A short lesson in perspective

A short lesson in perspective

Late last month an advertising executive (a real life Mad Man) named Linds Redding died of esophageal cancer.  After being diagnosed in 2011, he would regularly write about the disease, his treatments and his thoughts on life at his blog.

Earlier this year he wrote a post called A Short Lesson in Perspective in which he reflected on how wholeheartedly he had thrown himself into his career over the years.  As he rapidly approached the premature end of his life, he wondered aloud if it was worth it.

His insights and conclusions were so raw and honest that I wanted to excerpt a small portion of his post below so that you and I could reflect on our own priorities as we live life and plan for retirement.  One day (hopefully not soon) we will be where Linds was when he wrote that essay.  How great would it be if we could heed his words of warning so we could look back on our life with pride, satisfaction and few regrets?

A quick note: Linds refers to something called “The Overnight Test.”  When creating advertising campaigns, he and his team would often let ideas simmer overnight.  If it still seemed like a good idea the next day, they would say that it passed “The Overnight Test.”

From A Short Lesson in Perspective:

“Countless late nights and weekends, holidays, birthdays, school recitals and anniversary dinners were willingly sacrificed at the altar of some intangible but infinitely worthy higher cause.  It would all be worth it in the long run…

This was the con.  Convincing myself that there was nowhere I’d rather be was just a coping mechanism.  I can see that now.  It wasn’t really important.  Or of any consequence at all really.  How could it be?  We were just shifting product.  Our product, and the clients.  Just meeting the quota.  Feeding the beast as I called it on my more cynical days.

So was it worth it?

Well of course not.  It turns out it was just advertising.  There was no higher calling.  No ultimate prize.  Just a lot of faded, yellowing newsprint, and old video cassettes in an obsolete format I can’t even play any more even if I were interested.  Oh yes, and a lot of framed certificates and little gold statuettes.  A shit-load of empty Prozac boxes, wine bottles, a lot of grey hair and a tumor of indeterminate dimensions.

It sounds like I’m feeling sorry for myself again.  I’m not.  It was fun for quite a lot of the time.  I was pretty good at it.  I met a lot of funny, talented and clever people, got to become an overnight expert in everything from shower-heads to sheep-dip, got to scratch my creative itch on a daily basis, and earned enough money to raise the family which I love, and even see them occasionally.

But what I didn’t do, with the benefit of perspective, is anything of any lasting importance.  At least creatively speaking.  Economically I probably helped shift some merchandise.  Enhanced a few companies bottom lines.  Helped make one or two wealthy men a bit wealthier than they already were.

As a life, it all seemed like such a good idea at the time.

But I’m not really sure it passes The Overnight Test.”

Fiscal Cliff cheat sheet

Fiscal Cliff cheat sheet

Do you keep hearing the phrase “Fiscal Cliff,” but don’t know exactly what it means?  Well, get ready to impress your friends at the next cocktail party, because here’s a short cheat sheet on what it is as well as a few thoughts on how it might affect retirees.

The Fiscal Cliff is a combination of tax increases and spending cuts that will automatically occur on December 31 unless Congress and the White House come to some sort of compromise.

The tax increases include:

  • An increase in Federal income taxes.  We will go from six brackets to five, and the rates will go from 10%, 15%, 25%, 28%, 33% and 35% to 15%, 28%, 31%, 36% and 39.6%.
  • The maximum long-term capital gains tax rate will go from 15% to 20%.
  • Dividends will go from being the same as long-term gains (usually 15%) to being taxed as ordinary income (up to 39.6%)
  • The temporary 2% reduction in the FICA payroll tax will go away.
  • Itemized deductions and dependency deductions will be phased out for high wage earners.
  • The earned income tax credit, child tax credit and Hope tax credit will revert to their old (and less generous) limits.
  • People with student loans will no longer be able to deduct loan interest beyond the first 60 months of repayment.
  • Estate and gift tax provisions will change drastically.  The amount that can be excluded from an estate will drop from $5.12 million to $1 million and the top tax rate will increase from 35% to 55%.
  • The alternative minimum tax (AMT) exemption amounts will fall significantly, subjecting many more people to this tax.
  • In addition to the above, high wage earners will see a 0.9% increase in the Medicare portion of their payroll tax as well as a new 3.8% tax on some or all of their net investment income.

