Know Your Plan Before You Die…

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Most employees do not know what their Social Security benefits will be.  They don’t know what their 401(k) will provide for them at retirement, nor when they will be out of debt.  Few employers provide disability insurance if you get hurt or sick, so what will happen if you become sick or hurt?  And health insurance is a “can of worms.”  If you are self-employed, and/or running a small company, many more questions exist than there are answers.  What will you do when you die or your spouse does?

Everyone should know what benefits they are going to enjoy, and communicate with a spouse about them at least annually.  Things change so fast that if you think you have benefits and don’t, you can go broke in a single week!  It is not hard to gather all your financial information together and review it.  When you have a question, make the effort to call and get answers. 

To see how this works in the real world, I want to share one of my client’s stories:

The husband passed away suddenly at age 64 and his wife had never worked outside the home.  He had $20,000 of group term life insurance and they had $52,000 savings in a 401(k) account.  Their home was worth $230,000, but they still had $189,000 mortgage.  The wife is in good health and expected to live beyond the average life expectancy for women of 87.  The husband’s funeral cost $15,000.  The wife has the option of accessing Social Security benefits of $1,245 a month, or to wait another three years and get $1,570 a month.

What would you do in this situation?  Their monthly living expenses before the husband passed away had been $4,000 per month. Now there’s no money to live like that. Will the wife have to sell the house since the Social Security income she could take now will basically pay the monthly mortgage and that’s it?  If she does sell, where will she live and what will she live on?

This couple had not talked about early death or how one or the other would live once one of them passed away — there was never this kind of detail discussed, ever. They just went along thinking nothing would change.  But it did change and the woman in this situation is in a really bad place financially.  And it will change for you too.  It is only a matter of time before big changes come to your world.  Get prepared.  Review all your benefits and make decisions today as if one of you has passed away.  Play this game over and over until you feel comfortable that you have your financial situation right.

In my experience, most people die with nothing more than a simple will. Their assets have to be probated in court until they are cleared for distribution.  This can take two years.  The expense of having a judge decide how to divide up assets can drain another $30,000 off your assets.  And in many cases, the surviving spouse still needs an income to live on.  What if health problems arise?  

The best way to start preparing for coming changes is to stop spending any more money until you have a Spending Plan in place and have learned how to track that plan so you can see where you are wasting money. Once you do so you will find a surplus that you can begin saving. Fund your future with this real money, that comes from getting your spending and debt under control. Then make sure you create a living trust. Transfer your assets into the trust and make sure nothing goes to the court to decide. Go to www.easylegalplanning.com and see how simple it is to get organized and match assets with a real plan document.  Don’t delay and become part of the majority that leaves your family out in the cold, unable to help themselves.  The memory of you that will be left will not be good.  To learn more go to www.moneymastery.com or contact me: peter@moneymastery.com.

When Did the Concept of “Retirement” Come to Be?

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As you can well imagine, the idea of “retirement” did not exist in Roman times, nor medieval times, and certainly not when Pilgrims discovered America.  What about during the days of Lewis & Clark?  Or when the wild West was being settled?  History teaches us that a Roman peasant had to fight for food every day of their life.  A peasant could not even fathom taking life easy, sitting back to watch the evening news, or going out to eat and taking in a movie. How could an English Lord even conceive of “retiring?” He had to manage a kingdom and train new knights to protect him and his vassal serfs.

Some examples of newly created words, along with the idea of “retirement” in the last 100 years include:

  • Internet
  • World wide web
  • iPhone
  • Light bulb
  • Polyester
  • DVD
  • Contact lens

We have seen so many advances in technology and medical care in the last century that we have a lot more time on our hands than anyone born before the turn of the last century. That extension of life plus all that time we have available has been the reason the idea of retirement even exists.  “Retirement” is a new concept, only around since just before World War II broke out. Up until 1920, most people died before they reached the age of 60, so retirement wasn’t even an option.  When people started to live past age 65, some elderly folks started to save money for when they could no longer work, and thus the concept of retirement was born.

