by Joe Hearn | May 29, 2018 | Debt, Risk
Every year the flu kills about 36,000 people in the United States. Those who die typically have an immune system that is already compromised in some way, such as by age or illness. In other words, it’s not necessarily the strength of the flu that is so dangerous, but the weakness of some immune systems.
In the same way that the flu virus can disproportionately affect those with weakened immune systems, a financial virus can disproportionately affect those with compromised financial health. The virus could be something as simple as an unexpected car repair or something a bit more serious like a market crash, job loss, divorce, disability, illness or unexpected death. How well you’re able to respond to those things depends on how financially healthy you are and how well you’ve immunized yourself against those threats.
Some people are fragile and at risk. Others are financially resilient. The closer you get to retirement, the more resilient you want to be so that something unexpected doesn’t derail decades of planning. Below are five things that, financially speaking, will either make you weak or strong, depending on how you handle them.
How much you owe. There are many tell-tale signs of a person who is financially fragile and having too much debt is often the most obvious. When you take on debt, you are bringing future consumption to the present. That gives creditors a legal claim on your future earnings, which reduces your cash flow, increases the risk that you will run out of money and limits what you can afford to do. Get rid of your debt, however, and not only will you be more financially resilient, but you can also retire sooner. Unfortunately, years of low interest rates have encouraged exactly the opposite behavior. What’s a good level of debt for a retiree? Shoot for zero.
How much you spend. If you live at or above your means, you are financially fragile. That’s true whether you make $50,000 per year of $500,000. Here’s the good news. Most of the people reading this likely have the ability to live significantly below their means. What if you spent 10% to 50% less than you made every year? Would that give you a certain resilience? You wouldn’t be worried about an unexpected car repair, I can tell you that much. So take a stand against lifestyle inflation. Just because you will earn more money this year than you did last year doesn’t mean you have to spend it. Set a lifestyle cap and save the rest.
How much you’ve saved. If you spend less than you make, you’re able to save. That savings not only protects you in the short term (i.e. emergency fund), but it allows you the financial freedom to live the life you want to live in the long run (i.e. retirement). In other words, savings is the secret sauce in both security and independence. How much should you have saved by now? This article will give you a rough idea.
How well you’ve planned. Most people don’t have a plan for retirement. They don’t know what they want to do, how much it will cost or whether or not they are on track to save enough to pay for it. Not surprisingly, that creates a great deal of anxiety, uncertainty and—you guessed it—financial frailty. If you are among the 88% of people who don’t have a written plan, your retirement will probably fall far short of what it could be.
A plan can also help inoculate you against bad decisions. Sometimes a financial virus takes the form of fear and uncertainty. When we’re scared, we tend to make unwise and irrational decisions. To navigate those waters, it’s good to have a North Star. The wind can blow and the seas can rage, but when you look up, it will be there. A detailed retirement plan can act as that North Star. If you have a long-term plan—you know where you are, where you want to be and how you’re going to get there—you can inoculate yourself against short-term fear and uncertainty. When you have context and you understand the big picture, you’re less likely to be blown off course or panic and make a mistake. For help with creating a plan, check out my Ideal Retirement Design Guide or touch base with me if you want some one-on-one help.
How well you’ve prepared for the unexpected. What if something happened to you or your spouse? Would that derail your finances? Are your legal and financial affairs in order? Life is unexpected. The more “What if?” planning you do, the more resilient you will be in the face of tragedy. Here are two articles and a guide that can help:
That’s five ways to boost your immunity, harden your defenses and make yourself more financially resilient. But they only work if you take action. Modern medicine has given us many miracle vaccines, but they only work if you take them. So too, financial vaccines are either contagion or cure, depending on what you do with them.
