All Things Financial Planning Blog


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Retiring for the Wrong Reasons


Carl was 62 when he decided it was time to retire. I asked why. He said all his friends were retiring and he figured he wasn’t getting any younger and thought he would, too.

The next time I saw Carl, I asked how he was enjoying retirement. “What retirement?” he said. “I was so bored, I called my old boss and got my job back.”

In my years as I financial planner, I’ve seen both good and bad reasons to retire. Here are some of the more common bad reasons:

  • “I’m at retirement age.” In the US, you’re generally not required by law to retire at 65. I have clients who are over 80, still in good health, and still working because they enjoy it.
  • “I’m bored with (or sick of) my work.” If work is boring, retirement could potentially be even more so. Like Carl, you may quickly grow sick of retirement. If you hate your work, consider engaging an occupational therapist and find a job or career that will excite you. Remember, Colonel Sanders was in his 60’s when he founded Kentucky Fried Chicken.
  • “My parents retired when they were my age.” You are not your parents. Your life, circumstances, and reasons for retiring—or not—are different from theirs.
  • “I don’t like my boss.” If this is the umpteenth boss you haven’t liked, now would be a great time to get some counseling and find out how you’ve managed to pick such poor bosses. Once you figure that out, go find a boss that’s a joy to work for. They do exist.
  • “I got laid off.” It’s always hard to be laid off, especially at an advanced age when finding a new job can be more of a challenge. Again, this is not a good reason to retire. With an aging workforce, an increasing number of employers are willing, even eager, to hire older employees.
  • “Between Social Security and my savings, I think I have enough money to retire.” “Thinking” you have enough isn’t good enough. You’d better “know” you have enough. A good rule of thumb is to only withdraw 3% to 4% of your retirement nest egg each year. Add that to your annual Social Security income to get the total amount you can spend every year for everything, including taxes, travel, new cars, and one-time expenses.
  • “My spouse wants me to retire.” Cajoling a reluctant partner into retirement can backfire. Find out the reasons your partner wants you to retire and negotiate a win/win solution. For example, if your spouse wants to spend more time with you or travel, consider reducing your work hours or taking more vacation time.

So am I saying you should keep your job until you’re 90? Of course not. There are some excellent reasons to retire. The best one is having a good idea what you want to do instead of working for an income. I encourage my retiring clients to do a set of exercises that help them explore what the perfect day, week, and month look like in retirement. Make a list of the activities you want to do and establish a time line for accomplishing them.

Another good reason is being financially independent. You have a financial plan, a clear idea of how you and your spouse want to live in retirement, and ample income to support your chosen lifestyle.

The best reason to stop working for an income is that you have something else you actively want to do instead. Ideally, instead of merely retiring from something, you will retire to something you will enjoy.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD


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How Much Is Enough?


How much money is enough? Some people might give this question a flippant answer like, “A lot more than I have!” Others might argue there is a finite income or asset level that “should” be enough. But of course, there is no one-size-fits-all answer.

Well-being is made up of three factors: prosperity, happiness, and health. Without considering the components of happiness and health, we simply can’t answer the question of how much money is enough.

True, research has verified that having enough money to comfortably meet our basic needs is related to happiness. Yet the accumulation of money in and of itself rarely brings happiness. Many of us know people who have set financial goals: “When I earn $50,000 a year or have a net worth of $500,000, I’ll be happy.” When they attain that goal, they decide they will actually be happy when they obtain more.

Happiness is not entirely determined by the amount of money we have, but rather what we do with our money to support living an authentic life. An authentic life is one free from control by others in which our lifestyle is congruent with our deepest goals and desires.

The first step to finding out how much is enough is to put away your calculator and determine what makes you happy. Finding out what brings happiness to your life may be a bit more daunting than you first think.

The first things you may think of that make you happy are activities such as having a good meal or glass of wine, shopping, a new car or home, a vacation, or a romantic rendezvous with that special person. These are all pleasures, activities that give us a short-term boost of endorphins but are not long-lasting. Psychologists tell us that sustainable happiness comes from gratifications, which are long-lasting activities that draw on and challenge our personal talents, strengths and abilities.

