Cyanide Capsule

I remember when I was young, on television or in the movies there would be the scenario of the secret agent who when caught would take a cyanide capsule to die quickly, thus preventing all opportunity for information to be extracted from the opposing party.

There are many times that I wonder if many people do not have their own cyanide capsule hidden somewhere as it relates to retirement. It sometimes seems as if they plan to live their life however they choose in the manner that they choose as long as they can get away with it, despite the reality that financial matters will catch up with them. Okay, quick hypothetical financial planning exercise. You have a couple who is used to living off of $60,000/year. They will receive $30,000 in benefits from social security and other sources.  They also have $100,000 saved. Not counting the effects of inflation, how long do you think they can live their current lifestyle?

The sad truth is that most fifth graders probably have a stronger grasp of financial planning reality than people who are entering retirement. Most fifth graders would say 3-5 years. I would agree. And yet, I run across couple after couple who though they might be in an extremely similar situation, that they somehow have enough saved combined with other resources to last them the rest of their lives. I guess the operative phrase is “the rest of their lives”. Perhaps they have a cyanide capsule hidden somewhere. Given that the average life expectancy from birth is around 76.2 for men and 81.1 for females, and that the average retirement age is before age 66, there seems to be a disconnect between people’s expectations on how long they can live the lifestyle to which they have grown accustomed and the reality. Perhaps the baby boomers have some secret society and are passing out cyanide capsules to each other saying, “Just remember, if you run out of money… just bite down on this… that way you do not have to worry about anything…” If such is not the case, may I recommend sitting down with an unbiased source and figure out how to come up with a sustainable plan that does not require a cyanide capsule.

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I have a confession. I am not much of a skier. Occasionally I have been known to don some cross country skis, but more often I have been known to wear snow shoes. That being said, a couple of times I have participated in alpine skiing.

Perhaps many of you wondering by know, why is a personal finance guy talking about skiing? Summer is almost here!

In previous blog posts, I have talked about “withdrawal rates” which refers to how much one can plan on withdrawing from one’s retirement portfolio without having to worry too much about the money running out. I tend to recommend to my clients between 3-4% of their portfolio per year as a good rule of thumb.

It has been said that planning for/going into retirement is a lot like going alpine skiing. You do not hear about many people suffering that much as they go up the hill (the financial equivalent of building up assets to prepare for the ride of your life), but you may hear a fair amount about people doing a face plant when they got off of the ski lift (the financial equivalent of the market dropping suddenly when one first retires and has nowhere else to draw money), or people breaking a leg or something else and calling in for the medics, etc. (which may be closer to the financial equivalent of having to make unprepared drastic cuts to one’s lifestyle in retirement or having to more in with family or have family pay the bills because you can no longer support yourself).

Many people are surprised of the amount that they have to save in order to sustainably support the lifestyle to which they have grown accustomed. This may be mitigated by many different factors which may or may not include: changing one’s lifestyle, having investments that provide a steady stream of income for you, increasing one’s savings, planning on working while in retirement.

While all of these options may seem feasible, in some cases the final option is not. In fact there are many workers who find that either due to health issues or other reasons, that they end up working for less long of a period than they initially intended. This only serves to emphasize the importance of saving up as soon as possible so one does not find oneself getting off on the double-black diamond rated slope of retirement as opposed to the bunny slope of retirement. I will suggest that though excitement and challenge can be fun at times, few people actually want to navigate a challenging retirement financially.

The moral of the story when it relates to retirement is that you need to save as much as you can as early as you can because there is too much uncertainty in the slippery slope of life. Assuming that you have the option to continue working, check with a financial advisor to make sure that you have enough saved for a pleasant retirement.

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Advice to College Graduates

It is easier to get used to living with more than it is to get used to living on less.

Let us assume for the sake of argument, that while you were living in college, you were able to meet your living expenses on $24,000 or less per year. For this amount of money, you probably were able to live together with some other people, pay for food and utilities, clothes as they arose and be able to do a little bit of travel to visit the family. Let us also assume that you are lucky enough to be offered a job and have a salary of $50,000 to start.  Let us also assume that you have $3,000 in credit card debt.

You may possibly find that $50,000 that you thought was coming to you quickly turns into $40,000 due to various items withheld in your paycheck whether it is insurance or taxes.

My advice is this. Live as if you still only had $24,000 or less to live on and save the rest. If you are eligible for a match in a retirement plan at work, take it. If you have any credit card debt, this would most likely be a good time to pay it off.  If you are eligible for saving in a Roth IRA, there is a good chance that it would make sense to investigate how Roth IRAs work and consider investing the maximum contribution.  Consider placing some of the rest of the money to build up an emergency fund. Ideally this fund should be built up to 3-6 months’ worth of your expenses or in the case of living on $24,000 per year this would be $6,000-12,000.

