance).

Before considering or not considering a longevity insurance policy, please do your own review (or have an independent financial planner perform one). This analysis is based on information posted on the web provided by a major insurance carrier which can change over time as more competition hopefully reduces some of the expenses that are now being charged. The purpose of this article is to raise questions you may want to consider and should not be construed that all longevity policies are similar to the one I used for parts of this analysis.

Simplifying the Budget

A while back ago, I worked with a couple where the wife was very detailed oriented and the husband was a little bit more carefree when it came to money. In working with them, she wanted to learn how to do a budget because they had always been flying on the seat of their pants when it came to paying the bills, living paycheck to paycheck. He wanted the least intrusive financial tools, so he would not need to sit down for hours at a time to fine tune their financial situation. She on the other hand felt that they needed more discipline and accountability.

We worked together to help them set up a budget which showed them that they had a lot of choices when it came to their money. They both found the experience to be very rewarding. Yet, then came the moment of truth of how they were going to be held responsible for the budget. They had separate checking accounts and the husband did not want to complications of joining them together (more time trying to get on the same page).

I explained there were many ways to track a budget from using a tracking tool like Quicken or Money to tracking to the amount saved each month. The husband jumped on the amount saved each month because it is the easiest (and what I personally use). For this method, you figure out who is paying what bills each month and based on their income, how much they should have saved at the end of each month. They would then get together at the end of each month and report back if they were on track or not and why. Thus, if he was responsible for $1,000 of the budget for the month and earned $1,500 after taxes, then he should have saved $500 for the month. If his checking account had $500 at the beginning and $600 at the end, there is a problem (he only saved $100) which he would need to account for. Yet, if he had $975 at the end ($475 saved), the $25 difference would probably not be that big of a deal especially if he saved $35 more the next month where it all evened out over time.

She could not quite get her hands around this because it sounded so willy-nilly where there was no hard cold number to track at the end of the month. From reading all the financial books, she thought they needed something to report back how much their gas, eating out, groceries, etc. were for the month. I told her that the key to budgeting was to gain awareness of their spending. It could happen in any of several different methods, the key is what is easy and acceptable for both of them.

So, she went out and bought Quicken to track their spending and took charge of it because she knew he would not spend the time to keep it current. She got him to agree to periodic ½ hour to 1 hour meetings to help her set it up. Well after about ½ year doing this, she reported back to me recently that she has taken a more laid back approach to budgeting.

She reported that she started to think about spending on a weekly/monthly basis where gas costs $__ a week and other items may cost $___ a month. When she went back to her credit cards, she found out that she usually was right on track with her budget. What she realized is that a budget is about their choices they have not about the choice they had in the past. When she spent time trying to fine tune the past, they both had less energy for future decisions. More of their conversations would be about what happened (to nail it down) versus what will happen.

She found out that once they decided how to spend their money, many more things went according to plan, especially as they became more aware of their budget and spending when it happened (versus tallying it up at the end). Now, when they go out to eat, they know they had budgeted $__ a week and know which restaurants and what items fit in that amount. And, if they decide to go to a fancier place one week to celebrate (e.g., their anniversary), they could choose to cut back the following week to stay on track.

She found out that most of their spending became more conscious with few surprises because they were focused on what bills/spending they were accountable for the month. Thus, when they went out shopping, they knew what they had budgeted and kept within it. They also had a repair fund to take care of things going wrong with their cars and appliances. Thus, they did not need to change their current spending to account for these surprises.

She saw that it was far more beneficial to keep tack of what the budget was so that they could adjust their spending during the month if something popped up. Their conversations around money became less frequent, thus he is more willing to sit down if an emergency comes up rather than thinking it is a dreaded money discussion where they would pour over all the details. She was grateful that finances became easier for them.

It was funny that this came up when it did because I had just written a chapter in my book on budgeting. In it, I emphasized that they key to a budget is in the present and future, not on the past. When we are more aware of our budget, we know when something comes up that needs to be accounted for (e.g., higher gas prices or increase in insurance rates). They key is the choices that are going to be made to account for these items. Yet, sometimes what happens is that people get caught up with what has happened in the past that they spend less time making their choices today and tomorrow. The husband became more willing to sit down for financial conversations when it was about special issues and not spending time rehashing the past. And, if insurance rates increase, the more time a couple has to review their options, the more likely they are to save by shopping around versus being forced to accept the higher rates because no one has the time to make the calls.

Morale: The more we focus on the choices we have (instead of had), the better off we will be financially.

If you use Quicken or other programs to track what has happened and it works for you, do not give it up because I said to simplify. Just make sure you are more focused on what choices you have today that will affect your tomorrow instead of being more focused on the past on the choices you had.

