Tara Unverzagt July 5, 2016 No Comments

I Want a Carefree Retirement

Knee deep in debt, Bob and Carol were trying to decide if they should raid their retirement account to pay for the rest of the kids’ college education or if they should take on more student loan debt. Both choices made them sick to their stomach to think about. Either way, they couldn’t see a comfortable retirement in their future. It’s a situation that’s all too common today.

Life was different during our grandparents’ era. My grandfather, for example, went to college and paid for it himself. He became a civil engineer. My grandmother owned a beauty salon and together they raised three children. All three kids went to college, paid for with cash from my grandpa’s job and savings and their children paid for part of the expenses with summer job money. All three kids went on to live very nice middle class lives. Grandpa retired to a life of leisure full of golf. Grandma’s retirement revolved around church, singing in the choir, helping her friends, and taking care of the house. They liked to travel, especially to Florida for the winter.

It would be lovely if that was how our lives went, but it isn’t, we’re more likely to be in Bob and Carol’s situation. In Grandpa’s days, having debt would have been an embarrassment as well as scary. Coming out of the Great Depression, you might buy something on lay away, where you paid a little every week until you fully paid for the item and took it home. Otherwise, owing someone money was frowned upon.

Somewhere along the way, the finance companies talked us into thinking it was ok to use debt to pay for everything. You could buy anything on a credit card and make low monthly payments. Nowadays, many don’t even own their car. You carry the debt for the car that’s owned by the dealer. [Debt can be helpful see Use Debt to Your Advantage]

Grandpa had it right by not using debt to pay for goods. Using debt to buy consumables like a car or everyday items will make you poor. Once you take on debt, your expenses go up with debt payments. A $25,000 car turns into a $450 per month payment for five years or over $28,000 total. If you saved that $450 per month BEFORE you bought your car and invested it, you would only need to put aside $22,500 and you could do it in just over four years. That’s almost a $6,000 difference. What could you do with $6,000?

For many of us, our retirement years will be very different than our grandparents’ retirement. My grandpa had a pension, plenty of savings, Social Security at 65, he didn’t have to deal with high health care costs, and was debt free his whole life. I don’t have a pension, won’t be eligible for full Social Security benefits until 67, will have to pay for more of my health care costs, and cope with a home mortgage. And many will be dealing with their kids’ college debt as they try to retire. We will have to work a lot harder to get that comfortable, carefree life, plus we will live much longer lives than previous generations. How will we fill all those extra years and how will we pay for them?

Some people don’t want to retire at 65, they love what they do. My advice to these people is keep working. There’s a good chance you can work until 70 or even 80 and still have plenty of years to relax in retirement. The extra money will help finance those extra years. If you’re to the point where you need a change, consider a completely different job using the expertise you’ve gained. For example, you could teach math instead of working as an engineer. You could also consider a more relaxed job involving a hobby. One of my clients loved playing tennis and ran the club house at his tennis club when he retired. He was able to see his friends, make a little money, and play tennis for free. Or if you’ve saved enough to last a long retirement, you could consider volunteering at a charity that inspires you. You won’t make money, but will have purpose in life which research has shown is a key component to successful aging.

So why do we need to work longer these days than in Grandpa’s time? A lot of factors come into play. The only retirement plan most of us have today are the ones we fund. Companies decided they didn’t want to take on the risk of investment markets not doing well, so they pushed the risk on their employees. Healthcare costs have gone up and companies push more of the cost to the employees. More people are self-employed where you pay for everything and everything is going up in price.

Life has become much more complicated to manage. Today, we expect to have choices. Some people want to be able to pay more for insurance to go the doctor of our choice while others want to save money on their insurance and don’t care which doctor they go to. While choices are good it can be hard to know which choice is right for you.

The truth is, your retirement success is not affected as much by the outside world, as by your spending and saving habits. Just like always, spending less than you make leads to financial success. If you lose a job, you have to cut back. If college is too expensive, you can to consider a less expensive college, try two years at a community college (no one asks where you completed your Freshmen and Sophomore year), or have your child participate in a work/study program to help pay the cost of college. A much bigger part of your paycheck goes to healthcare which means you have to cut back somewhere else. Your car? Your home? Your hobbies? You have to choose insurance and retirement programs to meet your needs. That takes education and planning.