Fast forward one year. By this time you may have: 1) paid off your credit card debt, 2) built up an emergency fund of at least $6,000, 3) saved $5,000 into a Roth IRA, 4) may have $3,000 or more dollars built into your retirement plan if your employer offers an average 3% match.

If you were to keep this savings up for four years, there is a strong chance that you will have set yourself up for a favorable financial future for a number of reasons:

1)      You will have resisted the temptation to spend what you make or more than you make. This will carry you far in life.

2)      You should have a solid cash reserve built up that not only could be useful for times of financial hardship, but could be used for a major purchase.

3)      You would have $20,000 that you would have saved into a Roth IRA, in one more years’ time (after your 5th year), you will have the opportunity to take up to $10,000 of the growth in that account and put it towards a first time home purchase.

4)      You will have time on your side when it comes to investing for your retirement, because you were diligent in investing early.

Please write regarding any questions you may have.

*Please note that everyone’s situation is different, and that you should consult a financial advisor individually before following any investment recommendations.

When Time is More Important Than Money

For most people that are affluent, there comes a time in their lives where time is by far a more precious commodity than money. Often they have either reached a point where they are truly wealthy  and will not need to work another day in their lives or they are very close to it.

At this point it is important to ask what it is that you truly enjoy. Is it your work or is it something else? Would you rather be volunteering or puttering around the house? Perhaps you have not quite reached the stage where you cannot decide to quit work entirely, but you could take a drastic cut in salary or income and decide to try consulting, part-time work or a new profession altogether.

But why would time ever become more important than money?

There is an important concept in economics known as the law of diminishing returns. It effectively says that an additional unit of X in general gives less satisfaction than the one before it.

To illustrate, think about the pride you may feel if you saved your first $100,000. Now imagine that you have already saved $1,000,000. Is the next $100,000 really as exciting as the first $100,000? If you are like most people, the answer is probably no. But $100,000 is still $100,000 isn’t it? Yes. But its relative usefulness has gone down.

Given that time is a finite resource (we each have 168 hours in our week), It is easy then to see if you already have all of the money that you need that time to do what one wants becomes more important than the additional money one may accumulate. It is important to recognize however that if one wants to fully get out of the “rat race” one have enough wealth to live the lifestyle one wants to live…

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The Benefits of a Roommate

In previous articles, I have pointed out that Americans have more space than they had 100 years ago. I have also pointed out that this space tends to cost more in terms of taxes, upkeep, and utility costs. Besides living in a smaller space, what can one do to leverage the space that one has currently?

May I suggest the benefits of having a roommate or renting out a room as a possible alternative? Often I will hear people say that they would like to be able to have a rental, and yet question when I suggest starting by letting out a spare bedroom. Sometimes they may point out that this is for when family/friends come to visit. Or they may say that they value their privacy and do not want anyone else sharing a space with them.

Let us take a look at some of the financial implications of being able to rent out a room for $450/month. Let us assume that you have a vacancy rate of 10% or that it takes a little more than a month to find a roommate. Let us also assume that due to various reasons that it costs $600/year to have the roommate in terms of upkeep costs, etc. Doing the math in this situation we would come up with an additional $4,260 in income.

If we were to have multiple rooms available to let, this figure could be increased accordingly. It is acknowledged that this amount could vary depending on the room in question.

What could you do with an extra $4,000+/year in income? What if you were to have this extra amount set aside for four or five years?  Would you then potentially be able to purchase a small rental unit of your own, or at the very least be in a position where the possibility is much more feasible?

For some people, the cost of loss of privacy is not worth it. I understand this. For those that do not mind, there may be some opportunity to be had in terms of improved cash flow and potential investment savings.

Let us take a look at the long term effects of having a roommate as described in our hypothetical example if you were able increase your rent by 3% per year and what would happen if you were able to get 3%, 5%, and 7% returns on your money respectively.

As you can see, we are talking about an opportunity cost that could be equal to several hundred thousand dollars over the course of 30 years. Now granted, this amount could vary based on returns and your tax rate. However, given the amount of money that is at stake, it behooves the question for many Americans, how much is your privacy really worth?

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In recent times there has been discussion of the 1% vs. the 99%. Strangely enough, in order to be in the top 5% of net worth you have to have $1.5 million in net worth including your home. The question is does a large net worth make you “wealthy?”

It depends.

Perhaps the best explanation that I have run across on what wealth means is that it is how long you could live given your current lifestyle, net worth, and investment income without working another day.

What sort of lifestyle are you living? If you need $300,000/year to live and have a net worth or $1.5 million, you are certainly wealthier than most. I would argue that you are not necessarily wealthy.

