by Joe Hearn | Nov 15, 2012 | Asset Allocation, Distribution Planning, Estate Planning, Retirement
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.
by Joe Hearn | Nov 9, 2012 | Happiness, Pursuits, Risk
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.
by Joe Hearn | Nov 5, 2012 | Health
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.
by Joe Hearn | Oct 31, 2012 | Income, Pursuits
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.
by Joe Hearn | Oct 25, 2012 | Learning Challenge, Lifestyle Design, Pursuits
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