Some readers may ask, how do we know if our budget is really accurate if we do not track each item? I believe that we are more aware of our spending than we give ourselves credit for. We know that if we spend $300 on clothing a quarter, it is $1,200 a year. We know that if we spend $5 eating out 2 times a week that it is $520 a year. Now, is it important that we know that we spent $540 on eating out and $1,180 on clothing, if we saved the amount ($500 per month) we had planned to? Not in my book. It is more important to know that we have $10 to eat out a week and to choice to do so or not. It is more important going to the store that we come out with $300 or less in clothing (per the budget). And, if it was $400 in clothing, you would be truthful and report it to your spouse at the end of the month and discuss your choices for the next month to get back on track. By thinking of our purchases as we make them and how it relates to the budget is a form of tracking. More than not, we are aware month by month what we spent (with the exception of groceries if you went to an average of 3 stores per week). Even then, you would have a general ballpark estimate and if needed could put the receipts in a box to tally up at the end of the month for that category. Yet, I find even with my groceries that it is close to $100 a week ($50 for the weekly shopping and $100 every two weeks for the warehouse run).

My concern is that people rely on a program than mentally keeping tabs where they stand financially when shopping. Or, that they spend too much time on figuring out a program than using that time to make better decision for the future. We all wish we had more time during the day, thus the less time spent on the past leaves more time for the present and future.

What to Factor into Your Retirement Calculation Assumptions

In looking at online retirement calculators, there are a few things that stuck out to me on how we can mistakenly under estimate our retirement savings without realizing it. Now, retirement estimates (especially at younger ages) is just a rough estimate and will change drastically over time. However, to get a better handle on what it will take to retire, it is important to understand what goes into the calculations. Thus, I have chosen a few of the assumptions that can have a dramatic impact on how much we will need in retirement.

Investment Returns – Pre-retirement

I have always suggested taking a conservative approach in estimating future returns. At first, this was because I would rather save a little bit more than needed rather than fall a little short, especially if I had the flexibility to put the little extra away now. Thus, when some calculators start out with a 10% return before retirement, I would knock this down to 8% without giving it much thought.

In looking at the calculations further, I am now even more convinced that using a lower estimated return in a necessity rather than just out of being cautious. Even calculators that ask you how your portfolio is allocated (stock/bond mix) should be adjusted to use a lower percentage of stock.

Why is this? How you are invested today is not how you are going to be invested when you get to retirement. If you are invested in 80% stock and 20% bonds now, you may expect to receive a 9% return (assuming 10% return from stocks and 5.5% return on bonds). As you get closer to retirement, your risk tolerance is probably going to decrease. Thus, your allocation may get closer to 50% stocks and 50% bonds (probably even less in stock with some being allocated to cash or cash equivalents). Assuming 50/50 stock/bond allocation (for simplicity), the assumed rate of return is 7.75%. The difference between 9% and 7.75% may not sound very large, yet it adds up over time (especially if you are younger).

For a 35 year old who starts to invest today for retirement at 65, the difference in returns can decease the projected retirement balance by 13%, assuming a portfolio in stocks decreases steadily (assuming % allocated to stock in this calculation is 120 – age) instead of having a constant portfolio.

Investment Returns – Post-retirement

This is similar to the pre-retirement allocation. I am always a little surprised at how some calculators default to an 8 percent for its post-retirement investment rate of return. Because a bigger portion of retiree’s portfolio is allocated to cash or cash equivalents (e.g., high yield saving accounts and CDs), it is difficult to get to an 8% return, unless a large portion of the remaining portfolio is allocated to stocks. Even assuming a 30% stock, 50% bond and 20% cash portfolio (with cash assumed to earn 4%), the assumed rate of return for the portfolio is 6.5%.

Having 20% allocated to cash may sound too high, yet, if there retiree is older (age 75), it may only represent the next few years of expenses. And, even if you have less allocated to cash (30% stock, 60% bond and 10% cash portfolio), the assumed rate of return is still only 7.0%.

Salary Scale

Your future salary has a large effect on how much you can save and how much you can spend in the future (income – taxes – savings = expenses). The projected salary increases is technically based on assumed inflation rate + assumed promotion increases + assumed productivity and merit raises. However, when we sit down with these calculators, we may only think about our recent raises. For some, they may feel lucky to get inflation + 0.5%. So if inflation is 3.0%, the project salary increases would be 3.5%, in this situation. For others, they may be grateful for 3% raises.