Four problems came along with this new concept. The first problem is outliving your income. Today 92 percent of everyone who is retired is totally dependent upon their Social Security benefit.

A second huge problem is inflation.  Just use your Web browser to see what one gallon of milk cost 20 years ago and you will be shocked.  You will most likely need to double the money you think is needed at retirement, because of inflation.

A third problem is continual taxation.  As you take money from you retirement savings plan to live, this income is taxed and can cause Social Security benefits to be subject to income tax as well.

A fourth gigantic problem is the cost of medical, long-term care and nursing home expenses.  The national average shows costs for a retired couple for medical/nursing care is $250,000 before they die.  This kind of cost is eating up all possible savings most people manage to squirrel away for retirement.  When all resources have been exhausted, the surviving spouse becomes destitute and is classified as being on welfare.

Considering these four problems, now is the time to decide what “retirement” means to you and whether you will be able to make that vision a reality. You have heard about the importance of planning for retirement your entire life, while those who lived before 1920 did not even have an inclination of what that meant. Before it’s too late, define what you want to happen when you reach age 65 because unlike your grandpa and great grandpa you will likely live longer than 60 years, so you will need to be prepared for that long life and how you want to live it.  It’s never too late to get going on this.  Go to moneymastery.com and sign up for the Basic online training package and see for yourself how much money you need to be saving for retirement, or calculate how long your money will last. For more help, contact me directly: peter@moneymastery.com.

Take Caution: Read Disclosure Notices on Investment Projections Before You Sit Back on Your Retirement Laurels

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Following is a typical disclosure notice you might see at the end of an investment report. Take the time to read this disclosure,  you might be surprised what you find:

If a numerical analysis is shown, the results are neither guarantees nor projections, and actual results may differ significantly.  Any assumptions as to the interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only.  Rates of return shown are not indicative of any particular investment, and will vary over time.  Any reference to past performance is not indicative of future results and should not be taken as a guaranteed projection of actual returns from any recommended investment.

If you reviewed a report that said your retirement is going to be adequate but then get to the small print at the bottom of the report and it says, “Any assumptions as to the interest rates, rates of return, inflation, or other values are hypothetical and for illustrative purposes only,” how should you feel? How much credence can you place in the numbers from such a report when planning your future?  For example, if an assumed interest rate went from 5% to 3% in real time as you are saving for retirement, you might run out of money with 12 years left to live!

Or let’s say you use the past 40-year average market gains to forecast your future income and then read, “Any reference to past performance is not indicative of the future results.” You probably aren’t going to feel super confident about what your direction is going to be.

Of course we need to plan and project, using the best tools available, but how can you do any of those projections given all the unknowns?

In my experience, the best way to use forecasting projections is to keep track of each year’s projections and review from year to year.  As the years go by you can watch out for adjustments that will surely force some changes.  This way when something isn’t quite working out like you forecasted, you adjust. It’s the simple principle of tracking and you should be applying it when it comes to retirement funds, but what I have found is very few people do, only about 3 percent of us actually track and adjust each year.

Think of you being the navigator on an airplane.  As you fly from San Francisco to Dallas, you are seldom going straight to your destination because of wind and weather.  A navigator must keep adjusting and changing the course according to what affects the plane.  This is the same for each of us financially.  The forecasting is so important, but the adjusting to changes is critical.  So for the 97% of those who don’t forecast, they will not end up in Dallas, financially speaking, but probably Minneapolis.  I hope they like the colder north country. For information on how to create a more predictable retirement that you cannot outlive, contact me for a no cost consultation: peter@moneymastery.com.