Take a moment to visualize your future self. What do you want your life to be like? Feel how comfortable life would be if you could choose to work, play golf, or travel. Then look at what could get in the way of getting to that retirement. What can you do now, in the next year that is totally achievable to help make sure you achieve that retirement? Is your comfortable retirement worth enough to make a commitment to your one year plan? When you’re tempted to spend money on those lower priority items, think about your future self and consider “paying” him/her by putting that money in your savings account instead.

Control your spending and save for your future. Think about working a little longer since you’re going to live a little longer. You too can have that comfortable retirement that my grandparents lived.

Contact me if you’d like a carefree retirement.

To find out ways to invest for retirement, check out Part 2: Index funds are safe, right?

Photo by Extra Zebra; https://www.flickr.com/photos/23438569@N02/

 

Tara Unverzagt June 22, 2016 No Comments

What About RoboAdvisors?

RoboAdvisors have become popular recently. They provide a way for you to input what your goals are and the RoboAdvisor will come up with a plan just for you (and a million other people just like you). They are popular because they’re pretty easy to get started and their fees are very cheap, far cheaper than personal advisor. And they do a good job for what they do. I had a conversation with my hair stylist yesterday about why you might want a “person” to be your advisor.

In the middle of the conversation, another stylist came over to get advice on what color to use on her client. She said her client wanted highlights, but thought her ends (her last highlight color) were too light, she wanted darker highlights this time. The stylist was confused because the ends were the color that she would have picked for the client also.

My stylist said that perhaps the ends were the right color, but there was too much of that color. He pointed out that sometimes when clients say a color is too light, it’s really just that they want less of that color, not a darker color. My stylist pointed out a way to help the client get more information so she could make the right decision. The other stylist walked away to review the choices with her client.

After the other stylist left, I said “And THAT is why a RoboAdvisor isn’t the best solution for everyone. Sometimes, a client misunderstands what the issues are. A robot can’t have that discussion with you.”

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Tara Unverzagt April 4, 2016 No Comments

Use Debt to Your Advantage

Debt has fueled much of the growth in the world over the last four decades. Debt has made many business owners, investors, and individuals wealthy. But debt has also been the ruin of many businesses, investors, and individuals.

The “final exam” of my MBA involved a business simulation. Each study group was tasked to run a business manufacturing hairdryers. My study group was mostly made up of bankers. When our door shut at the start, the bankers immediately said, “We need to get a line of credit.” I said, “We’re starting with a lot of available cash.” They explained that bankers only loan you money when you have money. At some point down the road, we may need money, but we should secure it in the beginning. That 10 minutes was more valuable to me than the two years that led up to it. Indeed, “down the road” the hairdryer market was booming, but we didn’t have enough cash to build a new plant. That line of credit provided the opportunity to grow our business. Our study group ended with millions of dollars more than any other study group. We had that line of credit right when we needed it while the others were just starting to negotiate with the banks.

This was a lesson in how debt can make you wealthy. The other side of that coin occurred as the housing boom went bust in 2008. There were a lot of people who borrowed money to buy a house, but didn’t have the funds to pay the debt. They lost their house and their wealth.

Debt helps magnify your return. If you want to buy a house, most people can purchase a bigger house with a loan than if they only used savings to purchase the house. If the value of that house goes up, there is a larger gain on the larger investment. But if the value of that house goes down, there is a larger loss.

So how do you use debt to your advantage? As the bankers in my MBA study group pointed out, you will only get debt when you have money. The more money you have, the more debt you will be allowed to carry. If you think like a banker, and only incur debt that you can pay off, you can use it to your advantage.

You can’t predict what’s going to happen to the housing market in the next 2-5 years, but the longer you are in the housing market, the more likely you are to see the value grow above what you invested. If you plan to stay in the housing market for the long haul, it’s fine to incur debt to purchase your home. But make sure you have enough funds to pay the mortgage for 6-12 months, even if you lose your job. This should be part of your Emergency Fund. If you don’t have enough savings to make future mortgage payments, you may find yourself in the position that so many people did in 2008 and risk losing your home.

When you buy a car, you do not typically expect it to increase in value. As a matter of fact, as soon as you drive a new car off the lot, it loses value. Buying a car with debt increases the cost of the car and therefore increases your loss. If you have a 10%, five year loan on your $20,000 car, you are really paying $25,500 for the car. In addition to the decrease in the value of the car, you are losing an extra $5,500 from interest payments. Many people lease a car instead of buying. Keep in mind this is just building the loan costs into the price of the car. Typically it’s easy to hide higher loan costs in the “low” monthly payments of a lease agreement. The more expensive the car, the more you lose in value and interest paid.

