Step 1 in Retirement Planning: Set a Goal

May 03, 2017

It might sound cliché but as with any planning exercise, the first step is to just set a goal. After all, how will you know when you’ve gotten there if you don’t know where you’re going? How you’ll go about defining your goal depends a lot on how close you are to actually thinking about retiring as well as how you personally define the concept of “retirement.”

One of the challenges of setting a retirement goal is that it’s less of a set number and more of a moving target. How much you’ll need to have in order to stop worrying about how much is coming in from working depends heavily on how closely you want to mirror your working standard of living. Someone who will have their mortgage and other debt paid off and no dependents to care for can retire on much less than someone who will still have housing expenses or kids in college. If you’re looking at the more traditional definition of retirement by simply stopping work one day and living off of social security and savings, setting that goal can be as simple as running a retirement calculator and seeing if the age you’re hoping to retire is feasible considering your current savings amount and rate of saving. If you’re not on track to retire by the age you are hoping, then you’ll either need to push back your date, increase your savings, or decrease the expenses you’ll have to cover in retirement.

The closer you are to actually retiring, the more specific you can be with your planning. The Financial Finesse calculator gauges your goal based on whether you’re on track to replace a percentage of your income, but often people who are planning a significant reduction in living expenses and/or folks who are plowing tons of money away into savings during their later working years can get away with savings that only replace a fraction of current income. If you’re the type who thinks of retirement as more of a “financial freedom” day where you can pursue activities without concern for earning, then there are a few more variables. For example, if you’re thinking that you want to spend your second chapter starting a business, then your goal may be more of a dollar amount that will sustain you for a year while you build your business up to provide ongoing income.

If you’re a couple decades or more away from retiring, then the best way to set your goal is to aim for being on track to replace 80% of your current income. The closer you can remain to that target, the more choices you’ll have as the years go by. And if you’re getting a late start or the thought of quitting working feels more like an imminent reality and less like some hazy future that may or may not happen, then you’re better off using the “Equivalent Pay (Today’s Dollars)” amount in the Goal Calculation tab of the calculator to measure whether you’re close to your goal or not. If the equivalent pay amount doesn’t meet or exceed your anticipated annual budget in retirement, then you need to plan to work longer, save more or cut some expenses.

Retirement factor Need less savings Need more savings
My mortgage will be paid off X
I want to start a lucrative business X
I want to pursue a lower-paying passion project X
I want to travel in style X
I want to move to a lower cost region X
I have a long life expectancy X
I have health issues X
I have family to help support me X
I plan to work part-time X
I plan to be a missionary in a third-world country X
I expect to have a lot of expenses X
I expect life to be pretty simple and cheap X

 

 

Questions Your Future Self Wants to Ask You

February 13, 2017

Have you spoken to your future self lately? According to UCLA Professor Hal Hershfield, we often feel disconnected from the people we will become in the future. In essence, our future selves are strangers to us. Envisioning ourselves in the future, says Hershfield, helps us save more money and make better financial decisions.

In Hershfield’s research, participants were shown computer-aged avatars of their current selves. Then they were asked to make a choice of how to spend $1,000: buying a gift for a friend/family member, investing in a retirement fund, planning a fun event, or saving money at the bank. Participants who had seen the vivid digital image of their future selves were twice as likely to put money into the retirement fund.

I am guessing that if you had a conversation with Future You right now, he or she might have some pretty challenging questions for you. Here are some things Future You might ask you. How would you answer?

  • Have I turned out the way you thought I would?
  • How did you manage to save so much for retirement? Tell me how you did it.
  • I’ve got more money now than I need to live comfortably. How should I put it to the best use?
  • That was a great investment! Tell me how you chose it.
  • Who was your financial role model?
  • How did you decide to choose our career?

Future You could also have some recriminations, such as:

  • When are you going to pay me back all the money you borrowed from me?
  • Were those student loans worth it?
  • He/she didn’t turn out to be a great financial life partner. What were you thinking?
  • You spent that much on shoes/cocktails/gambling? Why?!!

Does having a frank conversation with your future self sound like just the thing you need to get you motivated to change your financial behaviors? Hershfield’s digital avatar creator isn’t available for public use. However, you can create an aged photo of yourself with age progression apps such as In 20 Years, Age Me, or Hour Face.

The Future Self in my blog photo? That’s our CEO’s son Jay, age 7, who is envisioning himself at 100. You know he’ll make some great financial decisions. Will you?

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

What Financial Security Really Means

July 13, 2016

When my colleague Matthew recently announced that his family had made the decision to move to Maui this summer, I was immediately intrigued. I’m a big believer in gathering wisdom from the experiences of others, so I asked Matthew to share the process that he and his family went through in making this life-altering decision. Here’s what he had to say, from an edited interview:

Q: You and your family have decided to move to Maui this summer. Was this something you always planned to do?

Matthew: This wasn’t something we always wanted to do. I was pretty content living in Southern California, due to our strong relationships here, up until recently. My wife’s family is from Maui, and she was born and raised there. Moving to Maui is something we only began to seriously consider end of December, last year.

Q: Was there a specific event that triggered you to start thinking about this?

Matthew: A number of happenings triggered us thinking about moving to Maui. For 14+ years, we had been part of a tight knit community through our church. Recently, some of the key leaders in that community passed away. Our families were really close so it was a big hit. It really hasn’t been the same since.

