by Joe Hearn | Jun 15, 2016 | Debt, Retirement, Risk
The amount of debt in the world is staggering.
- Auto loans recently passed $1 trillion for the first time and the average car loan is the highest it’s ever been, recently surpassing $30,000.
- Student debt stands at about $1.4 trillion.
- Mortgage debt is about $14 trillion.
- More than 30% of households carry a balance on their credit cards. Those that do have an average balance of $16,000
- The top 2,000 non-financial companies have $6.64 trillion in debt, $2.81 trillion of which they’ve added in the last five years.
- The U.S. public debt has nearly doubled since the 2008 financial crisis, ballooning from $10 trillion to more than $19 trillion.
- 20 years ago China had $500 billion in public and private and debt. Ten years ago that number stood at $3.5 trillion. Today it is more than $35 trillion.
More than the amount of debt, however, is just how much of it has been added since the 2008 financial crisis. After experiencing a debt induced financial Armageddon, you’d think individuals, companies and governments would be hesitant to go down that road again. Not so. Record low rates have fueled trillions (with a “T” like the Titanic) in new debt. It’s like eating until you’re sick at a buffet and then deciding that the next logical step is to grab a new plate and see how many cheese enchiladas and Mini BBQ Brisket sandwiches you can fit on it.
And just like binging at the buffet is likely to end badly, binging on debt will usually end in a combination of regret and real world consequences. How is all this debt affecting us and our ability to reach our retirement goals?
It’s causing stress. A recent survey of adults with student loan debt showed that people would go to some pretty extreme lengths to get rid of that debt. Nearly 57% would take a punch from Mike Tyson. More than 40% would give up a year of life expectancy. Almost 7% said they’d be willing to cut off their own pinky finger. Think about that. A not insignificant percentage of the borrowers polled would be willing to die sooner or hack off body parts if they could turn back time and get out from under their debt. Living with excessive debt is stressful.
It’s making us financially fragile. A recent Federal Reserve survey found that 47% of Americans could not cover an unexpected $400 expense without borrowing or selling something. In other words, half the country is stretched so thin that they couldn’t afford a car repair or a new pair of glasses without some sort of payment plan. There are likely many reasons for this state of affairs, but one is most assuredly debt. In other words, we need to go into debt to fund new purchases because all of our income is already being used to pay for the debts from our old purchases.
It’s limiting our ability to save for retirement. Each year the Employee Benefits Research Institute (EBRI) conducts a Retirement Confidence Survey to see how people are doing when it comes to saving for retirement. In the most recent survey, nearly a third of respondents reported having less than $1,000 saved so far. Two-thirds have less than $50,000 saved. You don’t need to be a financial genius to know that $1,000 is not enough to fund a 20 or 30 year retirement. Even $50,000 would only get you a year or two at best. Why aren’t we saving more? Again, one reason is debt. If most of your current money is being used to pay for past purchases, you won’t have much left over for future savings.
It’s exposing retirees to market risk. Even if you are near retirement and you have no debt, you may still be at risk from debt indirectly. That’s because, with interest rates so low, many retirees have been forced to move further up the risk spectrum to get any sort of yield on their investments. It used to be that you could put your money in a risk-free money market and earn 3%. Now those same investments pay 0%. Super safe bonds don’t yield much better, so many investors are shifting more of their portfolio to lower quality bonds or dividend paying stocks. That works fine while markets are rising, but if we get another debt shock and borrowers can’t repay, then markets could tumble and many investors may find that they took on too much risk in their search for yield.
How much debt is ok?
To be sure, not all debt is bad. Debt can be a useful tool when it’s used to purchase an asset or invest in a project that helps us to generate income and pay back the debt. That said, in order to retire comfortably, the typical person needs to move from a place of low savings and high debt early in their career to a place of high savings and low debt later in their career.
What should that gradual reduction look like? To help people track their progress, researcher Charles Farrell devised a Debt to Income Ratio and then established benchmarks for different age groups. According to Farrell, your debt (e.g. mortgage, car loans, credit cards, etc.) divided by your income should be 1.25 at 40, .75 at 50, .20 at 60 and zero at retirement.