The questions then become: What challenges you? What activities do you engage in that make time seem to stand still? That leave you energized and fulfilled?

Answering these questions takes some focus and time, sometimes years. Most of us don’t have the luxury to go meditate on a mountaintop until we figure out what will make us happy. While we’re defining the goals and activities that will gratify us, we also need to be making a living.

In fact, I would go even further and suggest that, while you’re exploring these essential questions, you also work on building some wealth. That way, when you eventually answer the question, “How much money is enough?” you’ll be well on your way to having that amount.

The challenge is to be sure that accumulating money doesn’t become a goal in itself. Here are a few ways to help your life aspiration planning and your wealth-building support each other in a balanced way.

Learn the basics of investing and focus on the long-term. Don’t allow yourself to get pulled into attempts to make money in a hurry through high-risk speculation or trading individual stocks.

Develop the habit of living on less than you make, so you don’t find yourself using up precious time and energy supporting a lifestyle you don’t really want.

Don’t invest a lot in an education until you’re sure it supports your life aspirations.

Finally, think in terms of “financial planning,” rather than “managing money.” A true financial plan is far more than a budget. It is a blueprint for using all your resources—including money—to create and support the fulfilled, gratifying life you want.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD


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Downgrade Your Lifestyle and Upgrade Your Future


Recently I was explaining to one of my staff members that I had decided to drop one of my two fitness studio memberships and save about $40 a month. She said, “So you’ve chosen to “downgrade your lifestyle to upgrade your future.”

It was a perfect phrase for the process of achieving financial independence.

People who become financially independent successfully internalize the future financial benefits of living frugally now. They understand that building financial security means never living the maximum lifestyle you can afford. Most successful financial frugalists have learned to live on less than 75% of their take-home pay.

Unfortunately, according to a survey published by Jean Chatzky, only 30% of Americans put anything toward building financial independence. In their senior years, the 70% who aren’t saving will find themselves completely reliant on government welfare, families, or the charity of strangers for their survival.

This fact quickly puts into perspective why so many Americans are embracing larger government and expanding government entitlements. Unfortunately, the retirement that government welfare will provide isn’t going exactly going to be golden.

Spending less today and investing that savings to provide for your future makes perfect sense. Why, then, do only three out of every ten Americans do it?

Psychologists tell us it’s because our brains are wired for instant gratification. There’s an immediate emotional reward in planning a shopping excursion, finding the perfect pair of shoes on sale, walking out of the store with them, and rushing home to try them on in front of your own mirror.

Making an online deposit to your IRA just doesn’t get the dopamine flowing in the same way.

One way to help you save is to trick your brain by learning to visualize today the reward you will receive tomorrow. What does financial independence mean to you? A paid-off house, travel, time to spend in your garden or with kids and grandkids? Take time to visualize clearly what your version of financial independence would be like. I have very successful clients who have actually clipped pictures representing their financial independence and taped them to their bathroom mirrors. Sound hokey? Not to one client who did this and went from having nothing to accumulating a net worth of $20 million.

Beginning to invest in your future will almost certainly mean downgrading your current lifestyle, significantly increasing your income, or both. The goal is to invest enough money to build a nest egg that, at retirement, will provide you a desirable lifestyle for the rest of your life.

To get started, you will first want to pay off all consumer debt and then never borrow again for consumer purchases. Set up savings accounts for future cars, vacations, repairs, medical expenses, and gifts. In addition, begin investing 10% to 50% of your take-home pay. The older you are, the higher percentage you will need. The best place to begin is a retirement account like an IRA, 401k, or 403b.

This will mean reducing your current expenditures on housing, car payments, vacations, eating out, and similar expenses. When possible, reduce rather than eliminate. Pay attention to which parts of your current lifestyle really matter to you, and be creative in finding ways to keep them.

