Let your paycheck be your portfolio

Let your paycheck be your portfolio

Have you ever daydreamed about what you’d do if you won the lottery? Maybe take that trip around the world you’ve always wanted to take.  Buy that little red sports car.  Retire early.

For some reason, we’re conditioned to think that there isn’t a dream, desire or problem that a seven figure payday couldn’t solve.  We’re guilty of this same thinking when it comes to retirement.  We have a million things we want to do, but we tell ourselves that we can’t really do them until we’re worth millions.

Well, today is your lucky day, because you just won $10 million in the Intentional Retirement Lottery*.  Woo-hoo!  Time to call work and tell your boss you won’t be coming in today (or any day for that matter).  Go ahead.  I’ll wait.

OK, with that pesky day-job out of the way, let’s get down to business.  Like most lotteries, we give you the option for a lump-sum payment rather than a lifetime annuity.  If you take the lump-sum (which most do), you end up with half of the jackpot amount, which in this case is a cool $5 million.

Of course you need to pay taxes too.  Now that you are officially part of the 1 percent, you are in the 35 percent tax bracket (congratulations!).  That, combined with a typical state tax of around 5 percent, will lop another 40 percent from your winnings.  Painful, but hey, that still leaves you with $3 million.

Of course your extended family is going to come out of the woodwork and want you to spread the wealth a bit.  You’ll probably also want to take care of a few of your favorite charities.  Drop around $500,000 on those and you end up with $2.5 million in the bank.

Since you just quit your job, you want that money to last.  To make sure that happens, I would advise you to take no more than 4 percent per year from your portfolio.  That comes out to $100,000 per year.  “Hey, wait a minute,” you might be saying.  “That’s close to what my spouse and I make right now.”

Exactly.  You may not have a seven figure nest egg, but if you make at least $40,000 per year, you have the income that a seven figure nest egg can generate.  What’s my point?  Don’t use your portfolio as the scapegoat that keeps you from pursuing your goals and dreams.

You likely have the same income now that you’d have if you had millions in the bank.  The only difference is in who signs your checks.  Said another way, you have the same (or better) income now that you’ll have in retirement.  Are you living that way?  If not, then maybe—just maybe—money isn’t the key problem after all.  Maybe it’s deciding what you really want to do with life and getting intentional about making it happen.  Don’t defer the very best until the end.  Keep building that portfolio, but until you get there, let your paycheck be your portfolio.

~ Joe

* Not really, but go with me on this one.
Photo by Paul Sapiano.  Used under Creative Commons License.
Discipline vs Motivation

Discipline vs Motivation

Before talking about discipline and motivation, I want to give you a quick update on the most recent 30 Day Challenge.  As many of you know I do periodic learning challenges in life and then write about them here at the site.  So far I’ve learned all the countries of the world, gotten SCUBA certified (followed by some amazing diving in Anguilla) and learned to make croissants with my wife.

My next challenge was to learn how to use a new presentation software called Prezi.  I’ve spent some time teaching myself to use it, with mixed results.  I have the basics down, but the presentations I have created so far are less than mind blowing.  Not only that, but my typical 30 day window has grown to about 90.  In today’s post, I go into a few of the reasons why this challenge has been less than successful so far and what key lesson we can learn from my struggles that will apply to any big goals we set in life.

Discipline vs. Motivation

“If you want to build a ship, don’t drum up people together to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.”   ~ Antoine de Saint-Exupéry

As I thought about my struggles with the most recent challenge, I realized that there was a significant difference between it and the first three:  I actually wanted to do the first three!  For example, I had a desire to learn to SCUBA dive.  I practically skipped to the classes each week.  The same is true for the countries and croissants.  They were fun, interesting and things I wanted to do.  On the other hand, Prezi was something that I felt like I should learn so that I could communicate my ideas more effectively when presenting, but it wasn’t really something that I had a burning desire to do.  At the core it came down to a difference between discipline and motivation.