The spending cuts include:

  • The failure of the “Super Committee” to reach a deal to cut spending in 2011 means across the board cuts will happen automatically in 2013.  The cuts will total about $1.2 trillion ($109 billion of that in 2013) and will be spread evenly between defense and non-defense spending.

What this means for you:

There’s good news and bad news if all of these things are allowed to happen.  The good news is that, according to the Congressional Budget Office, the deficit will be significantly reduced (i.e. We will go into debt more slowly).  The bad news is that the country will likely go back into recession.

I’m assuming that Congress and the White House will come to some sort of agreement to avoid at least some of the things outlined above.  That will grab the headlines and cause the markets to rally, but don’t let that obscure the larger point.

Our country has promised and spent far beyond its means for many decades.  That cannot go on forever.  If you filter out the “noise,” the major themes of the next decade or two will likely be higher taxes, more reserved spending and less generous benefits (think Medicare, Social Security, etc.).  That’s not doom and gloom, it’s just reality.  Keep that in mind as you plan for retirement and do your best to build a margin of safety into your planning.

~ Joe

Photo by Victoria.  Used under Creative Commons License.
Retirement fire drill

Retirement fire drill

If you spend a good portion of your day in a building like an office or a school, chances are good that you’ve participated in a fire drill.  Those faux escapes give everyone a chance to practice evacuating the building and give those in charge an opportunity to identify and fix any potential problems.

If retirement is on your horizon, it would probably make sense to do something similar.  Call it your “Retirement Fire Drill.”  After all, sometimes you get to choose when you retire, sometimes (through illness or layoffs) you don’t.  It’s good to be prepared.

So let’s sound the alarm and pretend that today is the day that you’re transitioning into the next phase of life.  How will the planning you’ve done so far hold up in the real world?  Below are 5 areas to test.

Is your budget going to work?

You have made a retirement budget haven’t you?  If not, download our free retirement budget worksheet.  What will your sources of income be once your paycheck stops?  Do you have a realistic estimate of how much that income will be?  How about expenses?  Some people say you can live on about 70 percent of your preretirement income, but is that realistic for you?  There’s only one way to find out.  Practice living for a few months on the income and expenses that you’ve projected.  Then reexamine your budget and see if anything needs to change.  If it didn’t work for a 2 month trial, it probably won’t work for a 20 year retirement.  Take what you learned and make adjustments as necessary.

Is your asset allocation going to work?

If you retired today, how would your investments fare if we had another downturn like 2008?  Are you invested too aggressively?  Or how about if we got into a period like the late 1970s and early 1980s when inflation increased by double digits each year.  Are you invested too conservatively for your retirement income to keep pace?  Shocks to your portfolio early in retirement greatly increase your chances of running out of money.  You can minimize that risk by having your asset allocation correct and by setting aside a year or so of retirement income in cash so you can draw from that, rather than your investments, in the event of a downturn.

Is your health care going to work?

You won’t be eligible for Medicare until 65.  Are you planning on retiring before that?  If so, how are you planning to bridge the gap?  Even if you wait until 65, do you have enough set aside to pay for the premiums and co-pays required under Medicare?  Have you budgeted in the cost of a Medicare supplement policy?  Are there any health care issues (e.g. dental work, operations) that you should take care of now, before transitioning into retirement?  And what about long term care?  What if you or your spouse became disabled or needed ongoing professional care?  Do you have a plan to pay for that care that doesn’t include spending down all of your assets and leaving the healthy person in a financial bind?

Is your income strategy going to work?

If you and your spouse are 65, there’s a 72 percent chance that one of you will live to age 85.  There’s a 45 percent chance that one of you will live to age 90.  Will your income last that long?  Are you taking a sustainable amount from your investments each year or are you in danger of running out of money because you’re taking too much?  Will part or your income (such as a pension or Social Security) disappear when you or your spouse dies?  Can the surviving spouse live on the remainder?  Rework your budget to factor in one or more of those income shocks and then think about how you would respond.

Is your estate plan going to work?

If you plan on moving to a different state, have you checked with your attorney to see if your will and estate plan documents will be valid in the new state?  What if you became disabled or incapacitated?  Do you have powers of attorney that specify who takes charge?  If that person is your spouse, what happens if he or she dies before you?  Does your will reflect your current wishes?  Do you have the correct beneficiaries listed on accounts and insurance policies?  Are your documents organized and easily accessible?  Do everything you can to have your affairs in order.