Retiring debt free used to be the rule rather than the exception. Unfortunately, that is no longer the case. In fact, a recent study by the Employee Benefits Research Institute showed that 65 percent of American families with a head of household age 65-74 had debt. The age group with one of the biggest spikes in debt was 75 and older.
That’s troubling because debt adds risk and reduces cash flow, two things that can derail your retirement. It is inherently limiting at a time when most hope for greater independence and opportunity. It increases uncertainty at a time when most people want security. So make a plan to gradually eliminate your debt and you will greatly increase your odds of having freedom, flexibility and peace of mind during retirement.
– Joe
by Joe Hearn | May 24, 2016 | Lifestyle Design, Pursuits
Last year I read a book called The Power of Habit that gave me some insight into what happens in our brain when we develop habits or get into a routine. I’ve thought about this topic before and had the sense that, while some routine is often necessary, too much routine can make life feel dull and short. It turns out that research backs this up.
In the book, the author talked about an experiment that the Brain and Cognitive Sciences Department at MIT did on rats. They hooked their brains up to a bunch monitoring devices and then put them, one at a time, into a simple T shaped maze. At one end of the maze, behind a partition, was a rat. Down the hall and around the corner was some chocolate. With the flip of a switch, the researcher would drop the partition (which made a loud click) and the rat would be standing there staring down the hall.
Slowly, it would start to sniff. It could smell the chocolate, but didn’t know where it was, so it would wander down the hall, stopping, sniffing, scratching and looking around. When it got to the end, it would usually look to the right, sniff, look to the left, sniff and then follow its nose to the left where the rat would discover the chocolate.
The more they did this experiment, the more the rats would hear the loud click, the partition would disappear and they would go straight to the chocolate. Once the rats had figured out the maze and developed a routine for getting the chocolate, the researchers compared the before and after brain scans. When the rat was new to the situation, his brain exploded with activity when he heard the click and the partition disappeared. Each time it scratched, sniffed and looked around the brain was buzzing with activity as it analyzed the sights, sounds and smells.
After repeating that experiment hundreds of times, however, the way their brains reacted started to change. Once they had the routine down—walk down hall, turn left, get chocolate—their mental activity started to decrease. The more automatic it became, the less the rats had to think. Almost every area of their brains quieted down. Even the part of the brain responsible for memory went quiet.
The only part of the brain that was still active was the basal ganglia, which is this ancient part of the brain that, up until then, scientist didn’t understand very well. What they learned from their experiments is that the basal ganglia is responsible for identifying the habits and routines that we have. Once it recognizes those patterns, it takes over and allows the rest of the brain to pretty much shut down.
The basal ganglia is your best friend when you’re trying to form new habits like going to the gym or eating healthy, but it’s bad news if life becomes so routine that your brain basically switches to autopilot. In that case, you’re not really creating new memories or being an active participant in big chunks of your day because major parts of your brain are switched off. If you do the same thing every day for a year, you don’t remember a bunch of unique days. You basically remember 1 day that you lived 365 times. The entire year kind of feels like it took 24 hours.
So if we want time to feel as if it’s passing more slowly and we want our memory banks full of unique experiences, we need to find a good balance between routine and novelty. Yes, we want a good exercise routine, but we also want to steer off the well-worn path of life once in a while. Especially in retirement. We need to find ways to break up the routine. We need to try new things and seek out new experiences. How can you do that in your life? What can you do this week to break routine? Experiment and see what happens.
Here’s a short video for inspiration. It’s by Jed Jenkins where he talks about coming to the realization that routine is the enemy of time so he quit his job and took a thousand-mile bike trip from Oregon to Patagonia. Some of you may remember the video from our Facebook page a while back. If you haven’t seen it yet, it will likely be the best 4 minutes of your day. Enjoy.