Be intentional,
Joe
by Joe Hearn | May 11, 2018 | Lifestyle Design
I’ve heard it said that the best way to spot a counterfeit is to be an expert in what is genuine. The Secret Service knows this well. When training their agents, they don’t start by giving them samples of fake bills. Instead they provide them with genuine bills and train them in every conceivable detail of those bills. The look. The feel. The ink. The borders. The serial numbers. The spacing. The portraits. The holograms. The seals. The details of Grant’s beard. The shading on Ben Franklin’s face.
Once the agents are experts in the details of genuine bills, spotting fakes is no problem. The slightest deviation from what is genuine is enough to expose the bill as fake.
Genuine vs. Counterfeit
Think about your life. Do you know what your “genuine” is supposed to look like? Do you have a clear understanding of what you really want out of life? The things. The people. The activities. The experiences. The priorities. How you spend your time.
If you haven’t done a good job defining your “genuine,” then counterfeits will slip by and begin circulating through your life. The more counterfeits you have, the further you’ll get from the life you actually want and the less happy and fulfilled you’ll be. Left unchecked, the economy of your life could become overwhelmed with counterfeits, at which point it ceases to function properly, just like a normal economy would.
How to find your genuine life
The application? You need to decide what you really want out of life and take those plans very seriously. That’s a theme I’ve touched on before. It’s a core element of Intentional Retirement. Below is a list of several resources and posts that take a deeper dive on this topic. Use them to help define your genuine and become an expert at spotting it. Then be diligent at tossing the fakes before they can take root.
Guides and eBooks
Posts
Have a great weekend. Be intentional.
~ Joe
by Joe Hearn | Apr 25, 2018 | Lifestyle Design, Pursuits, Travel
My wife went to visit her sister a few weeks ago in New York. While she was gone, my daughter and I felt like doing something fun, so the two of us went to Washington D.C. to see the cherry trees in bloom. A hundred years ago, either one of those trips would have been costly, dangerous and impractical. Now for a few hundred dollars and a little planning, you can start your day at home and end it a few thousand miles away.
I sometimes take for granted how crazy that is and it illustrates a gradual change that has been happening for decades: The declining cost of distance. Technology has utterly transformed the cost, effort, time and risk involved with getting from A to B. In many cases, you don’t even need to get off your couch. Here are some examples from just the last few decades.
- Email has replaced physical mail.
- Expensive long-distance calls are a thing of the past.
- Video conferencing options like FaceTime and Skype allow us to see and stay connected with those we love.
- The internet has not only put the world at your fingertips, but allows you to have it delivered in 2 days or less.
- Cars have become safer and more fuel efficient.
- Flights have gotten cheaper and more prevalent.
- Services like Airbnb and Uber make travel easier, more enjoyable and less expensive.
This trend will likely continue and the cost of distance will become more and more negligible (think virtual reality, hyperloop, automation, 3D printing and supersonic air travel). How should this affect your retirement planning? Here are a few thoughts:
Live where you want. As the cost of distance continues to decline, location becomes less important. When distance is expensive, deciding where to live often involves some serious tradeoffs. “Should I live by my grandkids in the Midwest or in that laid-back beach town in Southern California?” When distance is cheap, you can afford to choose “both/and” instead of “either/or.” It just takes a bit of money, planning and intentionality.
Don’t get stuck in the past. Take advantage of the new economics of distance to live life and do interesting and fulfilling things both now and in retirement. That’s pretty self-explanatory. Don’t get stuck in the old way of thinking and orient your life around a “distance is expensive” fallacy.
Embrace technology. Look for ways to shrink the cost of distance further. Be the grandparent who is an expert at FaceTime. Be the first of your friends to have a virtual reality headset and use it to “visit” famous museums and faraway cities without leaving home. You might even consider becoming a medical tourist. Need heart surgery or hip replacement? India caters to medical tourists needing those types of procedures. They have some of the best hospitals and physicians in the world and the costs on average are about one-tenth of the cost in the US.