Thus, when some people do their salary estimate, they may assume a salary increase close to inflation (3% or 3.5%). However, have you really maxed out your salary? For some, they may answer this with a definitive yes (especially if the thoughts of a future promotion are bleak). For others (especially younger employees), this may not be the case. What we forget in some cases that recent salary increases may not be as great because due to other larger raises (maybe 10 percent or more) coming with either promotions or job changes where with subsequent salary increases being smaller to compensate (get the employee’s salary back to average). Thus, if an employee receives a major raise of 10% once every 10 years (then relatively small raises after that), this is equivalent to a 1% increase every year. Thus, the meager 3.5% salary increase assumption is really closer to 4.5%.

Why does this matter? If you are basing your retirement expenses based on your spending today (assuming future salary increases = inflation or close to it), you can be underestimating your retirement expenses. If you receive a $5,000 raise for a major promotion or job switch, we may decide to save 20% of this ($1,000 a year), be taxed on 35% ($1,750 a year) and spend the rest, $2,250. If you assume your salary will stay constant to retirement, you will not recognize that your lifestyle has increased by $2,250 and thus not save for it.

Thus, even if you have not received a decent raise recently, a salary scale at least 1% to 2% over inflation should be considered.

Changing Lifestyle

In assuming retirement expenses, it is easy to overlook what will happen as we get older. In our 40s and 50s, when we have children living at home, it may be a time where we diligently cut expenses. My parents watched the number of times that we ate out because they could not afford the cost of taking out a family of 6, every week. However, as we (the children) grew up and left home, my parents had some of their income freed up and my mom went back to work. Thus, they started to eat out more because my mom hates to cook just for two and they could now afford dinner out on a more frequent basis. Others may take more vacations especially if they already have a healthy retirement fund or start bring in help to do chores (professional cleaners and lawn services) because they have a hard time keeping up with everything.

So, if you are estimating that you can live on 50% of your income due to your savings habits now especially with children, be cautious of spending creep as the drive to cut expenses diminishes as your budget situation is not quite as tight. This is important because how we spend in the 10 years before retirement is more important than how we spend now. If we get use to an upscale lifestyle after children leave the house, it is harder to cut back in retirement.

Mortality

By now, many already know that the average life expectancy is around 85 (slightly less for males). Thus, some calculators use 85 as the average age of death. However, as many also know, there is an increasing chance that retirees can live to 95 or 100. The odds are even better if married that retirement assets may need to last until at least age 95. For a married couple (both age 65), there is a 10% – 25% chance (depending on which mortality tables are used) that at least one of them will live to age 95. Thus, assuming that retirement savings only need to only last to 85 is a large gamble in my opinion because there may not be much savings left after 85 to live on other than Social Security.

Even though I did mention some assumptions where we can be underestimating our retirement income, there are a few other things that we may not be factoring in that can increase our retirement savings. In particular, older workers whose children leave home can shift a greater percentage of their income (that was used to raise children) shifted into retirement savings. Thus, if you are behind, you can look into taking advantage of additional catch-up contributions. This also helps reduce the expense creep (upgraded lifestyle) that some parents can get use to when the children leave the house.

In addition, some retirement calculators do not recognize part-time jobs that retirees may have that provide a little additional income in retirement that makes their retirement savings last longer. There is always a way to catch-up. It is just important to recognize what is reflected in the retirement calculation assumptions and what is not so you can adjust your retirement plans accordingly.

First Rule of Retirement – Be Comfortable with Uncertainty

Ode to the day that we can all sit back and have a drink in one hand overlooking the ocean on our first day of retirement. Just as we start thinking that we could get comfortable with this lifestyle, we think “what happens if I outlive our retirement money?” Luckily for us, we had the foresight to plan ahead. With all the retirement calculators out there, we think that this is an easy process. But, then a fear embraces us, as we think did we use the right one?

I was going to do an article on the different results that I got from all the retirement calculators and advice out there. However, as I was looking up the results on each site, things got confusing. Each one told me a different amount to save (some answers close to each other and others not). Then Kiplinger just came out with their analysis of 5 different online retirement calculators (it was sitting in my inbox until today). So why beat a dead horse?

