How are those 2020 plans working out for you? In crazy and uncertain times, it’s easy to get sidetracked. To feel helpless and stressed. To give up or get discouraged. To ask: “What’s the point?” To pick up bad habits. And even to actively do things that reduce your odds of long-term retirement success. Things like:
- Not being intentional with your time and money
- Not exercising
- Eating badly
- Drinking too much
- Not learning new things
- Having too much debt
- Neglecting your marriage
- Not investing in your friendships
- Associating with the wrong people
- Allowing yourself to get bitter over circumstances
- Taking life for granted and assuming it will go on forever
- Getting stuck in routine
- Comparing yourself to others
- Not taking some “at bats.”
- Letting the headlines derail your investment strategy
- Doing nothing instead of doing what excites you
- Not taking care of your mental and emotional health
- Caring too much about what others think
- Mimicking others rather than deciding what you really want out of life
- Having an external vs. internal locus of control (i.e. “Everything is out of my control.”)
Are you struggling with anything on that list? If so, what’s one thing you can stop doing this week because it is holding you back and harming your chances of a successful life and retirement? What’s one thing that needs to go because it doesn’t align with what you want your life to be? Don’t let a difficult year derail all your hard work. It’s time to weed the proverbial garden.
Well, we just past the halfway point of 2020. Five months to go. Time for a mid-year financial checkup. I’m a big proponent of doing an annual review each January, but this year has been a bit…unusual…so I encourage you to look things over now and make sure that your retirement plans are still on track. Here are a few things to focus on as well as a free Financial Checkup Checklist to help.
Investments. If you’ve been afraid to open your statements or log in to your accounts, it’s time. Look at where you are, but more importantly, look at where you’ve been. Markets plunged and then rallied, so you’ll see volatility for sure. But if it’s more than you can stomach (or more than your plan can handle), it’s time to rethink your risk and allocation.
Work. If you lost your job or changed jobs due to the pandemic, you need to re-run your retirement plan and make sure that it still works. A new job means a different income, different benefits and a different 401k. Those are all variables in your plan. If they change, your timeline for retirement might change.
Savings. It’s natural to get defensive in the face of uncertainty. When markets are plunging and the economy looks shaky, it’s easy to quit saving and investing. I see it all the time. It’s one thing if you lost your job or your income shrank considerably. But if you’re still working and you just quit saving out of fear, turn those automatic investments back on.
Budget. Did your spending change during the lockdown? Mine sure did. When you have no idea how bad a downturn will get or how long it will last, it’s natural to reevaluate your spending and reconsider your wants vs. needs. Ultimately, that’s a good thing. Nothing impacts your ability to retire quite as much as your retirement budget. The leaner you can make it, while still doing the things that are important to you, the better off you’ll be. Cut the fat and optimize your spending for the lifestyle you want. Here’s a budget worksheet to help.
Debt. Divide your total debt by your income. That ratio should get smaller over time. According to research by Charles Farrell, your Debt/Income ratio should be around 1.0 by age 45 and zero by age 65. How are you doing? What would your finances look like if you were debt free? How would you feel? What would you do with the extra money? How soon could you retire? Make a list of your debts and put together a plan to pay them off. And if you have a mortgage, consider refinancing while rates are at historic lows.
Insurance. Review all your coverages, but pay particular attention to your life insurance. The pandemic is a good reminder that unexpected things happen. If your family is depending on your income, then you need to have a plan to replace that income if you die. A general rule of thumb is to have 7 to 10 times your annual income in life insurance, but you should meet with a trusted adviser to discuss the specifics of your situation.
Legal affairs. Again, the pandemic is a good reminder that unexpected things happen. Make sure that your will, powers of attorney and estate plan are accurate, up-to-date and reflect your current wishes.