The Four C’s of Retirement Planning…

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Recently I was sitting in a retirement income training class and the four C’s of retirement planning were presented that just made good sense.  I have changed the details a little so that they fit the Money Mastery Principles and philosophy, but here you go:

First C:  Clarity of thought and action is the first strategy to begin building a predictable retirement income.  I ask these questions of the clients I coach and would like you to answer them as well:

  1. How much income will you need in retirement?
  2. How many years might you live in retirement?
  3. What resources do you have to fund your retirement?
  4. What is your risk tolerance?
  5. Do you plan to leave any assets to your beneficiary?

Second C: Comfort during retirement is a big concern.  Imagine for one minute that you are retired and that Monday arrives and you act like it is Saturday.  Tuesday is tomorrow and you act like it is Saturday, and so forth.  When you are retired everyday is like Saturday and we spend like we do on Saturday.  That is why we tend to spend more money in retirement than when we are working.  It is important to consider what kind of comfort you want in retirement so you are more cautious now during working years and not spend everything we make. 

Third C:  Cost of living is another big strategy to plan for and manage.  Health care costs will be the largest expense in retirement that you must prepare for. These expenses will be well beyond what you spend for food, transportation or living expenses.  In addition, inflation can slowly sneak into your pocket book and erode 20 to 30% of you purchasing power.  Be aware and make sure you are doing something to manage this creepy crawler.

Fourth C:  Certainty of income at a time we can not afford to run out of money.  Though you worked for 40 years, it is entirely possible that you will live 20 and 30 years more in retirement.  Market risks can be a huge drain if you are trying to make money last longer by investing more money, which adds more risks and chance of loss.

These 4 C’s are strategies that must be addressed for you to be at peace when arriving at retirement.  I have lots of great experience and advice with how to deal with these 4 C’s and am happy to share them with you: peter@moneymastery.com. 

What Is a True Financial Coach and How Do They Differ from and Adviser?

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Many people confuse financial coaches with a financial adviser. These are two very different animals that need distinguishing.

Financial Coach:  A true financial coach focuses on your knowledge, your habits, and your ability to make wise decisions.  They don’t superimpose their feelings upon you.  A true financial coach knows that each person is unique with different goals, different attitudes about money, different challenges with math, and different strengths/weaknesses.  A true financial coach will know how to strengthen your where you are weak.

Financial Planner or Adviser:  This person is most often selling a product.  A financial adviser wants to profit on the money you have already accumulated.  The problem is that this is not what most people actually need.  Most people need and want to know how to create the money in the first place and then how to manage it wisely, perhaps with the help of a financial adviser, once they acquire it.

Think about how a salesman wishes to make money.  They sign up with an institution and then submit to their training.  What kind of training will that be?  Will it be training on five other competitor products so they can sell for them as well?  Absurd, not ever!  This employer wants to train you on his or her own products.  In the Time and Moneycase of a financial adviser, who are truly not a lot more than sales representative, they are encouraged to acquire knowledge and even
seek degrees like Certified Financial Adviser, to show the public that they are knowledgeable.  All of this effort by the sales representative can be helpful to you with a small part of the puzzle, but they very rarely have all the answers to every part of your financial life.  Have you ever thought about asking a financial adviser about what to do about your overspending? Of course not, they wouldn’t be likely to have much information about how to help you with this, and even if they did, this is not what they’re paid to do. What about how to get out of debt, or to create a passive income from better managing  your own money? They wouldn’t know the first place to start helping you with these important matters.  Where they can sometimes help is in what to do with extra money you have created, but that’s really where their “advising” ends.    

Here is the real difference between a coach and an adviser.  A coach helps you with problems you are having with managing your money and your emotions. People have lots of emotions surrounding money. The products financial advisers sell have very little to do with how to manage emotions and get in control on a grassroots level. They don’t teach you principles of financial management, they only sell tools that can help you once you have money to manage. A coach, on the other hand, offers solutions on how to control spending, get out of all debt, save for retirement, and pay the right amount of taxes. If you don’t have someone who can teach you how to do all of these things (at the same time) then you aren’t getting advice from the right place.