Over the years, I have heard a lot of different advice on what to save for retirement that it became confusing even for me (an actuary who deals with retirement plans all the time). We have heard different strategies on how much to save, including:

• The standard answer, save 10% (very popular until about 2-3 years ago)

• The updated answer to the standard 10% advice, per Liz Weston at MSN, the article says if you save starting in your early 30’s, you need 10% for basics, 15% for comfort and 20% for a shot at early retirement

• The pessimistic answer, save as much as you can

• World is going to be over answer, live for today because tomorrow may never come

• More precise actuarial answer, per AON/Georgia State study in 2004, says that if an employee starts saving at age 35, we need to save 6.4% if we are earning $50,000, 9.9% if we earn $90,000 and 11.4% if we earn $90,000 and are female

So why is it that we can not get a clear answer? As the saying goes, there is no certainty in life except death and taxes. With retirement there are many things that are uncertain:

• Retirement age
• Life expectancy
• Social security benefits
• Return on investments
• Inflation (both general and medical inflation)
• Expenses (do we need 70%, 80% or 90% of their pre-retirement income)
• Marital status

With many different factors it is easy to see why everyone wants a standard answer like 10% or 15%.

I never like these simple rule of thumb approaches because it may work in some cases, but not for everyone (actually probably not for many). For example, United State’s Social Security benefits are projected to replace 30% or so of an average retiree’s final salary. However, if a retired couple is married where the one spouse worked and the other did not, the 30% replacement ratio may be close to 45%.

Thus, if someone was targeting to replace 70% of their pre-retirement income, they may need to save 40% if single (or dual wage earner family). Or, if one spouse stayed at home, they may need to save significantly less than the other couple due to only needing to replace 25% of their income (instead of 40%). Now, which scenario is the 10% to 15% of savings based on?

In addition, all rule of thumb examples need to make an assumption on income. A retiree’s income has another significant effect on their Social Security benefit. Someone who is earning a 6 figure income may only see 10% to 20% (or less) of his pre-retirement income replaced by his Social Security benefit. Thus, instead of the retiree’s 401(k) needing to replace 40% or so of his income based on rule of thumb estimate (which assumes a significant Social Security benefit), a higher paid retiree may need to replace 50% to 70% of his income (an additional 10% to 30% of his pre-retirement income).

Then, what if Social Security goes bankrupt? This is enough to make your head spin.

Note, Social Security will not go bankrupt in the sense it will stop paying all benefits. Social Security will still collect FICA taxes to pay most benefits. However, the amount of total benefits paid may only be 75% of what was originally projected to be paid (if nothing is done before then). The question is will some retirees see their benefits drop by more than 25% in order to help those who need Social Security the most (e.g., a poverty or income test).

The key goal for retirement planning is to become comfortable with the uncertainty. The easiest way to do this is a two prong approach:

• Know that you can handle what ever comes your way even if it means working in retirement or delaying retirement, the key is flexibility (such as not locking yourself into too many fixed expenses before retirement)

• Understand what the uncertainty is; in other words, run different calculation using different assumption

The best way to understand the possibilities is to run different assumptions using different online retirement calculators. I suggest using more than one calculator because they will each give you a different answer. Note, even when Kiplinger ran their sample person (a 37 year old) through 5 different calculators, the first year retirement income differed anywhere from receiving $75,000 to $250,000.

You may wonder, why even do retirement planning if there is going to be such a big range of results? Do not fear, the difference is due to all the different assumptions (investment return, inflation, etc.). For someone saving $1,000 a year for 30 years, the difference in the accumulated savings in 30 years is $113,000 at 8% assumption versus 164,000 at 10% assumption (45% increase). As you get closer to retirement, some of the uncertainty becomes more certain, as you have fewer years to project. However, there will always be some level of uncertainty because it is life (unpredictable).

By running some scenarios, you will see a reasonable range to target where you are aware how different things can affect your plans (like investment returns being less than expected). This way you know how your plans need to be adjusted based on how actual events unfold.

I know many would prefer just to be advised to contribute a specific % to their 401(k) and forget about it. However, I believe that simplifying retirement planning by using 10% or 15% is actually making matters worse for us in the long term. Recently, my local newspaper had an article on how debt is currently drowning retirees. It got me to thinking if these retirees are getting into trouble by using a rule of thumb estimates instead of really understanding the risks that they will encounter in retirement.

For example, a 50 year old couple may be able to afford a new home with a 30-year mortgage when they buy the home (and get approved by a bank). Yet, will they be able to afford the payments if they need to cut their expenses by 10% when they retiree because they were forced to retire early? Did they really understand how a small deviation in their plans could result in a significant financial issue?

So there is nothing certain in retirement. Best thing to do is to educate yourself on the risks and be better prepared to handle anything that comes your way. To help with this, I will have a series of articles on how some of these calculators make their estimates and compare the results to other estimates (one of which may be closer to your situation).