In my mind, discipline is consistently doing what you don’t really want to do, but know that you should.  Motivation is being impelled to do something that you actually want to do.  One is forced and the other is natural.

Not surprisingly, I feel like we will all have more success in life if we actually focus on the things that we’re motivated to do rather than trying to find the discipline needed to overcome our lack of interest or desire.  Sure, there will always be a place for discipline.  It will help us eat right and get to the gym.  It will help us set aside for the future.  But we will be much more effective if we can actually focus our time and efforts on things that we’re already motivated to do.

The more motivation you have, the less discipline you need.  The less discipline you need, the more likely it is that you’ll actually stick with it and accomplish what you’re trying to do.  So as you think about your own life, don’t litter your day with things that you’re not already motivated to do.  Focus on those things that you’re excited about.  And if you come across something that you need to do, but you’re not excited about, try to come up with ways to inject motivation instead of just discipline.  Find some friends to do it with you.  Make it into a contest.  Promise yourself some sort of reward.  Do that, and you’ll achieve more than if you just rely on willpower alone.

I’ll cue up the next challenge soon, but for now I want to finish up with Prezi.  My wife actually just learned to use it for a presentation that she needed to give.  I told her that if she teaches me everything she knows I’ll finally get around to that guest bedroom remodeling project I’ve been promising.  Hopefully, that will be all the motivation she needs.

How about you?  Are you running into roadblocks with your to-do list?  That could be a sign that you’re spending too much time focusing on things that you don’t actually want to do.  Life is too short for that.

~ Joe

How aging affects your financial decision making

How aging affects your financial decision making

As we age, our brains don’t work as well as they used to.  This is particularly true when it comes to making financial decisions.

A recent study by the Texas Tech Financial Literacy Assessment project showed that our ability to understand financial concepts and make good decisions based on that information peaks in our 50s.  After age 60, our abilities decline by about 2 percent per year.  By age 90, the typical person has about half the cognitive financial abilities that they had at 65.

Ironically, the study also showed that our confidence in our financial decision making ability rises as we age.  In other words, we get more and more confident even as we become less and less able.  How does the old saying go?  Often wrong, but never in doubt?

Since aging is a reality for all of us, what can we do to protect our finances from self-inflicted wounds?  Here are a few suggestions:

  • Hire a financial adviser that is trustworthy and younger than you.
  • Have a trusted family member that you can take to meetings with you.
  • As much as possible, have your finances on autopilot after 60.
  • Have a financial power of attorney in place so that someone can step in to help you if needed.
In short, surround yourself with people you trust and don’t be afraid to use them as a sounding board as you make decisions with your money.  Come to think of it, that’s good advice for any age.
~ Joe
When should you claim Social Security?

When should you claim Social Security?

Imagine for a moment that you are one of the few lucky people in America still covered by a defined benefit pension plan.  Now imagine that you’ve reached the ripe old age of 62 and you’re considering hanging up your work boots (or Wingtips) and heading off into retirement.  Your employer would like to see you stick around for a few more years, so he presents you with three options:

1)      Retire now and you can start collecting your $1,500 per month pension.

2)      Retire four years from now and he will bump your pension up by more than a third to just under $2,000 per month.

3)      Stick around for eight more years and he will increase your pension by more than 75 percent to around $2,625 per month.

If only you were so lucky, right?  Actually this is more than just a hypothetical.  You will likely face a very similar decision as you plan for your retirement, except the “pension” is called Social Security and the “employer” is Uncle Sam.

You will have four basic choices when it comes to claiming Social Security.  Three of those were mentioned above: Retire early, retire on time (age 66 or 67 for most baby-boomers) or retire late.  The fourth option is called file and suspend (more on that later).  If married, your spouse will have the same options.

According to the Social Security Administration more than 73 percent of people start taking benefits early.  Should you go with the majority or heed Oscar Wilde’s warning that “Everything popular is wrong.”?  It depends.

Your goal should be to choose the option or combination of options that will result in the greatest cash flow for you and your family.  Generally speaking, the longer you wait, the higher your benefits will be, but waiting isn’t a given.  Below are several questions to consider that will help you evaluate when to file.