We started re-thinking why we were in Los Angeles. It’s a busy place, and in many ways, not our ideal place to live, although we have really enjoyed the work and relationship opportunities we’ve had. We began to consider other places to live, Hawaii being the chief place, due to my wife being from there.

Q: What was your timeline for making this decision and what things did you consider?

Matthew: It took about 6 months to determine if the move was viable, and after we determined it was viable, we went with it. We considered a number of different factors:

  • Cost of living: Hawaii is a pretty expensive place to live, but so is where we currently live (the South Bay of Los Angeles). We performed a cost of living analysis and determined that besides food and gas, it’s pretty much a wash.
  • Housing costs: Rental rates are about the same between Maui and LA. We were pleasantly surprised to learn that housing prices are a bit more affordable than the South Bay, especially if you stay away from the beach.
  • Potential job salary (if we were unable to keep our jobs): We weren’t sure if we’d be able to keep our jobs or have to find new ones, so this was a bit of a gamble. After doing research on IT jobs for me and biology jobs for my wife, we found that we could possibly take a 50% pay cut if we moved. So we did some soul searching and felt ok with this decision – a more restful, peaceful way of life was more important to us than making more money and having a more expanded lifestyle.
  • Our current savings: We have been aggressively lowering debt and saving money for the last few years, which was a huge factor in our decision to move. Having a financial cushion to fall back on helped ease concerns over the cost of moving, initial rent payments, and possibly being without a job for a few months.
  • Relationships: Friends we’d be leaving behind as well as the benefit of being closer to my in-laws were important considerations. My son has a lot of close friendships with kids his age through school, so that was a big one to work through.

Q: Anything that would have caused you NOT to make the move?

Matthew: A number of things had to line up for this to work, and if any one of them had not, we probably wouldn’t have considered moving. First, and most important, we needed the existing relationships in Maui (my wife’s family and friends), which leads to potential connections between us and the community. Second, we had to have a viable financial plan to move. Third, the hope of a better lifestyle is what pushed us over the edge.

Q: If you had one piece of advice for people thinking about making a life change like this, what would it be?

Matthew: There’s a lot that goes into a decision like this, and obviously it’s not something to take lightly. I think understanding yourself, as well as understanding your immediate family is super important. What type of environment will make you and your family most effective and happy should be your starting place.

Some of us are lucky, and we understand ourselves from the get-go pretty well. Others may need to spend some time soul searching and looking for answers as to who we are and where we should go in life before decisions like this. This process takes time, but if you want to be effective and happy as a person, you’ll want to undergo this process and continue to re-evaluate and develop over time.

After you do some soul searching within yourself and with your family, then you can start evaluating where you might want to move. Is the place you’re thinking of a place to visit or is it a place to live? Could you really be happy there long term?

Do I, as a person, make sense within that community or region? Will I fit in well there? Do I have something to offer that community? Do I have the potential to care about the people that live there or will all of my relationships likely be superficial?

Lastly, have an exit plan in case you miscalculated. If it doesn’t work out or if the place doesn’t line up, what’s the worst that can happen? Can you and your family leave relatively unscathed?

The CFP® viewpoint: I was very happy to see that the long and short-term effects on family finances played a central role in the decision but that this wasn’t the primary factor. I’ve seen so many instances where families are dragged around the country as one parent climbs the ladder in a corporate job only to find that the financial success wasn’t worth the strain on their marriage, kids and overall life. I also love the fact that before they had this idea, they had already begun laying the financial foundation, and to me, that’s actually the key takeaway for all of us.

Even if you’re not sure what your “Moving to Maui” event will be, being financially prepared will make the decision much simpler. It’s a real shame to say no to the things you really want to do because you’re too burdened by debt or don’t have any savings in the bank to allow for leaps of faith. To me, that’s the true definition of financial security – making choices for every reason besides money because you’ve already got that one taken care of.

 

Nomads Don’t Have To Be Hobos

December 18, 2015

For some reason that I can’t quite figure out, I’ve been getting a bit contemplative about my future lately. Maybe it’s because my daughter is about to turn 20 and she’s been reminding me that I’m very old and falling apart so I should think about my future while I am still lucid. Letting my mind wander a bit to what my life could look like when my youngest goes away to college and I’m officially an empty-nester (unless they move back in!), I realized that I have a lot of options on the table. For my job, all I really need is a telephone, a good Wi-Fi signal and an airport. Those three things are available virtually anywhere on the planet. Continue reading “Nomads Don’t Have To Be Hobos”

The Future Gift – One of the Secrets of Amazing People

September 15, 2015

Recently, I was talking to one of my fellow financial planners, Teig Stanley, about how his day was going. When he told me he was going to a funeral parade, I asked for more information since that is not a normal weekend activity. His comments about his friend who passed away, Manfred, and life in general were so thoughtful that I wanted to share it in his own words: Continue reading “The Future Gift – One of the Secrets of Amazing People”

Why We Practice What We Preach (Part II)

July 22, 2010

Welcome back. I hope your time away from my blathering was enjoyable. So where was I? Oh that’s right, my wife wanting to retire in 5 years. Now keep in mind that as I was telling her we certainly could review where we are at and if it was possible, my internal dialogue was saying “Why bother? We don’t have enough money set aside yet.” But I shook off my negativity and started running our numbers. Continue reading “Why We Practice What We Preach (Part II)”