Joe
by Joe Hearn | May 3, 2016 | Health, Housing, Insurance, Medicare
Have you ever wondered what it would be like to live in one of those newfangled senior living facilities that are popping up all over the place? I was curious too. So I moved into one. I have a friend whose company owns a number of these retirement centers and they had just finished building a new one called Aksarben Village in Omaha. Since it was new and not yet full, I asked him if they had room for a temporary resident. He pulled a few strings and before I knew it my name was on the door of room 217, I was getting my hair cut at the in-house salon and I was sitting down to meals with my fellow residents. How did it go, what are these facilities like, what are the pros and cons of assisted living and what can you learn from the experience if you ever need this type of care for yourself or a loved one?
Who’s the new guy?
“Hi, I’m Pat,” she said as I sat down beside her for lunch. She was friendly and had that gleam in her eye that immediately puts you at ease. She quickly introduced me to the others at the table, including Dick, Kris, Martha, Dee Dee and Alice. We spent that first meal talking and laughing and I got to know a little bit about each one. I heard about kids, pets, spouses and stories from back in the day. They knew I was writing an article about assisted living facilities, so I asked them what prompted them to move. Most gave two or three reasons, but a common thread throughout revolved around health.
There aren’t many certainties in life, but this is one: Your health is going to change. Your mental and physical abilities will look different at 70 or 80 than they did at 50 or 60. Sometimes the changes are minor and sometimes major, but about two thirds of us will need help coping with those changes. In the past, as abilities diminished, your choice was either a curtailed lifestyle (e.g. no driving, less cooking, etc.) supplemented by whatever assistance friends and family could provide or a move into a nursing home facility that was very expensive and provided way more care than you needed.
The basic idea of the new retirement living options is that they broaden the spectrum of help available. They provide a base level of services that cover issues most of us deal with as we age and then provide a laundry list of à la carte services so that people get help where needed while still maintaining their lifestyle and independence.
Care levels
I learned all about these different levels of care during the check in process. At one end of the spectrum are independent living facilities. As the name implies, residents basically live independently (similar to renting an apartment), but the facility provides services like housekeeping, home maintenance, some meals, security and a number of other amenities.
Assisted Living, where I stayed, is next on the spectrum and provides much more involved care. You have your own apartment (equipped with things like zero entry showers and an emergency response system), weekly housekeeping, laundry services, access to onsite medical personnel, transportation to outings or appointments and three restaurant style meals per day in the dining room. In addition you have a personalized care plan based on an assessment completed at admission and then updated every 30 days. This personalized care includes things like medication management, breathing treatments, bathing, grooming, using the restroom, mobility, dressing, safety checks and help with things like the phone or email.
People who need more intensive or specialized care—such as those suffering from dementia or Alzheimer’s disease—can move into either a memory care facility or a nursing home. These facilities have specially trained staff and caregivers who are there to provide care 24 hours per day.
Many facilities (including where I stayed) recognize that people may need all three of these levels of care at some point, so they build them together into a sort of senior living campus. This allows a person or his/her spouse to move up to the next level of care when needed.
Amenities and Activities
These new facilities are definitely not like nursing homes of old. For example, where I stayed there was a large movie theater complete with popcorn machine and iPad controls that are connected to cable, Netflix and just about every other streaming service you could imagine. There was a banquet room, private dining rooms for when family comes to visit and a full service kitchen with chefs who were more than happy to take any special requests. There is also a workout room, a physical therapy room, billiard room, beauty/barber shop, chapel, library and an activity/craft room.
Residents put these facilities to good use. Each month the lifestyle coordinator releases a new activity calendar containing church services, workout classes, movie nights, political discussion groups, cooking classes and trips to places like museums, stores and local restaurants. Partnerships with community organizations provide additional benefits. For example, the Omaha Public Library rotates new books each month through the library based on resident requests and Hy-Vee does free delivery of groceries each week to any resident that orders them.