P.S. – Here is a quick summary of some of the results I got from internet retirement calculators. For it, I used a 35 year old with no retirement savings who wonders how much he needs to save (note, I do not endorse anyone of these calculators and do not guarantee the results):

Vanguard – 15%

Yahoo – 12.9% (It assumes 8% post-retirement investment return which seems high yet the default assumptions do not reflect any Social Security benefits and assumes the retiree lives 20 years)

CNN Money – if he saves 15%, he has 100% chance of reaching goal (yet the calculator default assumes retiree only lives to 85) if he saves 6%, he has 84% chance of reaching goal

MSN Money – if he saves 10%, money runs out at 102 (if no Social Security, money runs out at 81), if he saves 6%, money runs out at 83

AOL – if he saves 15%, money will run out just before age 87 (assuming their baseline expenses in retirement)

CCH Toolkit— If he saves 15%, money will run out at 88 without Social Security benefits and age 92 if he saves 10% with Social Security benefits (yet calculator estimates a 10% pre-retirement investment return and 8% post-retirement which seems a high yet a 90% pre-retirement income replacement ratio)

What is Your Definition of Quality of Life?

Not to stir a controversy here or anything. Yet, I like to hear from you on what is your definition of a need and a want is.

Typically, I like to think of a need as what we need to sustain life: basic food, clothing, shelter, etc. I do this to show people that we have a lot more choices in life and budgeting than we realize. I look at the issue as what does a person need to eat to sustain life? Basically, it is beans, rice and some fruits and vegetables. What is it for housing? For many, this may mean an apartment or house. For others, it may be a tent or a car. As a society, we debate the minimal standard of living that we should help others with to maintain a minimal standard for quality of life. So we set the bar between what is a need and what is a want that may be a little higher than basic need to sustain life based on our definition of quality of life.

Quality of life is interesting to define because every one has a different definition. Thus, I write this for people to think about their quality of life. For some, the first words that come up may be based on having a space to live in a safe neighborhood. For others, it may be having enough to eat so people do not go hungry at night. Others may say it is to be happy and to be able to enjoy life.

So I thought that it may be easier to define if it from a life and death perspective (medical care). However, as I thought about it, hoping to find a clear answer to blog about, the gray area became even grayer. Recently, my grandfather in-law passed away after a stroke. He had been having health problems for the last few years, so it was probably his time to go. However, after the stroke, he was maintained by life support systems and his daughters had to decide whether to continue life support. Years ago, there would not be a decision if life support was a need or a want because there would not be any an option. Now, with all our technological improvements, the level of health care that is a need versus a want has become grayer.

There is the argument that if we have the technology to help the patient and if the patient may be able to have some quality to life after the procedure, that we should employ it, no matter the cost. There is a debate on what is quality of life that I do not want to get into here. So let’s assume, their quality of life is considered “normal” life with no health problems for the reason that brought the patient to the hospitals (yet there could be pre-existing conditions). This argument is probably an easier one to make to use the life-saving medical procedure for a 5 year old patient than it is for a 95 year old patient that probably only had a few months or years to live at most due to his pre-existing conditions. It also probably makes a difference if the procedure is a simple on or a complicated one that will take many medical professionals to take care of the patient and thus raising its costs.

Hold it. I know that some readers are questioning what does cost have to do with saving a life? Money should not be an object when we are talking about a human being with a soul. Yet, if we assume that every one in health care (pharmacies, hospitals and companies making health care equipment) are not in it for the money (no profit motives), then the cost of health care is equivalent how many hours a doctor and nurse have to work and how much the medical supplies and use of the equipment costs. Now, it may seem reasonable to save a life no matter what the cost, especially if we have the time and money to do it. However, there comes a point where “no matter what the cost” means that the medical staff can not go home because they need to take care of the overload of patients on life support measures for months and years at a time. The question is should we factor in how this affects the quality of life for the medical professionals who are working 80 hours weeks, years at a time, and can not see their family? Is it worth them giving up their quality of life (time with children and family) to support someone who may or may not live and with no certainty, if they live, for how long (maybe 1 day, 2 years or 5 years)? And, what if that patient would probably be in a coma the entire time?

Doesn’t this bring up an interesting medical debate?

If you think that the current medical staff can not get stretched so thin that they are working all the time, consider the debate over residents working a standard 80 hour work week a few years ago. Part of the reason they worked so long was done to help them learn everything that they needed to know in their few years as a resident which is hard to do if they just work 9 to 5 without seeing a critical patient from start to finish. Yet, the long hours from residents also helped a hospital to be able to keep its doors open to patients that the staff could not do without an extra set of hands. Think about how the waiting lists of patients waiting for surgeries in other countries who decide to come to the U.S. or other countries like India because they do not want to remain on a waiting list for several months before it is their turn. Also, many of our hospitals are running at 95% to 100% capacity already with the growing needs of baby boomers waiting to hit our medical facilities in just a few years.

