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From Saver to Spender: Not so Easy (Part 2)

3/26/2018

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Continued from the Last blog …..

But regardless of our profile, thoughts usually creep in with a focus on how we can possibly live off the savings we’ve put away.  And the scary question to ask is “What if I discover later that my savings fail to support my retirement, what do I do then?”  As we answer that question, we acknowledge that fewer employers want to hire individuals our age and we are less likely to earn the income we now depend on if we go back to work.  This simply makes us ask the next question “what happens next if I quit my current occupation?” 

If we happen to be closer to the “Extreme Spender”  leading up to retirement, then the common decision is to likely stay put in a job we no longer feel challenged or wish continue.  The other not so popular choice is deciding to downsize expenses such as vacations, house size or entertainment until forced to do so.  In this case, it's very apparent why we would not want to spend our savings, but what is not apparent is why we would resist spending clearly when we have more than enough savings for retirement.  

But let's assume that we have saved enough to fund our income needs after retirement.  This would possibly mean we have been a better saver vs. spender.  Let's also assume that either we worked through our financial plan with an advisor or alone and determined that we financially can continue or even improve our pre-retirement lifestyle. 

So why do I see retiree’s in this situation continue to experience a fear of spending during retirement?  I’ve come to believe it has to do with how they viewed their savings during their career.  Savings for many investors represented a safety net in addition to their current income generator.  So during their career, if anything happened to their income they knew they could dip into their savings until they found the next income generator.  Therefore, when retirees leave their income generator and replace it with their savings they emotionally no longer feel they have a safety net.  This leaves the constant concern and fear of spending that often disrupts the enjoyment of spending. 

Often one solution to solve this dilemma is to build a safety net into our investment/savings that again allows us to sleep at night.  One suggestion for a safety net could very well be paying off our mortgage.  To find our safety nets I would recommend thinking about the “what if’s” and have plans for those situations.  Will the future go according to how our “what if” plans indicate?  Often the answer is No.  However, I can tell from experience that it's easier to modify previous “what if” plans than it is to create a solution on the fly from scratch while under pressure.

And to my business owner readers, I would tell you that planning your retirement is often more difficult because it’s likely 85% of your income will be based on the value you receive from selling your company.  And determining the sale value is not an exact method.  You may find yourself also carrying part of the sale value in a note to the buyer.  This also adds another dimension of risk to your retirement income vs. employees retirement income. 

Your comments and thoughts are welcome…

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From Saver to Spender: Not so Easy (Part 1)

3/18/2018

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Years ago I received a call from a client, worth 36+ million dollars with a $300,000 a year pension distribution and only used half the pension annual payout, asking if it was going to be ok to spend $250,000 on a recreational vehicle. 

One large difficulty with retirement is the challenge and fear of leaving the income generator, whether it be our business ownership or job, and relying on the fruits of our savings.  As we get older the fears of change continue to grow relative to our vulnerabilities of income security. 

The journey following the start of our young career often leads us to get married, have kids, buy a house, buy more expensive vehicles and essentially depend more on the increase in income we receive from promotions or business growth.  Early in our career, we tend to ignore that the future could be any less ideal than our incredibly optimistic vision of the future.  When we are young we can allow ourselves to leave a job and pursue another job in hopes of bettering our lives.  If the job or career fails to turn out, like we hoped, then we have the ability to continue looking for better possibilities. 

Some individuals, “Extreme Spenders”, spend every dollar earned to experience life and believe that better jobs tomorrow will eventually make up for the lack of planning today for retirement.  The difficulty with betting on higher incomes in the future is the lack of better-paying jobs the higher we progress up the income ladder. 

On the other end, some, “Extreme Savers”, believe that life is unpredictable and save every dollar they earn and don’t spend but on absolute necessities.  The difficulty with saving every last dollar is that we don’t really get to experience things like travel, entertainment, and vacations. 

Somewhere the rest of us fall in between both extremes.  And the closer we are to one extreme viewpoint vs. the other is often dependent on the sensitivity to the fear that the future may not look like our beginning optimistic vision.  Also the closer we are to the “Extreme Saver” profile during our career the more likely we will have the necessary funds to continue the lifestyle we have come to enjoy.  However, the closer we were to the “Extreme Spender” profile during our career the more likely we will be required to work longer or decrease our current lifestyle during retirement. 

This is important to understand, as somewhere along the way, as we get closer to retirement the realization starts to sink in about the cost of all the things we have come to depend on.  Things like a big house, expensive nice cars, travel, entertainment, hobbies, and vacations.  As the income generator starts to stall or go away the fear of transitioning to living off of retirement income exclusively starts to elevate. 

Until next…(Part 2)

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Should I try a do-it-yourself approach when beginning to invest .... or hire a financial advisor? Depends??

3/13/2018

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Below was my reply to another question I answered today on Investopedia.  It's a great resource for answers.  I hope this helps in your pursuit of investment knowledge. 

"Your question holds a couple of interesting concepts.   Should you do-it-yourself?  How should you invest if you do?  The first question is often asked to save on the cost of an advisor. 

But what if an advisor was free, would it not pose another question?  Do you love to invest and spend your time doing that?  If you answer yes, then I would suggest you pursue the do-it-yourself approach. But if you do, then you should really spend the time to self-educate yourself and have patience developing a strategy that fits you. 

Using an investment advisor or any professional should be a decision on added value.  I use advisors for more experience or just because I don’t want to spend the time and effort myself.  How much is your time worth?  It’s just a simple cost-benefit analysis on whether to use an advisor.  It’s really no different to why a business owner hires employees. 

On the second question on how to invest: Over the years I’ve seen thousands of different strategies and a lot of them are useless but then I’ve seen a large amount that gets the investor to their goals.  The ones that are successful are usually built around similar principals.  I’ve found after 20 years investing for clients and myself that the only strategy that matters is the one that you like that gets you to your goal. 

Everyone has a strategy they think best about how to fill a dishwasher, but I only care about the dishes getting clean.  If the dishes don’t come out clean then you need to change strategy.  Sure, someone can always find another way to include a couple more dishes, but do you care?"

Your questions, comments and feedback are always welcome!

All the best,
John

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Should you help your kids with a mortgage down payment?

3/7/2018

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I was responding to a short article request from a large newspaper, but when I emailed my reply back to the individual requesting it, I discovered the individual had left the company.  So, I have decided to post the question and my short answer here on my blog. 

Parents should ask themselves a couple of questions first, “Will this assistance put us in financial difficulty?” If no, then ask the next question, “Is my kid responsible with money?”  It may be a good idea if the first question is a “No” and the second question is a “Yes”.  If the answers are reversed then it will be a complete disaster for the parent’s retirement and often ends worse for the child as well. 
 
Years ago, I oversaw a couple of parents that paid the mortgage down payment for an irresponsible child (parents definition not mine) and the child kept taking out equity to spend until they eventually lost the house.  I’ve also seen where parents that gave a down payment as a wedding gift to a responsible child, years later, unexpectedly received it all back plus more in a thank you card. 
 
Had the first parents left the irresponsible child to renting then it might have saved the child from a mortgage default on their credit report.  “As I say often to parents,  What are the intents and likely results?” 

Until next...

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    John Hamel is the Managing Member of Austec Wealth Management, LLC. helping current & retired business owners optimize relative to their company value and personal life.

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