In order to sell more cars, dealers often offer 0% loan deals. This can be a way of using debt to your advantage. If you can get a 0% loan for $20,000 and then invest that money in a bond giving you 4%, you win. Make sure you have the $20,000 to pay off the loan. If the 0% interest is only for a limited time, pay the balance as soon as the interest rate goes up. Typically, if you miss a payment, you will pay high fees and/or the interest charges. So make those payments.

Bottom line, you can use debt to make money, but you can also lose money with debt. Follow some basic guidelines to use debt to your advantage.

  • Make sure you have the cash to pay the debt on time. For long term debt, have enough in cash to make payments for 6-12 months.
  • Use debt to increase your income, like paying for college tuition, but not for consumables like going out to eat or a nicer apartment.
  • Use debt when you can invest those funds at a higher return or in a business that can make more income than the cost of the debt.
  • If the item you purchase is not an investment that can increase in value, pay cash.

Debt always increases risk, but the risk can be managed if debt is used wisely.

 

All information provided is general in nature and not meant to be advice for you in particular. If you’d like to know more about how this topic relates to your situation, contact me at tara@southbayfinancialpartners.com

admin December 18, 2015 No Comments

Saving Your Bubble Gum Money

“It’s just not worth $60 to go to [a famous amusement park].” It’s a proud moment when a Financial Planner Mom hears this from her child.

I started teaching my kids financial skills where most financial planners will tell you to start, with an allowance. I started when they were about three. They received three-quarters that would be split between three jars. One was for spending (we called that “bubble gum money”), one for long term savings (in a two-year old’s world that means a week or longer), and one for charity. I let them split their quarters among the three jars however they like.

In the beginning the quarters were basically randomly deposited. I knew over time they would start to understand how different decisions would impact future options. I didn’t guide them because really, how big are mistakes a three year old can make verses how big the life lessons to be learned are?

Bubble gum money could be spent whenever and wherever. In the beginning, my youngest did spend most of her money on bubble gum.

The “long term savings” could only be “saved up” for bigger purchases. My requirement was that nothing was spent the same week the item was discovered. If they wanted that Lego™ set and had the money to buy it, they had to wait until the next week. They learned that impulse purchases were sometimes not the best financial decisions. Many angry moments led to a change of heart. In the moment, it was the only thing that would make them truly happy, but upon reflection they realized the happiness would be fleeting. On the other hand, there were times when the following week they still wanted to use their money for that Lego™ set and we’d go buy it.

Eventually, they started saving their bubble gum money. They realized bubble gum now was not nearly as rewarding as something big later. Shortly after, I started adding to their allowance. I gave them the birthday party budget. They could have a party or could use it to take a friend to Disneyland. Or they could save it to use for something else if celebrating their birthday was a low priority.

If the choice is a birthday party or no birthday party, who wouldn’t take the birthday party. But if the choice is a birthday party or saving for an iphone or xbox gaming system, there’s some serious thinking to be done. I also gave them the clothes, movie, and dance budget to use as they like. Empower your kids to make those financial decisions. They learn best through experience.

Kids who are older can still learn how to make financial decisions. With older kids still at home, sit down and negotiate an allowance. While it might take time and effort to figure out how much and what it covers, make sure you stick to giving them only the allowance. They may be sad or mad they can’t afford something, but help them realize they can save up by reducing their spending in areas that are less important to them. They can also look into getting a job to have more money available to them. If something is really important, they will figure out a way to save for it.

Adult children may need help learning to live within their salary. You are doing them a disservice by buying them a house they can’t afford or loaning them money for a nice, new car. Making loan payments is no easier than saving a little each month for their next car. Help them open a money market account to keep that money until they need their next car. It is hard to say “no” to your children, but know that they will be happier in the long run if they are financially secure.

The foundation of making financial decisions is understanding that you have a finite amount of money. If you choose to spend money today, you won’t have it available for tomorrow. As adults, our “long term” spending isn’t a week, but years or decades. Is that new car more important than your child’s education? Can you afford to do both? How about retirement? Are you going to put your children through college and then expect them to put you through retirement because you don’t have enough money left over?