You would most likely have a little over 5 years-worth of wealth. That is to say you could live your current lifestyle for a little over 5 years (I am assuming at least some of it produces income) without working.

Now, what if we to have a true makeover and you were to cut your expenses down to $40K-50K per year and most likely live in a more modest home? All of a sudden, I would probably say that you are wealthy. Chances are you could live the rest of your life without working.

For those of us who are the 95%, I have several pieces of good news. One of the first is that you do not need to be in the 5% of net worth to enjoy life and enjoy it responsibly. For example, let us say that you own your own home. And you have $3,000/month in expenses as a couple. Let us also say that as a couple you bring in $2,000/month in social security. It is altogether possible with $300,000 in investments you could live a very comfortable retirement. The second is that you can usually make changes to adjust your lifestyle which can increase your wealth. The third is that it is never too late to increase wealth.

Wealth is a function not only of net worth/income producing assets; it is a function of our expenses as well. It is altogether possible that a man who owns a car wash and lives a modest lifestyle can be wealthier than celebrities who make millions, but spend it as fast as they make it.

On the other hand, if you increase your expenses, it is easy to lose wealth as well.

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Some Risks when Retiring Abroad

Though there are a number of reasons that one can be excited about the prospect of retiring abroad including the excitement of a new culture and possibly a lower cost of living, there are also a number of risks that you may need to examine before considering the move. These include: culture shock, medical concerns, exchange rate risk, taxation issues, and bureaucracy.


Culture Shock

Things may be handled differently in other countries than which you may have grown accustomed. This should be an important factor to consider before deciding to relocate one’s place of residence, especially if one is not the sort open to new experiences. Culture shock can be somewhat mitigated both by being informed through research and field experience. It would be a good idea to plan on taking an extended vacation before considering moving anywhere. Research your destination on the internet. Talk with expatriates who may be living in the area.


Medical Concerns

Though according to the CIA and The World Factbook, there are a number of countries that boast life expectancies which are very similar if not better than the United States, many people do have concerns regarding the medical care that is available and how health care can be obtained.  Make it a point to research what is available in terms of health care and always remember if one’s health situation deteriorates, one can always consider moving back.


Exchange Rate Risk

It can sometimes be easy to forget that the dollar is not the only currency in the world and that people have made and lost fortunes by trading currency. When living abroad, it is very important to build in a hedge for changes in exchange rates. When expenses can increase by 20% in the period of three months, one needs to be prepared. There are a number of methods to deal with this including planning on having to spend significantly extra just in case and/or investing in options to deal with changes in currency.


Taxation Issues

Once you get into the aspects of living abroad, I would always suggest hiring a tax professional to help you deal with the international tax issues. Once again, plan on taking an extended vacation and talk with expatriates. The may know some of the basic issues as well as be able to give you some names of tax professionals to use. Interview a couple of tax professionals when you are in the country to which you are considering relocation.



This very well could tie into culture shock, but the length of time that it can take to get things done elsewhere can be astounding along with the amount of paperwork to make something happen whether it would be getting plugged into basic utilities if you are building or any transaction with government officials. Once again, it would be a very good idea to do some research and talk with the expatriate community before moving.

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The “Anti-Budget” Budget

The reason that I work with people on their budgets is not because I care how they spend their money, it is rather my aim is to help them maximize the use of their money based on their values and goals. There are some people who cannot stand tracking expenses. It positively drives them crazy. They have money in their pocket and they want to spend it however they want to spend it at the time. If you know someone like this who would still like to save and not have to worry about their future, let me suggest the “anti-budget” budget. Though it may not solve all problems financial, it will go a long ways towards building wealth.

Start with saving 15% of your income. If you have not saved before, increase this amount by 1% for every two years that you are older than 20. If you are fifty and have not saved a dime until this point, this means I will want you to begin saving 30% of your income, because the fact is you are running out of time to create a large enough nest egg for your future. Yes, if you have not saved before, this is going to mean a tremendous change to your lifestyle.  If you are riddled with high-interest debt, any amount of this that is not matched by your employer for savings needs to go towards paying off the debt first. You will probably need to save for at least 15 years or until full retirement age, whichever is greater using this method. The more and earlier you can save the better.

Estimate your taxes that you will have for the year and set aside funds that you will need to pay for your tax bill. If you are an employee this is often handled by your employer. If you are not, you will need to talk with your tax preparer and get some good advice on how much to plan to save so as not to be caught with late penalties, etc.

Put aside 10-20% of your income for an emergency fund and for long term expenses such as vacations, cars, etc. In my article on an introduction to cash, I wrote down some good ways to consider on how to save money.

For the religious or giving, you may need to budget 10-15% of your budget towards these beliefs.