I do not mean this to be a question on whether we should have universal health care in the U.S. or if the price of health care is too high. We can save that for later. Rather, I ask to raise a question for readers on what is quality of life and where the minimal line should be drawn. In particular, if you could to make a decision today to work 2 additional years (60+ hours a week) to afford to live an additional 2 years beyond where your life would currently end via the assistance of advanced medical care, would you do it?

It may be an easier question to ask if you made it at the end of your life, if you had to decide to have a surgery to extend your life because it is a life or death decision. It is easier if you did not have to pay for it and harder if you when you need to pay for it and work harder and longer to do it ahead of time.

No matter what health system we have (government pay, company pay or patient pay), it ends up costing us as a tax payer, consumer or directly as a patient, one way or another. Thus, in a sense we are paying for it now.

For myself, I would want to live a balanced life today rather than work extra on a consistent basis, giving up time with my family, to afford to pay the few extra years at the end of my life. However, I do enjoy the benefits that our health care systems provide. Thus, my wife and I work to afford basic health insurance to have the opportunity to have a normal life after a car crash. However, there is a line we have talked about on where to cut off life support based on the prognosis of quality of life.

This is going to become an important issue for our politicians and voters to decide on as our baby boomers reach their 70’s and 80’s. Before, we automatically paid for health care because we had many people working to support Medicare for a few elderly. Thus, costs did not really factor into the decision, too much. In the future, we will have to pay for their health care with a few workers supporting each elderly patient on Medicare. It may seem easy to say pay for health care no matter what the cost. Yet, even if we did use money to pay for health care, there may be a point where the health care needed strains the resources we have available.

Thus, for me, the current political discussion on health care should not only be if we keep the system we have or go to a universal health care system but also should be how to clarify our expectations on what is quality of life. It is one thing to discuss how to extend our quality of life if cost was not a factor. However, it is another decision when we are the ones paying for it whether it as taxpayers or directly as the patient or whether we consider the doctors and nurses who may be the ones expected to do more for less (which has already been going on with Medicare cost cutting measures).

This also raises other questions as consumers on how we make purchases to help our quality of life especially if it means working longer in a job we do not enjoy. Where do we draw the line on working harder (especially if it is in a job we do not like) or making by with less?

Again, I do not mean to raise an argument on whether insurance companies, drug companies or hospitals are greedy or not. I meant it for a philosophical debate on if your quality of life is measured more on quantity (length of life) or quality (doing more of what we want in the time we have, even if it means a shorter life).

I know most people would like to have quality of life mean sitting on a beach sipping a margarita (instead of working), yet who would be at the hospital taking care of the sun burns and skin cancer?

First Steps to Financial Independence

Last 4th of July, I wrote an article on comparison of financial independence with the American Revolutionary War. In particular, I looked at how important it is to:

• Know what you are fighting for

• Declare your independence

• Do not let initial defeats stop you

• Understand your enemy may come back, so be ready

• Realize your enemy can become your biggest ally

As a follow-up to the article, I thought I would look at some of the other similarities in the initial course of action that should be taken.

• Look beyond the initial reason to fight and consider what you really want

Last year, I discussed how the initial rebellion was for what we did not want (no taxation without representation). However, to be truly successful, we needed to look for what we really wanted (independence and freedom). People may get frustrated and angry for a short time with what they do not want (taxes). However, lasting change only happens when we move towards what we want (freedom).

Financially, we may rise up in arms against debt, higher health care insurance costs, taxes and stress of paying bills. These things tend to be something to get people riled up for a time. Yet, in time, people wander off in different directions aimlessly because there was no ultimate goal to move towards.

The first step in financial independence is to really understand what we want. Do we want financial peace, happiness, or something else? There is little we can do about taxes or higher health care costs other than vote and wait several years hoping our politicians can agree on a compromised bill that is acceptable. Yet, when we have a direction of what we really want, we can take individual steps towards that goal as we wait for other changes to follow.

We want better consumer debt protection laws because we get upset and angry when we are charged 18% or more for interest. However, our real goal is not lowering the interest rates rather what we believe that the high interest rates are doing to us, for example robbing us of our happiness due to working longer to pay the bills. We may become happier when we know we have better consumer debt protection laws, yet why wait that long for Congress to do something only to get discouraged until it gets here? Take steps now to monitor and manage your debt. Take steps to be happy despite what credit card companies are doing out there. If we don’t, we may end up waiting to be happy, hoping something out there will change to get us to where we want to be.