One more thing before I go. Don’t just focus on your finances or legal affairs. One of the most important ingredients to a successful retirement is to decide what you really want out of life and to start taking those things very seriously. COVID-19, while terrible, has likely helped you in that regard by forcing you to reexamine your habits, routines, priorities, purpose, relationships, finances, lifestyle, career and any number of other things. What have you learned about yourself? Don’t just ignore those lessons and slowly ease back into your pre-pandemic rut. Design a lifestyle—home, work, leisure—that reflects your priorities and is faithful to what you want out of life. You still have plenty of time to do that before the end of the year. Redeem 2020 by turning the disasters and difficulties into a better, more secure, more fulfilling life.
“It’s an ill wind that doesn’t blow some good.” – Pa Ingalls in Little House on the Prairie
COVID-19 has been a tragedy. There’s no disputing that. Thousands dead. Millions sick. Millions more jobless. It’s hard to overstate the negative impacts of the pandemic. And yet, to paraphrase Pa Ingalls, even terrible situations can produce some good. As difficult as this time has been, I can’t help but think that many of us will look back on it as one of the best things to happen to us. Not in a “I just won the lottery!” sort of way, but in a “Painful, but positive” sort of way. Keep reading to see what I mean and to see how you can make sure that this “ill wind” blows some good for your retirement.
It forces us out of routine. It’s easy to get in a rut. Easy to put life on autopilot and live the same day over and over. Even if we don’t like the rut we’re in, we’ll often stay there because it feels safe. Human nature is such that we will often choose being unhappy over being uncertain. One thing this virus has done in spades is forced us all to live life in a different way. It grabbed the steering wheel and yanked us out of the rut. That’s not necessarily a bad thing. In fact, it’s almost certainly a good thing. It gives us a fresh perspective. It helps time pass more slowly (because routine is the enemy of time). It opens us up to new experiences and new ways of thinking about things. It presents new opportunities. Yes, it brings uncertainty, but hiding in all that uncertainty is opportunity. Look for it.
It forces us to reexamine our priorities. Priorities are the things in life that are most important to us. They are the people, activities or things that we really care about and that bring us meaning. When life is going along swimmingly and we’re healthy and have plenty of time and money, we tend to get lazy. We allow things in that clutter or confuse our priorities. When life gets hard, however, and one or more of our priorities are threatened, it refocuses our mind on what’s important. Hard times force us to cut and say “no.” They force us to get back to the basics. That means a life less cluttered with filler and more focused on the things that bring you joy and meaning. That’s a good thing.
It forces us to think differently about debt. When the economy is strong and interest rates are low, it’s tempting to add debt. You almost feel foolish if you don’t. “One percent interest? Why wouldn’t I buy a $60,000 car?” But when hard times hit, servicing that debt becomes difficult if not impossible. Debt increases risk and reduces cash flow. It adds stress. It can derail your plans and dreams. It weakens your financial “immune system.” The pandemic is a good reminder to use debt sparingly.
It shows the fallacy of “appearances.” On a sunny day, a house built on the sand doesn’t look any different than a house built on rock. But when the storms come, the difference is pretty clear. It’s easy to get caught up in appearances. It’s tempting to keep up with the Jones’s. But even in the best of times, that strategy can be stressful and unfulfilling. In bad times it can be catastrophic. Machiavelli once wrote “The great majority of mankind are satisfied with appearances, as though they were realities.” Don’t be one of those people. Build a life that is happy, secure and fulfilling, not one that only looks good on Instagram.
It exposes our weaknesses. Warren Buffett once said “It’s only when the tide goes out that you learn who has been swimming naked.” There’s nothing like a combination global pandemic + financial crisis to help expose your weaknesses. Too much risk in your investments? Too much debt? No rainy day fund? Strained relationship with your spouse? Underlying health issues you’ve been ignoring? Settling for a life that isn’t what you want? If the tide went out and you find yourself a bit overexposed, maybe it’s time to go shopping for a swimsuit.