How did you do?  If you encountered a few problems, don’t worry.  One of the great things about a drill is that it’s just practice.  Take the information you learned from the fire drill and tweak your plans to give yourself a better outcome.  That way you’ll be ready when the real alarm bell sounds.

~ Joe

I originally published this article at www.fpanet.org.
Contentment demands little

Contentment demands little

I recently had a friend who quit his job after working there for almost 20 years.  When I asked him why he said, “I had just gotten too comfortable.”

Too comfortable?!  Is there such a thing?  After all, isn’t that what we’re all striving for?  What’s wrong with being too comfortable?

As I thought about it, I think I caught his meaning.  For him, comfort had become risky because:

  • It was sapping his drive and motivation
  • It was keeping him from taking risks
  • It was making him lazy and fearful of change
  • It was causing him to give up on certain dreams

He had a stable income and a warm bed, but he was starting to feel stuck and stagnate.  He was comfortable, but he wasn’t feeling particularly fulfilled.  Not only that, but he was afraid to do anything about it for fear that things would get uncomfortable.

Have you ever felt that way?  I have.  Comfort is nice, but it can be dangerous if it leaves you feeling overly content.  That’s because contentment demands little.  It steers you into a rut that can be hard to get out of.

This comfort paradox can be especially worrisome as we get close to retirement.  Why?  Comfort is often a by-product of successful retirement planning (e.g. no job, financial independence, etc.).  In some ways that can be good.  After all, who wants to be worried about where your next meal is going to come from or how you’re going to pay the electric bill.

Unfortunately, it can be bad too.  First of all, retirement is a major transition and transitions can be uncomfortable.  You’re leaving a job and a routine you’ve know for decades.  You’re dealing with unfamiliar things like Medicare and Social Security.  You may be moving to a new house or a new city.  Being too focused on comfort can cause you to make decisions during that transition that favor short-term comfort over long-term good.

Second, retirement is the time to make your plans and dreams a reality.  That means you’ll be doing new things, visiting unfamiliar places and meeting new people.  To make that happen, you can’t be content to sit back and play defense.

In other words, both the transition into retirement and your lifestyle in retirement require you to get out of your comfort zone.  There needs to be a tension between your desire for comfort and your desire to strive for more.  If your primary goal is comfort, don’t expect great things.  If, however, your primary goals are growth, fulfillment and personal satisfaction, then you can expect a remarkable retirement, but you can also expect to be a bit uncomfortable in the process.

~ Joe

Photo by Becky McCray.  Used under Creative Commons License.
How to stay mentally sharp as you age

How to stay mentally sharp as you age

Most of us know what we need to do to keep our bodies fit, but how can we keep our brain fit? It turns out that the answer might be the same for both: Exercise.

An article in the Wall Street Journal recently highlighted a study that has been following a group of Scottish school children born in 1936. In 1947, at age 11, those children were tested for cognitive ability. Sixty years later, a group of them agreed to retake the same test.

In addition to the cognition test, they filled out lengthy questionnaires that examined things like family history, health history and level of physical activity. They also underwent MRI brain scans. The results? There appeared to be a direct correlation between physical activity and brain shrinkage. Those who were inactive had more brain shrinkage and greater cognitive decline. Those who were active had less. Alan Gow, one of the researchers conducting the survey, summarized it this way: “People who exercise more have better brain health.”

Somewhat surprisingly, the study didn’t find a similar correlation between brain health and things like social interaction or intellectual activities. In other words, if you want to keep your brain fit as you age, put down the Sudoku and pick up the barbell.

Fit by 40 Update

While we’re on the topic of health, I thought I’d give you an update on my own quest to get into shape. My trainer continues to come up with workouts apparently taken from the Rocky IV playbook (push this box, life this weight, chase this chicken). So far I’ve dropped ten pounds of fat and replaced it with five pounds of lean muscle. I still have a ways to go, but so far so good.

Thanks for the encouraging notes that many of you have sent. Hopefully some of you will use my story as motivation to start a program of your own. Especially now that we know how exercise can benefit our brain as well as our biceps.

Have a great week!

~ Joe

Photo by Kiran Raja Bahadur.  Used under Creative Commons License.