Are you still working?

If you are still working and you decide to begin receiving Social Security benefits early, chances are good that your benefits will be reduced.  If you earn more than the earnings limit ($14,640 for 2012), your benefits will be reduced by $1 for $2 you make above the limit.  That penalty shrinks in the year that you reach full retirement age.  This is more of a delay than a permanent reduction.  Once you reach full retirement age, the earnings penalty goes away and Social Security will recalculate your benefit amount to credit you for the months you were penalized.  Still, if your plan is to file early in order to supplement your income, you may have less coming than you thought.

Do you have a long life expectancy?

Some people spend only a few years in retirement, while others spend decades.  Consider the life expectancy of both you and your spouse.  If you are healthy and expect to be collecting benefits for a long time, it might benefit you to delay filing for Social Security until you have accrued the maximum benefit.  Alternatively, if your health is poor, you might consider collecting benefits as soon as possible, unless your spouse is healthy and is relying on your earnings history (spousal benefits allow your spouse to either claim their benefit or half of yours, whichever is greater).  In that case, if you file early and receive reduced benefits, your spouse will be stuck with those reduced benefits for the remainder of his or her life.  Be sure to consider how your actions affect your spouse’s benefits and vice-versa.

Will you have health insurance?

You can begin collecting Social Security benefits as early as age 62, but you won’t be eligible for Medicare until 65.  It’s not a good idea to be without coverage, so make sure you have a plan to replace your employer provided health coverage if you decide to retire early.

Do others qualify for benefits based on your earnings record?

If someone is filing based on your benefits, when you choose to file will affect the benefit that they receive.  If you choose to file early and take a reduced benefit, any person filing based on your record will take a reduced benefit as well.  The decision that maximizes your lifetime benefits might drastically reduce those of your spouse.  Keep that in mind.

Do you qualify for benefits on someone else’s record?

If your spouse or former spouse has died and you qualify for survivor benefits based on his or her earnings history, it could make sense to apply for those benefits now and wait to claim your own retirement benefits until later, when they are higher.

If your spouse is still living and has reached full retirement age, it might make sense for him or her to employ a file and suspend strategy.  Here your spouse would file for benefits, but ask the Social Security Administration to suspend the payment of those benefits.  Because you can’t file for benefits on their record until they do, this would allow them to continue earning delayed retirement credits, but would also allow you to file for spousal benefits.

Where will you get more growth?

Your Social Security benefits will be about 75 percent higher if you wait until 70 to collect as opposed to 62.  That’s a compound rate of growth of more than 7 percent per year to your benefits.  Can you get a better rate of return with your personal investments?  Certainly not with a money market or certificates of deposit whose rates are at multi-decade lows.  You might be able to get that kind of growth in stocks, but not without added risk.  My point?  If your benefits are growing faster than your personal investments, it might be better to tap your nest egg first and wait to take Social Security until later.

Thankfully, there are many tools available to help you evaluate your options.  To analyze your personal situation and get ideas for how best to maximize your benefits, use the Social Security timing calculator at www.intentionalretirement.com/social-security.  No matter what you ultimately decide, be sure to consider your options carefully.  Your choice will likely be one of the most important decisions you will make when it comes to your retirement.

~ Joe

I originally published this article at www.fpanet.org.


Move, Eat, Learn

Move, Eat, Learn

Today I have something a little different for you.  As you know, a few of the major themes here at Intentional Retirement are to focus on a life full of rich experiences and to always be learning.  About a year ago three guys went on a 44 day, 38,000 mile, round the world trip and used the footage from their trip to create three short films encouraging people to move, eat and learn.  As we head into the weekend, I thought they’d be a fun reminder to get out there and enjoy the world.

You can’t embed video into these emails, so I put links to each below.  They are only about a minute each.


Move: http://vimeo.com/27246366

Eat: http://vimeo.com/27243869

Learn: http://vimeo.com/27244727

Have a great weekend!