One of the most important ingredients to a successful retirement is to decide what you really want out of life and to start taking those things very seriously. COVID-19, while terrible, has likely helped you in that regard by forcing you to reexamine your habits, routines, priorities, purpose, relationships, finances, lifestyle and any number of other things. Embrace that process and you’ll likely come out the other side a stronger, more resilient, more self-aware person.
What are some practical ways to apply all this? I’ll put a few ideas below along with links to articles and resources at Intentional Retirement.
We just wrapped up Labor Day Weekend here in the U.S. That is the unofficial end of summer and it
means we only have four months to go before we finish up this year and start a
new decade. That’s plenty of time to get
a few things done and finish the year strong.
Think about any financial, investing, lifestyle, relationship, health or retirement goals you had for 2019. How have you done so far? How can you make the most out of the next four months? Focus in on one or two areas where you’d like to make progress before year-end and get to work. Maybe that’s making a written retirement plan, increasing your savings rate or making a plan to finally get debt free. Maybe that’s repairing a relationship, starting a new workout program or learning a new skill. Maybe you’ve reached your health deductible for the year and it’s a good time to schedule that procedure. Or maybe it’s time to plan that trip (always a good idea). Think about how good it would feel to finish the year with a few major items checked off your To-Do list. Think about how much progress you could make in 2020 if you ended 2019 with solid momentum.
Part of my job here is to help people avoid
complacency. To push you to have a tough
conversation with yourself about what you really want out of life and to
encourage you to take those plans really seriously. Consider yourself pushed. Touch base if there’s anything I can do to
help. And props for everything you’re
doing so far. The fact that you’re
following along at this site tells me that you’re no slouch. Saving for retirement and being intentional
with life are not easy tasks. Most
people don’t do it. You’re in that small
minority of people who are laying the foundation for their future through
discipline, hard work and good stewardship.
Well done! Keep up the good
work. Finish the year strong.
I’ve seen some disturbing data points recently:
- 78 percent of American workers report living paycheck to paycheck. This became very visible during the recent government shutdown.
- 40 percent of Americans said they couldn’t cover a $400 unexpected expense without going into debt. That number jumps to 60 percent for a $1,000 expense.
- A record 7 million Americans are 3 months delinquent on their car loans.
- In 2018, student loan debt hit $1.46 trillion and $166 billion of that is seriously delinquent. Both record highs.
- People in their 60s with student loans owe an average of $33,800 in student debt. They owe $86 billion total which is a 161% increase since 2010.
- People over 60 owed $615 billion in credit cards, auto loans, personal loans and student loans as of 2017. That’s an 84% increase since 2010 and the biggest increase of any age group.
- The percentage of bankruptcy filers older than 65 is higher than it’s ever been.
Whatever the reasons, we’re spending too much, saving too little and living on the bleeding edge of financial insecurity. Sure, everyone on Facebook looks like they’re #LivingTheirBestLife, but peer behind the curtains and there’s trouble. To make matters worse, all of this is happening at a point in time when the economy is in relatively good shape, unemployment is at multidecade lows and the stock market is near all-time highs. What happens if/when we have another recession?
I’m going to spend the next several posts discussing these worrisome trends and talking about how you can overhaul your expenses, save more and improve your retirement security. Today, however, I’m just giving you a friendly reminder. The general idea behind retirement is to reach a point of financial independence where work is optional. If you’re not on track for financial independence, you’re doing it wrong. Stay tuned over the next few weeks and I’ll give you some practical ideas on how to get there.
Hardly a week goes by that I’m not asked the question: “Should I pay off my mortgage before I retire?” The answer, of course, depends. On math. On your situation. On your personal preferences. Let’s look through some of the key variables to consider and then I’ll tell you what I’m doing with my house (spoiler alert: I’m a big proponent of retiring debt free) and give you some tips on how to retire your mortgage early, should you choose to do so.