• Create a plan of action

Usually creating a financial plan seems daunting. What should we tackle first? Thus, we avoid make a daunting plan and take one step at a time. Doing one-step at a time is a good approach. However, a great pool player or baseball pitcher and catcher have a plan of action on how their current step will lead them to their next step. If George Washington only worried about the current day, he would have never thought a few steps ahead and planned a course of action to keep a rag-tag army from deserting which they almost did if it was not for the Battle of Trenton and Princeton which changed the momentum of the war.

Thus, come up with a plan of action. You do not need to do all the steps at once (better to focus on one step at a time). Yet, prioritize your plan in an order that makes sense and then tackle it one step/day at a time while seeing there is a path to reach your goals. You may find that your plan changes as new options and alternatives arise because a great plan is laid out first so that we can see the end in sight (believe that it can happen) and is flexible enough to handle changing circumstances.

For example, to get out of debt, you may start out with the following steps:

1) Set your intention with your spouse on getting out of debt

2) Call credit card companies to lower rates

3) Create a budget to figure out how much money can be paid towards debt

4) Follow up on budget – to see any problem areas that need to be corrected before the problems become overwhelming

By mapping out a plan ahead of time, we may be able to see issues come up ahead of time. Some people have tried to do a budget and reduce their debt without the buy-in of their spouse. When they do a budget, they feel great about it. However, when they get to the step of monitoring the budget, they realize it is not only their spending that they need to track yet also their spouse (sorry if I simplified this example to much). By setting up an action plan ahead of time, we are able to see the bigger picture and how the steps are dependent on the other. Thus, in this example, the person doing the budget may see the need to have a budget that the spouse buys into when it comes to the monitoring step. Thus, they see it easier to get the spouse’s buy-in before doing a budget, thus save aggravation by getting their spouse on board the debt reduction plan before the budget is created.

Or in another case, someone may call the credit cards companies first to lower their rates and get denied because they were late with their payments in the last 6 to 12 months. They may give up thinking that it is hopeless because they can not get past this step. Alternatively, if they have their plan in mind and think through the plan, they may discover that having a budget in place before calling the credit card companies back may give them more support on what they are able to pay to convince the credit card companies that things have changed and they are more financially responsible now than in the past. As I written about before, I believe that we are more determined and convincing when we call credit card companies to lower rates if we have a budget plan in place ahead of time (see Getting Out of Debt – New Approach to Calling Credit Card Companies. The order of the steps in your plan does not matter as much as seeing the bigger picture and thinking a few steps ahead of how to adjust your plan to handle issues as they arise. The worst thing is to get stuck and not seeing the bigger picture to determine a way out.

• Rally support

When we go into battle alone, we can find no one is watching our backs. When battle financial debt or other financial problems, it is always better to have a friend to talk to that will support you when you need a little extra push to get back on track. Plus, they may be able to give you suggestions on what to do next. Friends are our biggest ally. America would not have won the war if it was not for the support from France (first logistically and training, long before they jumped into the actual battles at the end).

Thus, find a friend who you feel can be a good coach and that you can trust. Sit down with them to lay down your expectations. There is a difference between being a friend to talk to for support and being a coach that gets in your face when needed. Thus, make sure your friend knows what you are expecting from them.

If you can find someone going through the same issues, it may be a good mutual support system. You will be able to share your ideas and examples with each other to make each other’s plan even better as you go through it together. Yet, still have someone else ready in case you are both stuck at the same point without any ideas of how to move forward.

For more examples on how to achieve financial independence, see How To Regain Power in Your Financial Life

And, have a joyous 4th of July where ever you are.

Reasons Not to Set Your Goal to Become a Millionaire

I have been reading some forums on why people want to be a millionaire.
There are four main camps that many of the answers fall into:

• Get whatever I want

• Never have to worry about paying a bill

• Symbol of status or success

• Ability to help others

In these discussions, it seems like the line in becoming a millionaire is a defining moment where dreams can come true. Unfortunately, for many people, they are a long way off from reaching this milestone. And, by the time that some reach it, the millionaire milestone will have lost its meaning and buying power. $1 million in 40 years will be equivalent to about $250,000 today, assuming 3.5% inflation, still a lot of money yet not enough to retire early.