Cost
As you can probably imagine, these services are not cheap. The more care a person needs, the more expensive it gets. Independent living averages about $2,500 per month nationwide. Memory care and nursing home care are higher, averaging $6,000-$7000 per month. Assisted living falls somewhere in the middle with the median cost of care nationwide around $3,600 per month. Studio apartments where I stayed start at $3,500, but you could spend much more if you wanted a 2 bedroom, 2 bath unit. The monthly care plan can add additional costs to assisted living. Where I stayed, services are given a point value and any additional costs are based on the point total. For example, someone who needs 2 medication reminders per day as well as assistance with shaving and getting dressed would have a point total of 14, which would cost about $285 extra each month.
How to pay
Except in very limited circumstances Medicare does not cover any long-term care costs. Medicaid does, but to qualify, you basically need to be both sick and poor. Even then, the amount Medicaid provides is limited, so most private facilities have a minimal number of beds set aside for Medicaid residents. Because of that, those who want to live in these facilities will need the means to pay for it, which can be a major obstacle. Most of the people I talked to were covering the costs from a combination of personal savings and payments from long-term care insurance. Those policies can be expensive, but one month of care will usually cost more than one year of insurance premiums, so having a policy can make financial sense if you end up needing it. In some cases, adult children were also helping to cover some of the costs so they could have peace of mind that mom and dad were well cared for.
Pros and Cons
One of the first people I met when I arrived at Aksarben Village was Colleen. She is suffering from mild dementia which affects her short term memory, but was otherwise healthy, sharply dressed and a kick to talk with. She has six kids and we spent the better part of an afternoon talking about each of them. On the last day of my stay, I actually got to spend some time visiting with one of her daughters, Sara Wachter. Her perspective gave me some great insights into the pros and cons of assisted living facilities.
Prior to moving into assisted living, she told me that her mom’s dementia was causing problems like social isolation, missed medications and missed meals. Even with a big, supportive family the memory loss was creating issues that were impacting Colleen’s health, safety and lifestyle. Their gerontologist said it was time to make a move so they started exploring options. “Mom grew up in this part of town, so it was a good fit,” Sara said. It wasn’t without challenges, however. Finding out she had to leave her home was initially a shock, but hearing the news from the gerontologist gave it more weight and took the pressure for that decision off Colleen and her family. Giving up her car was also tough, but since the facility had transportation the kids thought it was for the best. Expenses were also a concern, but Colleen’s mother lived to be 104 and was in a nursing home, so Colleen purchased a long-term care policy years ago which has helped with the costs.
As Sara and I talked, we saw her mom come down to the front lobby and start chatting with other residents. Dick Loneman, the driver at the facility, was getting ready to take them for an afternoon at the Joslyn Art Museum.
“Mom has thrived since moving in here,” said Sara. “The things she couldn’t take care of were all of a sudden being taken care of by someone else. Now she’s free to enjoy life and doesn’t have the responsibility for all those day to day things that had become so challenging for her. It’s less stressful for us too, because we know she’s in good hands.”
by Joe Hearn | Apr 18, 2016 | Retirement, Risk
“What could cause this to fail?”
That’s what I asked myself before heading to the Grand Canyon recently for a 47 mile, Rim to Rim to Rim hike with my friend Mike. The answer, it turns out, is “A LOT of things could cause it to fail.” In fact, there’s a 400 page book dedicated solely to detailing all of the deaths that have occurred in the canyon in modern times. I know because I read it. I wanted to see all the dumb, misguided, or sometimes just unlucky decisions people made that ended very badly so I could avoid those same blunders. I like adventure as much as the next guy, but priority #1 is coming home alive. Hence my question: What could go wrong and how can I avoid it? I call this process a Pre-Mortem.
You’ve likely heard of a Post Mortem. When someone dies, the medical examiner will often do a Post Mortem exam to determine cause of death. Similarly, when a project fails at work, the team responsible for said failure will often do a project Post Mortem to determine what went wrong. Post mortems can be helpful because people can learn from them and lessons can be used to avoid future mistakes.