For those of you who are doing the math in your head, perhaps you are saying, but this means I may have to live on two/thirds or less of my after-tax income! Yes, you may. And this may involve preparing your own meals more, taking on a roommate, living in a less expensive place, and buying used. You may have to seek additional sources of income whether working a part time job on the side or something else. The plan is simple. It is not necessarily easy.

The good news is that you can spend the remainder however you wish and probably be in decent shape for the future provided you have proper insurance in place.


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The Freedom of Exile

Most people do not like change.  They prefer to stick with their familiar habits and familiar ways. The benefit of course is that one has a better idea of what to expect if one does not change. The downside is that one usually retains the problems one had before.

In the title of this blog I included the word exile which is usually thought of as a punishment, “Possibly never seeing one’s home or country again.” The benefits or freedoms associated with exile are often ignored. Many people in this country live in areas that carry an extremely high cost relative to other areas of the country.  According to cost of living research by the US Census Bureau, the city where I currently live, Nashville, TN has a cost of living index of 88.9 (with 100 being the national average) as compared with a cost of living index of 121.4 for Seattle, WA or 216.7 for New York (Manhattan), NY. If one is going to be making a large life change anyway for retirement, perhaps exile is something to consider if you live in a high cost city.

Imagine what your life would be like if you suddenly found that your costs of living were ‘on sale’.  For some who would choose exile from their locales, this could mean experiencing ‘sales’ of 10%, 33%, or over 50% for their regular life expenses. I would suggest that having one’s expenses reduced could be one of the best methods available to increase the likelihood of a successful retirement.

Another form of exile, that may be considered, is downsizing. Does a couple or a single person really need 2,500+ square feet of space to live comfortably? Or is this extra space realistically sitting relatively unused other than as a private museum for rarely used items? If one is not willing to consider renting out rooms to boarders, perhaps it is time to consider a smaller place. The benefits could be substantial in terms of decreased property taxes as well as potentially smaller utility and maintenance costs, and in some cases a smaller mortgage payment as well. I have known several people who decreased their property tax and utility costs by over $1,000 per month simply by downsizing. This does not take into account the $2,000 per month that they saved by no longer having to pay a mortgage on their home. How would a $3,000 decrease in expenses effect your retirement chances or your ability to do some other things that you may desire?

A more extreme option being taken by a number of retirees is to leave their country. Unsurprisingly, there are a number of places in the world where the cost of living is substantially less than the United States. The benefits available may be less, but the cost is less as well. Many people say that they would want to travel in retirement. What better way to truly get to experience something different than to live in a completely different place and take day trips or weekend getaways from there? Many people often cite concern for access to medical care when living abroad. I grant that though this is a concern, it may not be as large of a concern for someone who is in relatively good health than someone who is not.  How would your life look if you were able to live for less than $1,500 per month in a retirement paradise, whether that be cool temperate mountains or by the ocean? If health concerns became more of an issue, one could move back.

I did not mention that exile had to be permanent. It does not have to be. It could be for as short or as long of a period that wanted, though the benefits would tend to compound over time and every change has a cost. If the change is for too short a duration, then it may cost more than not having made it at all. To be able to experience the excitement of a different culture whether in the same city, in the same country or abroad while having a very low withdrawal rate from one’s retirement portfolio could be an exciting option for many retirees. It could make their retirement more sustainable. Perhaps exile is not such a bad option after all…


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An Introduction to Withdrawal Rates Part 2 of 2

The Issue of Rate of Return

If one were to assume that one could get an 8% average rate of return and that one were to retire at 65, and have to contend with 4% inflation, one could possibly argue for a 5% or 6% withdrawal rate since this could last until ages 103 or 92 respectively.  There are of course problems with this. One of the majorly cited problems is what if you have bad returns your first couple of years? The idea behind this is that if you are taking money out of a portfolio when it is down at the very beginning, one may never recover and become penniless well before one passes away. One of the other problems I alluded to in my article on rate of return. Long term rates of return have fluctuated significantly depending on the time period you examine.

It could be entirely possible to go through a long period of time with only a 6% average rate of return and have to contend with 4% inflation which changes the scenario significantly. In this case if one were to take out at a 5% or 6% withdrawal rate one would run out of money at ages 93 and 88 respectively.  A graphic representation of the effects of pulling out various percentages from a million dollar portfolio assuming a 6% average return and 4% inflation with various percentage withdrawal rates can be seen below. It must be noted that these rates do not assume fluctuation in performance of investments. To reiterate, down markets can happen at the beginning of one’s retirement and quite negatively affect the overall performance of one’s retirement portfolio. Having safeguards against this event would seem prudent. Without some form of safeguard, it could be possible that a 4% withdrawal rate would not be sustainable.


Withdrawal Rates


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