My best planning advice is: to plan. There are so many people that we meet with, and so many advisors, who only focus on investments and never ask the tough questions that we ask. “What do you want your retirement to look like?” “How much are you currently spending?” And “What happens if you or your spouse dies?”
The Dreaded B Word
I had a dear client who actually yelled at me for using the “B word.” He said I kept saying the B word and I said I wasn’t. He was adamant and slammed his hand on the desk when I used it again! Finally, I asked, “What? What did I say?” You said “BUDGET.” I laughed and asked him, “Well, what am I supposed to call it?” “Spending Projections,” he said.
Whatever you call it, it all starts with creating a budget. To most people, it is a very constraining word. Actually, it should be a “freeing” word. Most people who have thousands in their checking account will say, “Ah! Yeah, I’m good,” when looking at the general balance every once in a while. As long as it stays around a certain amount, they don’t pay much attention to the inflows and outflows of the account.
Even the experts fail. Several years ago my wife asked me, “So where does the money go between the beginning of the month and the end of the month?” What we learned by doing a budget and paying attention to our spending was that we were experiencing “death by 10,000 paper cuts.” We weren’t spending lavishly. We weren’t buying big-ticket items. We were buying things on sale. Unfortunately, we were buying a lot of things on sale. All of those purchases flew under the radar because they weren’t large. But we didn’t look at the frequency of those purchases.
Home Depot, for example, is dangerous for me because I like gadgets! I justified buying a lot of things on sale that I won’t touch for years and years. But seeing that behavior through budgeting is very freeing. Now I know where the important money goes and where the less important money goes.
Ask yourself: “Do I want money to go to another pair of jeans, or to another tool that I’ll never use? Or do I want to change a spending decision and take the family on a vacation?” Without that knowledge, I know I couldn’t change my behavior because I didn’t realize I had less-than-optimum behavior.
For most of our clients, once we work that freeing exercise, there is one thing that totally surprises each of them; a budget allows you to take control of your finances by consciously allocating resources in a manner that is efficient and in-line with your goals.
Tough Questions, Even Tougher Answers
Basically, if you were to retire tomorrow, what would you need to spend? Do you have debt that needs to be taken care of? Do you have a car that’s not going to last as long as you do? What are you going to do about a new car, a vacation, or visiting the grandkids? What about healthcare if you retire before 65?
The vast majority of people we meet with have never been asked, let alone answered, these types of questions. Even among friends and contemporaries, very rarely do I hear this type of planning, and when I do, they tend to forget about inflation.
Day One of their retirement they’ll say they’ve got ‘everything’ they need. But then, what happens 10 years from now, or 20 years from now? The cost of living will have doubled. Now those numbers fall apart, don’t they? So the real question is, “At what point will you have to start depleting your investments?” It reverts to those core-planning concepts.
There is Always Life Insurance
For younger folks, the two key things are savings and life insurance. I am always surprised when I talk with young families and they say, “I’ve got three kids and plenty of life insurance.” When I ask how much life insurance, they’ll say, “$50,000.”
“Well, OK. You make $100,000 a year, so that’s six months’ salary,” I’ll say. “Your spouse doesn’t work, you’ve got three children that will be college bound, and you’ve got a mortgage and a car payment. So $50,000 isn’t going to cut it.” Certainly, this takes some people aback and, usually, it’s the spouse that has to raise the children.
I usually ask, “If the paycheck stops, what are you going to do? Go back to work? What will you do with these babies if you have to back to work?”
In all sincerity, one million dollars in life insurance for someone in their thirties is probably $1,000 a year. Our general recommendation is a half to a million dollars per child, especially college bound, because assets haven’t been accumulated yet.
For older folks it’s almost the opposite. They don’t need insurance when they’ve paid off most of their debts and they’ve amassed a great deal of wealth. While it might be nice to have, there is no need to have because that is not their highest insurance risk. Death is not the risk that they face. A catastrophic health situation is their biggest risk. So it makes more sense that their insurance needs shift from life insurance to long-term care insurance.
The value of having LTC insurance is enormous. As you know, people require long-term healthcare services due to illnesses, accidents and longevity. The impact of long-term care can adversely affect families and finances, which is why being prepared usually starts with being aware. We can help.