The downside of a Post Mortem is the Post (after) part. Whatever it is you’re examining has already gone horribly wrong and the game is over. The opportunity is gone. Others can learn from your mistakes, but your chance is gone.
A better thing to do would be to do a Pre-Mortem. Instead of “Why did this fail?” ask yourself “What might cause this to fail?” Look at your own weak points and vulnerabilities. Examine other people who have failed doing something similar. What can you learn from them? How can you avoid similar mistakes or pitfalls?
Retirement Pre-Mortem
The application to retirement is obvious. Retirement is a relatively short period of time when you hope to live a secure, exciting and fulfilling life. The problem is you’ve only got one shot at it and there are a whole mess of variables, any one of which could derail your plans. By doing a Pre-Mortem, you examine your unique situation and consider the most probable things that could cause your retirement to get sideways. Then you do everything you can to plan and prepare so those things either don’t happen or you’re well equipped to deal with them if they do. Result: Retirement goes off without a hitch.
What are some of the more common things that derail retirement?
- Running out of money
- Divorce
- Death of a spouse
- Health issues with you or a spouse
- No clear plans for what you want to do
- Lack of friends
- Depression/anxiety due to major life change
- Market crash
- Unexpected job loss
- Family issues (children, relative, etc.)
- Caring for elderly parents
- Living longer than you expected
- High debt or other poor financial decisions
- Health care costs
- Mistakes claiming Social Security
- Mistakes with your distribution strategy
Which are the most likely to trip up your plans? Think honestly about your life, your finances, your health, your family and your friendships. What things do you honestly see as the biggest potential threats to your retirement? What can you do to either prevent them or at least be prepared to deal with them if they arise? Spend some time thinking about this now and you’ll greatly improve your odds for a successful retirement.
By the way, the Grand Canyon hike went off without a hitch. Time to rest my feet for a while and start planning the next adventure.
~ Joe
by Joe Hearn | Mar 17, 2016 | Distribution Planning, Retirement
Not long ago, most people worked as long as they were able and eventually either “died in harness” or relied on younger family members to care for them in their old age. And then along came this idea of retirement where through hard work, shrewd investing and some help from a pension (if you’re lucky) and Uncle Sam, you could hang up your work boots a little early and spend your golden years enjoying a bit of leisure and fun. But for most people, the math of retirement only works if they’re able to earn some interest on their savings. That is a challenging task in a world where Central Banks the world over seem to have declared war on savers. What does this mean for the long term viability of your retirement? In other words, are low interest rates ruining retirement? More importantly, what can you do to keep your plans on track?
The 4% Rule
Back in the early 1990s, a financial adviser by the name of William Bengen did research on sustainable portfolio withdrawal rates. Assuming an asset mix of half stocks and half bonds, he back tested withdrawal rates against historical 30 year periods in the market. His conclusion was that if you wanted your portfolio to last 30 years, the maximum withdrawal that you should take each year is 4%. That rate has worked well for millions and many assume it will continue to work great unless future returns are significantly worse than past returns. Enter the Central Banks.
ZIRP and NIRP
The global economy has been stuck in slow growth mode since recovering from the near death experience of the 2008 financial crisis. To stimulate growth, Central Banks around the world lowered rates to pretty much zero and engaged in endless rounds of quantitative easing. When that didn’t work some of them started adopting negative interest rates. That’s right, zero apparently wasn’t low enough. Now they’re moving to negative. ZIRP (zero interest rate policy) has given way to NIRP (negative interest rate policy) in countries such as Denmark, Sweden, Switzerland and Japan. The logic is to force banks to lend, weaken currencies to help exports and stimulate economies. Not surprisingly, there are a lot of people who think these policies could come with some pretty significant unintended consequences, not the least of which being that it will be pretty tough for savers, pension funds and governments to meet those future withdrawal needs if large portions of their bond portfolios are earning zero instead of the 4%-5% that history has taught us to expect.