Financial Perspective

One of the things that I have been noticing is that when people have reached certain milestones in life (like becoming a millionaire) the bar of what they and others want to achieve is raised as well. Every day there is something new and different that we can spend our money on. Five years ago, people would have thought it would be crazy to spend $500+ on a phone that could be used to play music and connect to the internet. People just a few years ago would have been satisfied with a cell phone that did not drop their calls. Ten years ago, people would have thought is mad to buy a 3,000+ square foot home especially if they only had one child. Twenty years ago, people would have thought it as crazy to spend $150 on a dinner for two for anything but a golden anniversary celebration. Yet, now these events are common place. Thus, as we become more prosperous as a society, the bar of what we want continues to rise.

A part of our wants is driven by wanting to improve our self-worth. We see what others have and are driven by envy to stay on even footing with others. Even becoming a millionaire is a status symbol. Yet, it does stop at being equal to others. We also look for things because of how it makes us feel. Just 15 years ago, it would have been crazy to think that someone needed a SUV/minivan to haul a family. Growing up in a family with 4 children, the biggest vehicle we had growing up was a station wagon. Now, once a family has one child, it is off to the car dealership for a minivan or SUV with the added costs associate with going to the pump. We say that it is a need and convenience to have a larger vehicle due to having a family. Yet, what part of it is due to the power we feel sitting up high off the ground? What part is it the status symbol like having a BMW or Lexus name plate on the car? So it is not just about keeping up with the Joneses but also about how we try to feel better by what we have.

I know that many people have controlled the need to keep up with the Joneses. They may have learned that they can become a millionaire by limiting their wants now. We sacrifice today for a better tomorrow. However, this just creates a vacuum of wants just waiting to be filled. This is because stopping buying things by cutting up credit cards or following a strict budget, does nothing with the underlying drive we have to acquire the things we wanted in the first place, only delays the drive. Until we figure out what drives us to consume what we do, we will never satisfy our wants. This is why many people seem to get ahead (put some money into savings) and then splurge. Look at what happens to people who win a large lottery or receive an inheritance. Many lottery winners end up bankrupt in 5 years (seen statistics indicating this is anywhere from 30% to 80% of all lottery winners).

Thus, thinking that we will have no worries or have all our wants fulfilled by becoming a millionaire is backwards and leaves many people left wondering where all their money went. Instead, we need to determine what our worries and real wants are first, to free ourselves to become millionaires down the road. If we want to feel more powerful, that can only come from within ourselves. The power we feel from being behind a car will not last. It only leaves us wanting more. For example, next time we would be looking for a bigger truck or SUV (like a Hummer).

Successful Philanthropist

One comment which kept on coming up was that we can help more people by being a millionaire. As a society, we have deemed our success based on a quantifiable measure. Did we tithe 10%? When did we become a millionaire, multi-millionaire or billionaire? It is like the motto of snowboards goes, “go big or go home”. We have a tendency to think that the biggest impact comes from having the most money (reason why we incorrectly equate money to power). We are only successful if we are a millionaire and only then can we really change things and help others.

Yet, we lose track of the impact we have in society, in the present (in the here and now). One of my beliefs is that giving comes in many forms, other than money. For example, giving is in how we use money. We do not understand how a small innocent action can impact the society as a whole. A success stories that I enjoy reading is about how Thomas Edison dropped out of school after the age of 8 because a teacher said he was un-teachable. Where would we have been if our country’s greatest inventor was kept in school languishing instead of home schooled by his mother? We consider Edison as our greatest inventor. What about recognizing his mother as one of our greatest teachers?

Yet, we do not think in terms of what our actions today do to inspire tomorrow’s generation. Rather, we want to play big or stay at home. We think that only when we see our name in lights does it qualify as a “wow” moment. A friend of mine who had financial issues came to see me as a client. When we talked about a course he taught, he did not seem like he really understood the impact that he had. He had a way of minimizing the impact he had and never sat back to observe what he has done. We may not see it in the moment, yet he had more of an impact in the lives of 1,000s of people than he could probably ever realize. A few years ago, I ran a self-improvement course for teens. Every once and a while, I run into a parent of one of the children that came through the course. I could not imagine how a weekend course could affect someone, especially as we were struggling to keep the course going. Yet, the biggest change sometimes comes in the smallest actions or words that are magnified over the years. And, by recognizing this, we can then capitalize our small actions into great things.

Thus, if we are waiting to be successful by leaving our impact on the world or hitting a milestone, we have missed the boat. Our impact is felt in what we do today where the biggest impact is propelling others to reach their goals and dreams. Being a millionaire is not a measure of success rather it is in how we became a millionaire that is more important. Did we have to trample over others to reach our goals? Or, did we help others reach their goals along the way?

Thus, we do not want to become a millionaire. Rather, the goal is in living today because it is how we live today that decides who we are and can become (whether it is a millionaire or not).

The goal is to notice the little things in life rather than the grand milestones.