Here is a test question to ask a sales representative to determine if they are an adviser or a coach: “What do you recommend I do?”  Then listen carefully as to how fast they go directly to a product that they think you need.  If they make a specific recommendation they are a financial adviser.  If they say, “Tell me more about what you are trying to accomplish, today and in the near future?”  Then they search out your true feelings and even coach you along these lines before identifying options.  A true coach will strengthen you until you are making good decisions. Once you are making better financial decisions, then you can talk about what to do with your money from there.  

There are huge differences between a coach and an adviser, but it will take some time interviewing and asking questions of these people before you will see  how they approach helping you.  Most likely you will find 1 out of 25 advisers that will serve you like a true coach will.  For true financial coaching without the pushing of products, visit www.moneymastery.com. 

Retirement Ahead

How Do You Determine Retirement Needs Accurately?

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Here are the U.S. statistics on how workers plan for retirement:

  • 3% don’t have any idea
  • 47% do their own calculations or use a financial adviser
  • 50% just guess

To help you avoid guessing, I offer two different ways to approach how to calculate retirement needs accurately.

First method:  

  1. Estimate how long your parents and grandparents have lived.  Average the results.  This gives you a fairly accurate age you can expect to live.  In this example, let’s say it’s 83.
  2. Determine the minimum income you will need to live comfortably.  Let’s say it’s $3,000 per month.
  3. Subtract what Social Security is slated to pay and any pensions or other monthly income you can count on. In our example, let’s say it’s $2,000 per month. That leaves $1,000 per month you need on top of these payments for retirement.
  4. Subtract your age at retirement from age 83. In our example, this means you will need $216,000 for retirement.
  5. Divide the total amount needed to be saved by the number of months you have between now and the time you retire and this will give you a fairly accurate amount you need to be saving monthly.  In our example it looks like this:

Math: 65 (retirement age) – 40 (current age) = 25 years left to save; multiple 25 years x 12 months = 300 months; divide the 300 months you have between now and the time you retire by the total amount you need to retire of $216,000 = $720 per month you need to be saving

Second method:

  1. Calculate where all of your income might come from, and then build a spending plan around that amount.  For example, if you will receive $1,850 a month from Social Security, and $400 a month from a pension, along with $800 a month from a rental property, then build a spending plan around $3,050 per month of income.
  2. Adjust your plan to take into consideration variables that you cannot foresee right at the moment. For example, what if you live to age 89 and not age 83, or if you get sick and need medical care costing $23,000? Be thinking about unknowns and build some extra money into the spending plan to allow for them.
  3. Build into the plan how to pay for such things as the following:
  • Long-term care costs
  • Liquidity for emergencies
  • Inflation

If all of these factors require you to work longer than expected, it is better you know today and not find it out in 25 years! For specific help contact me at peter@moneymastery.com.

Fixed Indexed Annuities Are a Good Tool If You’re Getting Close to Retirement

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When you see an investment report on a 401(k), for example, it most often shows the average rate of return on funds over the last 40 years.  Averages do not show the impact on retirement of periodic drops in value.  Reports give averages over a long-range period of time, but fund managers never want you to focus on the big drops that happen during the shorter periods in between. For example, in 2000 the S&P 500 dipped by -10.14%, then again in 2001 by -13.04%, and then again in 2002 by -23.37%.  That is a total of 46.55% drop in values in three years.  If you took the average gain per year for just those three years it was negative, at -15.5% each year!  So what does that mean to you? Well, if you’ve got a lot of time to make up those losses, then maybe not too much. But it would take eight years at an 8% gain just to get back to where you were three years earlier. If you don’t have 40 years to make up these big dips in the market, then frankly you’re getting bamboozled.

This is a lot of math, but my point is that most people don’t know how to calculate the math.  They just look at a report showing a 40-year average and say, “Not bad.”  Not bad if you have lots of time, but what if you’re getting within 10 years of retirement?

Indexed annuities can be a great way to overcome market dips. When you invest in indexed annuities, you get only the gains and no downs — you are “sharing” the ups but not having to experience the downs.  Don’t know what an indexed annuity is? Contact me for more info: peter@moneymastery.com.