The $64,000 question (more like $64 trillion) is whether or not these low interest rates will derail retirees and the portfolios, pensions and Social Security program that they rely on to fund retirement. I can say with certainty that…it depends. If these low rates are an anomaly and they eventually return to normal, then the 4% rule of thumb that retirees rely on and the return assumptions that pensions rely on can continue to work. But if they stay this low for a long time, then retirement as we have come to know it is at significant risk. Which will it be? My gut tells me that rates will eventually rise and the 4% rule will continue to work, but it makes sense to plan for the worst even while hoping for the best.
What to do
There are several levers you can pull in order to improve your odds of success. Some are better than others. One side effect of ZIRP has been to force people into riskier investments in search of returns. That works great until it doesn’t as we saw recently when markets rang in the New Year by plummeting. Another side effect of ZIRP has been to encourage individuals, companies and countries to take on more debt. That can also work for a while, but debts eventually needs to be repaid. Are there better options?
Draw less. If a 4% withdrawal rate is too high, the most obvious way to protect yourself is to take less than 4%. I have some clients that are taking 2%-3%. Some are even taking 0% because their pension and Social Security cover their expenses. There is an extremely high probability that those taking less than 4% will be fine even if rates stay low for a long time. Of course drawing less only works if the amount you’re taking is enough to cover your expenses. That might mean you need to…
Cut retirement expenses. Examine your retirement budget for items you can reduce or eliminate. Housing and transportation are often major expenses. Consider downsizing to a smaller home or sharing a car with your spouse. Staying active and healthy can save on health care co-pays and prescription costs. Substituting planned hobbies or activities with less expensive alternatives also can trim costs without significantly changing the quality of your retirement. Taken cumulatively, these adjustments to your retirement budget can help reduce the strain on your nest egg and still provide a meaningful retirement.
Save more. Spending less is one option, but you could also improve your chances if you save more (assuming you’re not already retired). Recent research by Aon Hewitt and others shows that a person will need Social Security plus savings worth about 11-12 times their annual income in order to fund their retirement. If interest rates stay low, that multiple will be higher. If you are still working, make saving a high priority. Both 401(k)s and IRAs have higher contribution limits for people over 50. Take advantage of those limits by putting away as much as possible. The maximum 401(k) contribution for 2016 is $18,000 plus an additional $6,000 if you’re over 50. IRA contribution limits are $5,500 plus an additional $1,000 if you’re over 50. Extra additions to your portfolio could significantly improve your financial position in retirement.
Pay off debt. As I mentioned earlier, one of the unfortunate side effects of low interest rates is that the Fed is punishing savers and encouraging debtors. Debt can make sense if it’s used to purchase an asset that generates income such as a new computer for the office or a college education. Last I checked, however, a $60,000 SUV or a gourmet kitchen aren’t income producing asset for most people. When used unwisely, debt adds risk and reduces cash flow. Those things are especially troublesome to someone in retirement. By retiring debt free, you can greatly reduce the amount of savings necessary to fund your retirement.
Work longer. Working longer may not sound fun, but neither is running out of money. If low rates reduce the viability of your retirement plan, one option is to keep working and earning a paycheck. This strategy has multiple benefits: it allows you to save more, it gives your portfolio more years to grow, it could help boost your potential Social Security benefits and it decreases the overall amount of income you need to draw over the years. Of course this assumes that working longer is an option. Don’t put all your eggs in that basket in case your health doesn’t cooperate or your job skills don’t translate well in a changing world.
Delay Social Security. If you delay collecting Social Security until after your full retirement age, you will get a permanent increase in your benefits. The increase is based on the year you were born. For example, those born after 1943 will get an 8% credit for each year they wait. The increase caps out at age 70, but waiting until then will increase your benefits significantly.
Obviously, we have to deal with the world as it is, not how we want it to be. When I started my career, you could buy a 1 year CD yielding 7%. That made retirement planning much easier. Now you’re lucky if you can get 1% on that same CD. That’s just the world we live in and there’s a chance that it could persist for some time. Plan accordingly and you’ll greatly improve your odds of retirement success.
~ Joe
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