Variables to consider
Interest rate. What is the interest rate on your mortgage? If you buy a $250,000 home and have a 30-year mortgage at a rate of 4%, you’ll pay $179,674 in interest over the life of that loan. That same loan at 6% would cost $289,595 in interest, about $110,000 more. The higher your interest rate, all else being equal, the more incentive there is to pay it off sooner.
Other debt. Mortgage rates are typically lower than rates on other forms of debt like credit cards or car loans. If you look strictly at the math, it makes sense to pay off your higher interest rate loans first. If you carry a credit card balance or car debt, focus on those first. Once those are gone, you can target your mortgage.
Investment alternatives. Your house is an investment. Whether you use available cash to pay it off will partly depend on the other investment opportunities you have for that available cash. If your mortgage is 4%, but you have another investment opportunity that yields 8%, it might make sense to hold off on the house and invest the cash at the higher rate. Just keep in mind that paying off your house offers a guaranteed return (the interest disappears), while alternative investments likely do not.
Income sources in retirement. Think about your income sources in retirement. Social Security. Pension. Income from your investments. Add that up and then compare it to your retirement budget. Is there enough there to easily service your mortgage without limiting your other plans for retirement? If so, carrying a mortgage in retirement might not be a burden. If not, it might make sense to pay it off early.
Nest egg. Are you on track with your retirement savings? Are you maxing out your 401k and IRA contributions each year? If not, focus on those things first and then, if you still have some extra cash, consider paying down your house second.
Peace of mind. The decision to pay off your house isn’t entirely numbers based. I’ve had plenty of clients who could justify carrying a mortgage, but they paid it off anyway because they wanted the peace of mind of being debt free. I’ve never had a single client tell me that they regret the decision to pay off their house.
How long will you live there? Do you plan on downsizing to a different house or moving somewhere else in retirement? If you only plan on being in your current house for a few more years, it might not make sense to pay it off. If you plan on being there for a while, however, owning it outright would probably be best.
Tax considerations: Many people argue against paying off your house because of the “tax benefit.” Recent changes to the standard deduction make this argument less compelling, but even before then, I think this argument didn’t hold water. Consider a person in the 20% tax bracket who paid $10,000 in interest and got a $2,000 deduction. They paid $10,000 to get $2,000. Better to pay it off, spend a little more on taxes and save the $10,000 in interest.
What I’m doing and why.
As you’ve probably guessed (both from this article and others I’ve written on debt), I’m paying my house off early. I thought through the math, but to be honest, that was secondary. The three primary drivers of my decision are:
- Peace of mind: I sleep better when I’m debt free.
- Security: Debt adds risk and reduces cash flow. Both are bad for retirees.
- Priorities: According to the Employee Benefits Research Institute, the average retiree spends 40-45% of their budget on housing. I have other plans for that money! (For more, read The benefits of an extravagantly modest lifestyle)
A few tips to pay it off early.
Below are a few strategies I use:
- Set a goal and re-run the amortization schedule: If you have 7 years until retirement and want to have the house paid off by then, re-run your loan amortization for 7 years and figure out how much extra you need to pay each month to reach your goal.
- Make it automatic: Once you know how much you need to pay each month, make it automatic. Saving in your 401k is easy because it automatically comes out of your paycheck. Set up your extra principal payments to do the same thing.
- Refinance: Rates are still historically low. If you haven’t refinanced in a while, call your bank to see if it would make sense. Just don’t refinance into another 30-year loan. Keep the payback period as short as possible so more of your payments go to principal.
- Stop escrowing: This is more of a mental trick. When I started paying off my house early, I got discouraged each month at how much of my payments went to taxes, insurance and interest. So I called the bank and asked them to stop escrowing. Yes, I still need to pay my taxes and insurance, but now those bills come separately. Most of my payments go to principal and I’m forced to save extra to cover the taxes and insurance.
- For more ideas, read How (and why) to retire debt free and Your biggest retirement expense (and how to get rid of it).