Do not confuse indexed annuities with variable annuities. Variable means you are in the market and must therefore be subject to the full ups and downs. Even if you placed your money in a strong New York Life variable annuity, remember, your money is in the market, not invested in New York Life, so it is subject to market ups and downs. Many people have made the mistake of assuming they were safe because of the financial strength of New York Life. But in my experience variable annuities can experience drops in value and then you still can’t get your money out during a bad drop because annuities aren’t all that liquid.

Now indexed annuities are even less liquid than variable annuities, so there is some disadvantage there. They may not work for you because they are not liquid enough for your needs.  But indexed annuities are guaranteed not to lose money and to share in the increases of the market.  And that’s a good thing.  If you are close to retirement and want a safe rate of return, and no downside risk in the market, these are great tools to use.

As a final note, there is one way to overcome to some degree the liquidity problem with indexed annuities and that’s by “laddering” them. You have probably heard about laddering CD’s and it works the same for indexed annuities. For example with a CD, let’s say you had $100,000 and wanted a good 5-year rate of interest on your safe money. You could split up the $100,000 into five $20,000 CDs.  Schedule each CD to mature one year apart, so $20,000 for a one-year CD until it matures, then place the next $20,000 in a CD that matures in two years, and so forth. Then in one year, the first CD matures, which if you need the money, you take it. But if not, it rolls over into a 5-year CD. In this manner, you have $20,000 maturing each year and in five years you will  have a five-year CD providing a top rate of return. To get the same impact for indexed annuities, you can “ladder” these annuities and provide better liquidity while getting the best possible rate of return.  

Contact me for more information on better ways to fund retirement than just dumping money into a 401(k) and hoping for the best: peter@moneymastery.com.

What Does It Cost to Die?

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Okay, a strange question, but hey if you aren’t thinking about it now, when you die your poor family will be and they won’t like what you have not prepared for. Here’s why…

A recent survey of funeral homes shows the average cost for a funeral is $7,500.  In New York and California it is twice that much! Iowa and Oklahoma is a bit less than this amount. The point is, however, that dying is darned expensive!! 

We all know how emotional it can be to have a loved one pass away, but to put that kind of cash burden on family on top of that emotional stress is awful.

Some time back, I attended a funeral and sat with the surviving family members.  They talked openly about the funeral and burial costs and how they didn’t know anything about how to proceed so they just let the funeral home make all the decisions for them about their father.  In retrospect, they regretted that decision, so they met as a family to talk about what they could have done better to make the death of their father more bearable and less financially taxing.

Here are the things they discussed that they didn’t do or didn’t urge their father to do before he died that would make a difference if they did do them for other family members upon their deaths:

  1. Make a list of all assets and where they were located.
  2. Record who is in charge of each particular asset and the ongoing expenses for that asset.
  3. Determine whether assets can be sold upon death and what the tax implications might be upon sale.

Another thing they had  not planned on was the cost of an attorney to help settle their father’s affairs. They decided they could not navigate the court system, organize a funeral, and meet with the tax preparer all at the same time, so they approached an attorney they knew who said he could handle all these matters for them quickly and simply.  This sounded attractive to each of the four members of the family so they hired this attorney and started to do his assignments. However, they soon found the list of to-do’s becoming longer and longer and the cost to retain this attorney more and more prohibitive. If their father had done some of this work before his death and helped his family members be prepared to settle his estate, hiring an attorney for this length of time would have been totally unnecessary.

The family finally reached out to Money Mastery and we are coaching them on how to gather all the financial information simply, effectively, and without the high cost of an attorney. 

As they have followed the Money Mastery program, their heads are starting to clear and they are more openly discussing as a family what to do going forward as other loved ones pass away. It has created a healthy respect for each other and in the end they have all now recorded what they each want done in the case of their own deaths. They are determined not to let this happen to them again.