Will this be challenging? Of course. Will it pay off? Done properly and consciously, absolutely.

The more clearly you can imagine a financially independent future, the easier it will be to make conscious, frugal choices in the present. You won’t be depriving yourself, you will be investing in yourself. Downgrading your present lifestyle to upgrade your future is the surest way to make your dreams come true.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD


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Defining Financial Wellness


What does financial wellness look like?

A lot is written on the symptoms and consequences of poor financial health. These days we are surrounded by news stories of financial disease in individuals, corporations, and nations. Financial instability seems to be the new normal.

A recent survey done by Jean Chatzky found that 15% of US citizens are insolvent and 55% live month-to-month. Only 27% are “financially sound.” Just 3% are considered wealthy, which is defined as having a net worth of over $500,000. This is a very low threshold; I’ve yet to talk to anyone worth $500,000 who considers themselves wealthy.

The signs of personal financial disease are easy to spot: spending more than you make, not having one year of living expenses saved, not funding your retirement plan, no (or negative) net worth, a history of poor money decisions, and chronic emotional distress around money. 

What we don’t hear much about are examples of financial wellness. I’ve asked a number of people what financial wellness looks like. I’ve received a wide array of answers, but the most common goes something like, “I’m not sure I can define it but I know it when I see it!”

I Googled “definition of financial wellness” and got some interesting responses. One site, thegreenlivingexpert.com, defines financial wellness as “having a clear understanding of your financial situation.”

I know a number of individuals meeting that definition who are as far from financial wellness as South Dakota is from China. Having a clear understanding that, “Oh, I’m so deep in debt I’ll never be able to get out,” is not financial wellness.

Other definitions of financial wellness include:

  • Not having to worry about finances
  • Having a written financial plan
  • Having your finances in place to achieve your financial goals while adhering to basic principles of financial planning
  • When you’re not stressed about money
  • Living within your means and having debts and obligations that you can meet
  • No longer having to worry about retirement
  • To be in such a financial situation that your hopes, dreams, and future endeavors for you and your family are realistically possible and attainable
  • Having the ability to live within your financial means

If I could boil all these definitions down, I might conclude that financial wellness is having adequate cash flow to live my desired lifestyle for the rest of my life without anxiety or fear. This to me is defines financial independence rather than financial wellness.

Netwellness.org got closer with a definition of “working towards balance in how we think and feel about money, having an understanding of our finances, caring for finances so that we can handle financial changes, and being comfortable with where money comes from and where it’s going.” 

Financial wellness certainly includes financial independence, but it is more than that. Financial wellness needs to include what a person thinks, feels, and believes about money. I know many people who are financially independent that I would not describe as having financial wellness. Some of them have almost debilitating guilt around having enough, live in fear that their money will run out, have such poor physical health that they can’t use their money to do the things they love to do, or lie awake nights worrying about what legacy they should leave to their children and grandchildren.

Financial wellness, then, is a balanced integration of financial, emotional, and physical health. It comprises having adequate cash flow, sufficient assets, the absence of illness, and the presence of emotional well-being. It is the sum of everything that goes with being financially, emotionally, and physically sound.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD


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Don’t Throw Your Money Away


As I cleared our dinner table the other night, I scraped some of my uneaten veggies into the trash. I immediately heard my mother saying, “There are starving kids in India that would give their right arms to eat what you are throwing away!”

She had a point. Affluence inherently breeds a certain level of waste. So do negligence and inefficiency. I could easily have avoided wasting those veggies by reducing the amount I originally scooped onto my plate. When I dumped them into the trash, I was also wasting more than food. I was literally “throwing money away.”

As a financial planner, I regularly consult with people who have been throwing real money into the trash on a daily basis. Here are the top areas where people waste money and what they should do instead:

Buying investment products with hidden fees and commissions. This includes mutual funds, insurance, structured products, limited partnerships, and annuities. Costs can go as high as 10% of your initial investment and 5% a year. Since an average return may be 7%, subtracting 5% in costs leaves a paltry 2% return to the investor. A $500,000 investment could cost $50,000 up front and $25,000 a year. All too often, most of this information is buried in fine print and not voluntarily disclosed to you if you are dealing with an agent or broker.