One last thought
Before I sign off for today, I mentioned that my daughter and I saw the cherry blossoms. Part of that decision was inspired by a poem I like by A.E. Housman. His sentiments are similar to our philosophy here at Intentional Retirement, so I thought I’d share it.
Loveliest of trees, the cherry now
Is hung with bloom along the bough,
And stands about the woodland ride
Wearing white for Eastertide.
Now, of my threescore years and ten,
Twenty will not come again,
And take from seventy springs a score,
It only leaves me fifty more.
And since to look at things in bloom
Fifty springs are little room,
About the woodlands I will go
To see the cherry hung with snow.
Stay Intentional,
~Joe
by Joe Hearn | Apr 16, 2018 | Lifestyle Design, Pursuits, Retirement
A blogger I follow recently shared the following paragraph from the book The Rise of Superman: Decoding the Science of Ultimate Human Performance:
“Scientists who study human motivation have lately learned that after basic survival needs have been met, the combination of autonomy (the desire to direct your own life), mastery (the desire to learn, explore, and be creative), and purpose (the desire to matter, to contribute to the world) are our most powerful intrinsic drivers—the three things that motivate us most.”
In other words, once you have a roof over your head and food in the fridge, you want to take a step or two up Maslow’s Hierarchy and focus on things that bring happiness and fulfillment. Retirement is the ideal time to make that a reality. Financial independence means that the money is covered, so you’re free to pursue the things that bring meaning. Both are important. The money will help you sleep at night. The meaning will give you a reason to get out of bed in the morning. With that in mind, here are 3 simple rules for retirement that will help you find meaning and purpose.
Rule #1: Control your time. We all want to feel like we are in control of our life and directing its course. The good news is, no matter how old you are or how much money you have, you control part of our life right now. Congrats! You’re (sort of) retired! Maybe you control 10 percent. Maybe 50 percent. No matter the amount, make the most out of it. Be motivated, intentional, creative, thoughtful, curious, introspective, willing to take risks, healthy and active. Be disciplined with whatever time you control now because the more you do it, the better you’ll get at it. It’s tough to flip a switch at retirement and go from decades of deferring your dreams to really living. Be a good steward when you control 10-20 percent of your time and that will help you when financial independence allows you to control 80-90 percent.
Why is controlling your time so important? Because, to paraphrase Annie Dillard, how you spend your days is how you spend your life. If you spend your time doing the things that are important to you, then you’ll look back on life as time well spent. If not, you’ll have plenty of regrets. In fact, the number 1 regret of the dying, according to the aptly titled book The Top 5 Regrets of the Dying, is this: “I wish I’d had the courage to live a life true to myself, not the life others expected of me.”
We should learn from that. The author interviewed hundreds of people who are where we will one day be. They had lived their entire life. They got out of bed thousands of days in a row and with each new day they had the freedom and opportunity to do what they wanted. And yet, when they reached the end, their top regret was, “Man, did I make the wrong choice most days. I didn’t really live the kind of life I wanted. I didn’t do the things that were important to me.” So if you want a remarkable retirement, control your time. Know what you want out of life and take those plans very seriously.
Rule #2: Be a lifelong learner. We saw earlier that it’s human nature to want to learn, explore and be creative. Show me someone who loves to learn new things and I’ll show you someone who will most likely have an interesting, rewarding retirement. Why is that? Learning comes with a host of benefits. It keeps your mind sharp. It keeps you engaged with advances in society. It helps you to know yourself and discover new things. It gives you new people to interact with. It gives you something fun to do with your spouse or significant other. It provides personal satisfaction and a sense of accomplishment.
And when I talk about learning, I’m not talking about learning in the traditional, sometimes boring sense of the word (e.g. What year did the Spanish-American War start?), but in the fun, practical, interesting sense of the word (e.g. How do you scuba dive?). In other words, pursuing knowledge and experiences that enrich your life.