For more information on how to properly organize and settle your estate contact me directly:  peter@moneymastery.com.

Cost of Medical Care After Age 65 Will Bury the Nation… and Probably You As Well

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National statistics report that healthcare costs for retired persons average $250,000 from age 65 through the remainder of life.  How can a retired person (or anyone for that matter) afford this expense?  Statistics show that 91 percent of those retired are totally dependent upon Social Security benefits for their monthly income.  How can any retired person take their Social Security income and carve out an extra $250,000 to pay for health care?  This is an impossible task!  If anything is done to curtail Social Security benefits it will totally destroy the senior class.  Medicare is soon running out of money and Medicaid is broke.  I predict healthcare costs will be the largest hammer to come down on our financial world in the next five years. 

As you read this article, take inventory and ask how you will pay for healthcare costs in retirement?  If you do not have an answer, then you will probably be in this same group of people in the U.S. who are currently incurring $250,000 in medical/nursing home expenses that eat up all their retirement and life savings because they were not prepared.  If you are not saving adequate money for retirement, then healthcare costs will eat up what little you have saved and destroy you right along with our nation. 

I suggest 91 percent of the population needs to cut all expenses and not buy new homes, new gadgets, new cars, or go on expensive vacations until they  have saved, saved, saved!  Times are troubled and only promise to get worse for those who are in debt and have not established passive income they cannot outlive. If you are counting on Social Security and a risky 401(k) plan, you have no chance of survival.

Gloom and doom you say? It is what it is.  The real magnitude of the situation just hasn’t hit the fan in your own living room yet, so you don’t see it but it’s coming.  Plan on making changes now, while you still can.  My word of caution is take action today! For more ideas on how to do this, contact me for a no cost consultation: peter@moneymastery.com.

More Ideas on What to Do with “Old” 401(k) Money…

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As noted in my last post, “How Old 401(k) Funds Can Get You Out of Debt Quicker,” many people change employment and still have money sitting in an “old” 401(k) they set up with their previous employer.  In my last post, I noted that this money can be used to pay off high-interest-rate debt, such as credit cards.

Here are some additional options to think about in terms of how to use this money instead of leaving it behind where is doing very little to benefit you today:

Option 1:  Roll this 401(k) money over into an IRA that you control.  Put it where you might get a good rate of return and have little or no risk.  Make sure you keep control of this account and can take the money out as needed.  Of course there will be a 10 percent penalty to pay if you do withdraw from an IRA before age 59.5, but that does not apply to the 72(t) tax rule. This ruling allows you to retire this plan (meaning you no longer contribute to it and only take the earnings from it over your life expectancy, usually age 84) without incurring a penalty. 

So, for example, if are say age 44 and have $100,000 in an account you retire, you will receive $3,365 per year without any penalty. CAUTION:  Once you select this option, you cannot change it  until age 59.5.  This example is simplified, so check with your tax adviser on how this best fits your circumstances.  There are places to put the $3,365 each year that can make you around 4 percent interest per year. Contact me for more details:  peter@moneymastery.com. So for this example, this means that when you reach age 59.5, all the money you started the account is still there, as you only took the earnings when you took the 72(t) option.

Option 2:  Roll the 401(k) money over into your own IRA that you control, then convert some portion of this amount once a year to a Roth IRA.  After five years, the principal amount you placed into the Roth IRA can be taken out without a penalty.  Check with your tax adviser first before taking this option to make sure you know all the rules associated with it, but in general this is another great way to get money out of an old 401(k) without paying a 10 percent penalty.

Option 3:  Roll the 401(k) money over into your own “self-directed” IRA.  There are extra fees you pay to the trustee of these kind of plans, but they allow you flexibility on where to invest and manage your money.

These ideas are for the purpose of giving your alternatives to leaving your money in an old 401(k) or IRA.  By being creative you can double the amount of money you might otherwise have if you just leave it where it is. For more information on these options feel free to email me: peter@moneymastery.com.