What to do? Insist on full disclosure of fees. Even better, make sure you have someone looking out for your best interests, someone for whom you are a client and not a prospect. Home buyers routinely employ real estate brokers to represent their interests. Consumers of financial products need to consider doing the same.

Paying more than your fair share in state and federal taxes. A mentor once told me the best paying job in the world is understanding the tax code. Because the US tax code is extremely complex, most people try to just keep it simple. In this case, simplicity can come with a very high price tag. Some of the biggest tax savings come from fully funding retirement plans, maximizing deductions, proper use of corporations, and paying attention to your estate planning.

Impulse buying without researching products for quality and price. Comparison shopping pays big dividends, and the Internet makes it easier than ever. One of the best investments for frugal shoppers may be a subscription to Consumer Reports.

Buying new, brand name, large ticket items. America’s debt binge of the past five years will change our lifestyles for the foreseeable future. More of our income will go to taxes and personal debt repayment. New cars, houses, furniture, and even clothes are luxuries most of us must learn to live without. Get to know places where you can purchase these goods used. Check out local second-hand dealers as well as websites like Autotrader.com, Ebay.com, and Funituretrader.com.

Education for education’s sake. Getting an education is great, as long as it will help open career doors for you. Often I get resumes from people whose education has little or nothing to do with the job for which they are applying. A master’s degree in history is great if you want a career teaching history, but it won’t prepare you to own your own business. For many, it’s best to delay going to college until you know what education you need.

Ironically, some of these ways of wasting money are easy to overlook because they’re so big. But learning to spend more consciously in large transactions, from taxes to tuition, can save you enough to buy all the veggies you could ever want to eat.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD


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This is Your Brain in a Stock Market Crash


Bryan flipped on MSNBC to catch the stock market’s closing numbers. It was March 9, 2009. A visibly shaken reporter was telling viewers the Dow Jones had fallen to 6547, its lowest closing in over 13 years. Retirement accounts had lost trillions of dollars, and many experts expected the market to continue to fall. 

Bryan’s heart raced; his hands began sweating. He grabbed the phone and ordered his investment advisor to sell all his investments and move everything to money market funds. 

Psychologists, investment advisors, and neuroscientists will agree that what Bryan did wasn’t rational. He reacted to the decline of the stock market as if his life were in danger. While watching stock markets fall is not enjoyable, there was no real emergency. He and his wife were in their mid-50’s, still working, with about $1 million in their retirement accounts that they wouldn’t need for another 10 years. The volatility in their portfolio was not going to affect their current cash flow or lifestyle. 

Had Bryan held out and done nothing, his retirement portfolio would have gained $300,000 by the end of the year. Instead, he lost $250,000. His panic selling cost him $550,000. 

Unfortunately, Bryan has a brain that isn’t well equipped to handle complicated financial decisions. Neither do the rest of us. 

Our brains were splendidly designed to handle physical threats. If a saber-tooth tiger was bearing down on one of our ancestors, his brain would kick into high gear to move him out of harm’s way or help him fight for his life. It’s hard to run from or fight stock market volatility, but our perception of danger is just the same. 

Our brain is divided into three sections: upper (the cerebral cortex), middle (the limbic system), and lower (the basal ganglia). The upper brain is where we reason, the middle brain is where we react to emotional impulse, and the lower brain is what regulates the operations of the body. Our limbic system is where our emotions reside. This middle brain has one function, to move us toward pleasure or away from danger. The very word “e-motion” suggests movement. Difficult emotions like fear, anger, and sadness can cause the limbic system to move us away from a perceived danger, while joy, peace, and happiness move us toward a perceived benefit. There is no gray with the limbic system, it’s black or white, good or bad. 