One of the great things about our world today is that self-learning (also known as Autodidactism) is easier than ever. Gone are the days when you need an expensive education or lengthy apprenticeship just to learn more about something that you find interesting. Now you can just sit down on your own time and access a plethora of resources, tools, apps, books, and videos on just about any topic that interests you. Take advantage of that. Be a lifelong learner.
Rule #3: Make a difference to someone or something. One of the most popular posts I’ve written at Intentional Retirement is 15 Practical Ways to Live a Purposeful Life. One of the most popular books in recent memory is The Purpose Driven Life. Neurologist, psychiatrist and holocaust survivor Viktor Frankl said that striving to find meaning in one’s life is the primary, most powerful motivating and driving force in humans.
In other words, we’re hard wired to want purpose and meaning. That need doesn’t somehow vanish when you enter retirement. If anything, it gets stronger. When I talk to clients that have been retired for a while, the desire to find purpose and to leave some sort of legacy that outlasts them is important.
Your bucket list doesn’t need to consist entirely of bungee jumping and exotic travel. As Shakespeare once said: “Leisure is a beautiful garment for a day, but a horrible choice for permanent attire.” Don’t get me wrong. You should absolutely do fun and interesting things. Splurge on yourself. Be a little selfish. Those things are great, but don’t forget to add items to your list like giving, serving and volunteering as well. Maybe that means doing something like my retired friend Dan who spent three months volunteering on Mercy Ships in the Congo. Maybe that’s building houses for Habitat for Humanity like my client Bill. Maybe it means volunteering in your church or running for town council. Whatever it is, be thinking of ways to use your time, treasure and talents during retirement that will have a positive impact on others and will bring meaning and purpose to you.
~ Joe
by Joe Hearn | Mar 26, 2018 | Asset Allocation, Debt, Investing, Risk
The current bull market is 9 years old. That’s the second longest on record and it has people wondering how much further it can go. That question has taken on added urgency given the recent volatility, rising interest rates and political uncertainty. Markets lost ground in February (the first losing month in over a year) and they’re on track to close lower in March as well. Is this the beginning of something bigger? Should you make changes to your portfolio or otherwise prepare for a deeper downturn? I’ll share my thoughts below.
Keep Things in Perspective
First of all, I think it’s good to keep things in perspective. Yes, there have been some scary drops recently. In February, the Dow had its two biggest point drops ever. The S&P 500 had four of its largest drops ever. On a percentage basis, however, those drops didn’t even crack the top 20. Still, when the daily loss has a comma, it’s disconcerting. Just try to remember that pullbacks are natural and healthy, especially after the outsized gains we’ve had over the last several years. At the beginning of this bull market (the end of the Great Recession) the Dow was below 7,000 and the S&P was below 700. Now, even after the recent selling, they’re around 24,000 and 2,600 respectively.
Watch the Fundamentals
Warren Buffett has famously said that in the short-term the market is a voting machine, but in the long-term it’s a weighing machine. In other words, fundamentals matter more than feelings. How do the fundamentals look? In a word, strong. GDP and corporate earnings are growing at the fastest pace in years. The tax cuts will boost profits even more. Job creation continues to surprise on the upside. Unemployment is low. Consumer sentiment and consumer spending are very strong. Interest rates are still relatively low. Most signs point to a healthy and growing economy.
3 Key Risks
While most indicators are positive, that doesn’t mean that investors should be complacent. The bullish case is always strongest right before it’s not. And even if the fundamentals stay strong, you can still get some nasty price corrections. What are the key risks?
I see three primary risks right now: 1) Valuations, 2) Interest Rates, and 3) Political/Geopolitical risks. Because of the strong economy, stocks have been going up and valuations are at the upper end of their historical range. Markets are priced for perfection. What if we don’t get it? To quote John Mauldin, an economist I follow, “the consequences of a mistake are growing.” Or what if the Fed raises rates too aggressively? That could tip the economy into recession. And the uncertainty in Washington is not helping. If we get into a trade war with China or the Mueller investigation finds serious wrongdoing, markets will not react positively.
