In meetings with thousands of clients, we hear people quoting advice that they grew up with decades ago, believing it is still valid in today’s world. Just because these sayings are common, doesn’t mean the advice is reliable.
1. If It’s Not Broke, Don’t Fix It.
As people transition into retirement and the later stages of life, they tend to be comfortable in their surroundings and at times don’t realize that things are in need of attention and investment. Instead of waiting until the everyday things you rely on to become outdated, deteriorate and ultimately stop functioning, proactively anticipating problems and dealing with them head-on is often the preferred approach.
For your primary home, are there any aspects that haven’t been updated for 20-30 years? Maybe the roof needs fixing before snow and ice cause damage next winter. Are there trees at risk of falling on the house or into the pool that you aren’t going to be using much anymore? If your heating system is 40 years old, maybe it’s time to upgrade to a more efficient HVAC system and benefit from the latest technology such as smart thermostats and mini splits.
Outside the home, be mindful of how you get around. Buying or leasing a new car can allow you to take advantage of modern safety features such as sensors, backup cameras and GPS navigation. All these elements will help to supplement faculties that start declining in our later years, such as peripheral vision and response time. Furthermore, having a vehicle that is covered under warranty can help avoid surprise repair bills.
Since your retirement years will be different than the previous 20 years of life, both in terms of your lifestyle and finances, look at your home and cars and get projects checked off the list proactively, knowing that the costs will be significantly higher than they were 10-20 years ago. A project that may have cost $5,000 in the past could be a $15,000 job today - if you can even find a contractor! Getting projects tackled proactively is a worthwhile investment, and your future self will thank you for it.
2.Ignorance is Bliss.
This saying means that what you don’t know won’t hurt you, but in our experience that is rarely true. What you don’t know probably will hurt you. In our experience, a lot of people are overly dependent on “experts”. If someone is trying to sell you something that sounds too good to be true, it probably is. Be aware that some products are attached to very high commissions and fees that can be hidden, so you need to be aware of any underlying motivations for the advice upfront, instead of after the fact.
If financial concepts such as budgeting, cash flow projections, the sequence of returns and market volatility are new to you, it can be a steep learning curve to develop these skills later in life, but they are important for self-reliance. Taxes will likewise have a significant effect on your income and investments in retirement. Having a liquid source of funds will be essential, so you’re not forced to sell equity investments in an economic downturn.
In addition, the force of inflation is also quite real. We hear people complaining all the time that things have become more expensive, but on average, inflation runs about 2-3% per year, and you need to be planning for that. Something as simple as a 3% inflation rate cuts your spending power in half in about 20 years, so if you think you will be spending the same amount in 20 years as you do today, think again.
Investing in a broad-based portfolio that reflects the performance of the overall stock market, coupled with some conservative elements that can be relied upon during a downturn, means your portfolio can keep pace with the force of inflation over time.
3. Don’t Put All Your Eggs In One Basket.
In an attempt to follow this old adage and benefit from diversification, we often see clients open up multiple accounts with multiple institutions, but they are not quite sure how these accounts fit into an overall plan. Rather than being truly diversified, at times we find their investments are quite heavily concentrated in certain asset classes
and that clients may not understand what risks they are running.
Thus we recommend:
• One checking account;
• One pre-tax retirement account (or add a Roth IRA if you can); and
• One post-tax investment account.
That’s it. Pool your savings with your after-tax investments. If you want to buy CDs at multiple banks, you can buy them through a broker, without opening 10 accounts at 10 banks across town. Having multiple accounts can also create a tax compliance nightmare for your beneficiaries as they try to gather 1099s from multiple accounts.
By simply multiplying accounts, you don’t make your life better or less risky. In fact, you make it more complicated and possibly more costly to administer your estate after you pass, or for someone else to pick up if something happens to you, so try to keep it simple and to understand what diversification really is.
No one has a crystal ball to predict where the stock market is going or what the best stock is going to be in the next year or 10 years from now, but we do know that the US stock market tends to return about 10% a year, and in an inflationary environment, that means you can spend about 5-6% a year without dipping in to your principal.
4. A Penny Saved Is A Penny Earned.
While no one can deny the benefits of frugality, sometimes you need to spend money to make money.
We often see clients chase coupons and believe saving is done through spending on sale items. They see a discount offer and feel proud of themselves for buying something to “get the deal”, but many times the purchase is something that they don’t need at all.
Other times, clients buy something in bulk, but the volume becomes a burden because they aren’t consuming at the rate they used to. This is especially true when people buy too much perishable food, which ends up spoiling in the fridge. Don’t chase these low dollar savings.
Instead, think about quality over quantity and buying things that will last. Rather than buying something online that takes up space, such as another kitchen gadget that will only be used once or twice, or another duck decoy that just gathers dust, have a sense of mindfulness and intentionality about the cost, purpose and value of the item. Each time you purchase something, you also need to have a budget to maintain it, and a place to store it. These hidden costs are not advertised in sale fliers. Instead, consider purchasing an experience that creates lasting memories. You can keep the digital pictures as a visual reminder of a wonderful occasion or vacation with family and friends.
5. I Paid Cash For That.
Sometimes paying cash is great if you can afford to do so, but often times, it makes sense to take advantage of a low interest rate if your investments offer a higher rate of return.
Many people realize a higher rate of return on their investment portfolio than they would save by buying a car for cash. Some people avoid leasing a car, but that can be a wonderful option for an older person who doesn’t put a lot of miles on their car and doesn’t want to have the hassle of owning a car that suddenly goes out of warranty and needs a costly repair.
Instead of owning a vacation home, it may be cheaper to sell the property and use the earnings on the proceeds for short-term rental stays. This choice gives you flexibility and you don’t have to worry about the constant costs for maintenance, repairs, insurance and property taxes.
In summary, it is important to have a simple and rational approach to life in retirement. By following these five tips, you can spend more time enjoying your golden years and less time chasing paper and maintaining an overly complex lifestyle that does not align with your long-term goals.
If you are struggling in one of more of these areas, one of our attorneys will be happy to bring you up to speed with our time-tested, streamlined approach. Here’s to a great New Year!