When Bryan heard the television commentator deliver bad economic news, his limbic system reacted reflexively to a perceived threat much as it would to a real physical threat. It immediately sent a message to the lower brain to prepare to flee. His heart started beating faster, the blood flow to his stomach reduced, and his palms became sweaty. The limbic system also disconnected most of the upper brain’s ability to reason. The limbic system was now ready to evoke motion by making a seemingly rational decision to move out of harm’s way. Its way of eliminating the threat was for Bryan to call the advisor and sell his investments. 

Fortunately, neuroscientists have found we can rewire our brains to separate the actions from the emotions. This is done by creating new neuropathways between the cortex and limbic system. A number of methods help the brain accomplish this, including cognitive behavioral therapy, financial therapy, experiential therapy, brain training, and awareness meditation. They all take time and practice. 

If you don’t think you have the time or money to engage these methodologies, just remember Bryan. Had he invested some time, effort, and money into rewiring his brain, he would be some $500,000 richer today.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD


3 Comments

When Building Wealth, Uncle Sam Is No Example


So much for the silver lining. Most of my financial planning peers and I hoped the upside of the worst recession since the Great Depression of the 1930’s would be a newfound fervor to save.

Not exactly. The economic crisis of 2008 apparently didn’t last long enough to create significant change in attitudes about personal saving. The amount Americans save out of their paychecks was almost zero at the peak of the credit bubble. Near the bottom of the recession it rose to 6.4%. In April, it fell to 2.7%, its lowest level since the crisis began in the fall of 2008.

I’ve argued that the economic crisis of 2008 was largely caused by Americans’ inability in recent years to save. In the early 1980’s the US national savings rate was around 10% of income. It has fallen steadily since then. Governmental policy changes in the late 90’s made borrowing even easier. Many lenders and investment banks abetted consumers in their hunger for more goods and services they couldn’t afford. As a result, our national savings rate dropped to just 0.8% in April 2008.

Inevitably, as in all credit bubbles, the house of cards collapsed. The economy went into a tailspin as lenders turned off the credit spigot, consumers slashed spending, millions lost their jobs, and many consumers defaulted on their debt obligations.

The U.S. government decided the way to fight the necessary purging of bad consumer loans from the economy was to spend even more by borrowing and raising taxes. As a result, the US has seen its debt balloon from 64% of GDP in 2006 to an estimated 94% in 2010. Most economists predict that the government’s stratospheric increase in borrowing, while perhaps helping mitigate the blow in the short term, has guaranteed a sputtering and lethargic economy for years to come. One economist I recently spoke with shocked me when he predicted Greece’s debt problem will be easier to fix than America’s.

According to almost every prediction I read, we are in for a rough road for the next 10 to 20 years. Americans should expect to pay higher taxes and see a lower standard of living.

To survive, you will need to internalize and practice two simple economic principles. The first is: to build wealth you must develop the skill of saving. To save or invest, anyone (whether an individual, corporation, association, or government entity) must spend less than they make.

The second principle is: don’t borrow for consumer expenses. As my father has always told me, “It’s impossible to go bankrupt if you don’t owe anybody anything.” This means cut up the credit cards, don’t finance furniture or cars, and don’t borrow to fund your education.

As simple as these economic rules may seem, practicing them voluntarily is incredibly difficult for most people and organizations. Instead, many people (including elected officials worldwide) seem to ignore these principles until forced by the market to comply with them. That is when the lenders cut off your lending or you lose your job and can no longer make the payments on your debt. That is when the spending spree comes to its inevitable and painful end.

So, what can you do? First, don’t follow your neighbor or the example of most state and federal governments. Increase your savings, plan ahead for “unexpected” expenses like car and home repairs, and build a substantial emergency savings account for genuine crises like a job loss, a sudden death, or a natural disaster. Choose to live frugally now instead of waiting for an economic crisis to force you into painful, involuntary frugality later.

rickKahlerRick Kahler, CFP®, MS
President
Kahler Financial Group
Rapid City, SD

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