How to Protect Yourself
I said earlier that pullbacks are healthy. What do I mean by that? Economist Hyman Minsky had a theory that stability leads to instability. In other words, when the economy and markets are good, it encourages more and more risk taking. People start to focus on reward and ignoring risk. They invest too aggressively. They take on too much debt. They save less. They get complacent. And then a shock hits the system, losses start to build and people panic. The bottom falls out. That sudden instability is referred to as a Minsky Moment. The longer the period of stability, the greater the likelihood that people are making decisions that will eventually lead to serious instability. Periodic corrections are healthy because they keep people from straying too far from home.
Which brings me to the question at the beginning of this article. Should you prepare for a deeper downturn? The answer, of course, depends. During this 9-year bull market, how far have you strayed or drifted from your appropriate investment and retirement strategy? How can you tell? Here are 7 areas to look at closely.
Risk Tolerance. The longer a bull market goes, the less people worry about (or even think about) risk. That’s a problem, because the economy and markets usually revert to the mean. What would mean reversion look like now? We’ve gotten a taste of it over the last several weeks. After years of rising markets, they start to fall. After years of almost non-existent volatility, it spikes. After a decade of historically low interest rates, they start to climb. If the market dropped 20-30% this year, how would that impact your portfolio? Could you (would you) just ride it out? If not, you should probably dial back your risk.
Asset Allocation. The two primary ways to manage risk are through diversification and asset allocation. Look at your portfolio. Do you have any outsized positions? Is your stock/bond balance appropriate given your risk tolerance? Has your allocation drifted or changed over the years? Review your portfolio and align your asset allocation with your risk tolerance.
Time Horizon. All of this is a bigger deal if you’re at or near retirement. You have less to worry about the longer you have to go. Even after the 57% peak to trough drop in 2008-09 the markets fully recovered within about 4 years. Those who rode it out did fine. Could you ride out another major downturn? If you’re already retired, maybe not. At the very least you’re 9 years closer to retirement than you were during the last serious pullback. And even if you have time, sharp drops can cause you to make mistakes and do the wrong thing at the wrong time, so see points 1 and 2 again. Make sure you understand your risk tolerance and that your allocation is aligned with that.
Spending. Most people have lifestyle bloat as they get older. As income grows, so do expenses. Bigger paychecks mean better houses, cars, vacations, wardrobes and gadgets. That’s not necessarily bad, but the longer good times persist, the closer we tend to push our spending to the outer limits. That makes a person financially fragile. It can cause stress, limit your options and force you to make compromises in life. You control your spending. Beware of bloat. The more you live below your means, the more financially resilient you will be. And when you splurge on things or add expenses, do your best to make that spending discretionary rather than fixed. That way you can dial back if your income drops or the economy heads into recession. See this article on how to use dynamic spending to make your money last.
Debt. One of the characteristics of long bull markets is that people load up on debt. The boom years make them more comfortable borrowing for cars, houses and credit cards. Having debt adds risk and reduces cash flow, two things that are especially troublesome for a person at or near retirement. If you want to be better positioned to weather a financial storm, get rid of debt.
Saving. The average savings rate in 2015 was 7.19%. In 2016 it fell to 5.98%. Last year it fell to 3.74%. Care to guess which direction it will move in 2018? This is what Minsky was talking about. Stability leads to instability. People become complacent. They save less, which means they have less of a buffer, which means they’re less able to weather a storm.
Cash. It’s always a good idea to have a portion of your portfolio in cash or short-term securities. That way, if markets drop and a good investment opportunity presents itself, you’ll have some dry powder to invest. Or, if you’re already retired and taking distributions from your portfolio, you can pull your distributions from your cash rather than selling your stocks into a declining market.
Will the markets drop further? Who knows. The risk is certainly there. The important thing is to focus on the things you can control and make sure that if we get another downturn, it won’t derail your plans.
