Tag Archives: Retirement

Social Security Age: Claim at 62 or Wait until 70

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“The age you claim Social Security affects your lifetime income.”

Social Security Administration (SSA) payments are based on a calculation of a 35-year average of your lifetime earnings. Each year’s wages are adjusted for inflation before being averaged. If you worked longer than 35 years, the highest 35 years will be used. If you worked fewer than 35 years, SSA will average in zeros for the missing years.

When to collect benefits

According to the Center for Retirement Research at Boston College, 48% of women and 42% of men who claimed Social Security retirement benefits in 2013 did so as soon as they were eligible at age 62.

Yet, according to many financial advisers, baby boomers would be better off waiting until their seventieth (70th) birthday to start claiming Social Security, than if they take benefits in their 60s.

The logic behind this advice is driven by the 8% government-guaranteed increase in lifetime payments for each year baby boomers delay benefits past age 62, up to age 70.

But, baby boomers need to ask themselves what is the likelihood they will live long enough to benefit from the increased payments that start later in life at seventy years old versus collecting benefits at sixty-two years old.

When you decide to delay starting Social Security benefits, you’re betting that you will out-live an actuarially based mortality estimate.

Discount Rate Specification and the Social Security Claiming Decision from the Social Security Administration (SSA) study evaluates Social Security benefits not only as a function of the age of death, but also the probability of reaching that age. It provides that analysis over a range of discount rates.

A general conclusion of the study is that you shouldn’t wait to reach the age of 70 to initiate your Social Security benefits.

Social Security Benefit Breakeven

Before you start drawing on Social Security at age 62, it is recommended that you determine if it maximizes your total payments by calculating the breakeven. Additionally, it’s important that you balance the timing of those benefits with the rest of your retirement income plans. This choice of starting benefits isn’t reversible after 12 months.

Social Security breakeven age occurs when the total value of higher benefits (from postponing retirement) starts to exceed the total value of lower benefits (from choosing early retirement).

  • Example: If you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.

https://youtu.be/9e3M3kM9LFk

Early Benefits

Collecting early benefits may pay off despite the reduced monthly check. Since it is impossible to predict how long a baby boomer will live. If you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate.

Just be aware that you will receive a reduced benefit. If your full retirement age is 67 and you begin collecting Social Security at age 62, for example, your benefits are reduced by about 30 percent.

The rational advisors often hear from baby boomers who want to apply for Social Security early benefits at age 62 is that you’ve paid into the system for decades, and want to get something out of it before it goes bankrupt. It might feel like the best decision at the time, but down the road, it may prove the worst decision you ever made in your life.

The legitimate fear for planning purposes is not that you might die early and miss out on some money you could have had from social security, but rather that you will outlive your money.   Think about waiting to collect Social Security as a form of longevity insurance—for you for sure, but also for your surviving spouse if you are the higher earner.  In fact, a higher Social Security benefit is the best deal on longevity insurance you can get.

Benefits reduced if you’re work while receiving benefits

Working after you start receiving retirement benefits may affect your monthly benefit amount, depending on your age and how much you earn. If you are younger than your full retirement age, and your earnings exceed certain dollar amounts, some of your monthly benefit may be withheld.

Social Security will increase your monthly benefit after you reach full retirement age to account for the months of withheld benefits. When you reach your full retirement age, you can work and earn as much as you want and your benefit will not be affected.

Full Retirement Age

Optimum strategy for most baby boomers may or may not be to postpone Social Security benefits at least until you reach full retirement age, which is determined by the Social Security Administration.

Your full retirement age (FRA) is determined by the year you were born. The retirement age used to be 65 for everyone, but is gradually increasing to 67. As the full retirement age goes up, benefits claimed at earlier ages go down.

FRA is 67 for those born in 1960 or later. If you were born in 1937 or earlier, your full retirement age is 65. The FRA rises two months every year after that until it caps out at age 67.

However, collecting Social Security early will cost you. If your full retirement age is 67, your Social Security benefit is reduced by:

  • About 30 percent if you start collecting at 62.
  • About 25 percent if you start collecting at 63.
  • About 20 percent if you start collecting at 64.
  • About 13.3 percent if you start collecting at 65.
  • About 6.7 percent if you start collecting at 66.

If you expect to live beyond the breakeven age, it would be financially worth your while to delay drawing benefits. Yet, there’s not an age that’s appropriate for everyone. Baby boomers must consider their own financial need, health and post-retirement plans before deciding when to begin social security benefits.

There are many ways to collect Social Security benefits. You can collect benefits starting at age 62 or anytime up until you’re 70. Collecting early benefits at age 62 means smaller monthly payouts than waiting until full retirement age or waiting until seventy (70). It’s generally advisable to wait until full retirement age to start collecting Social Security benefits because the monthly benefit is higher than starting early benefits at age 62.

References:

  1. https://crr.bc.edu
  2. https://www.thestreet.com/retirement/social-security-claim-now-or-wait
  3. https://www.bankrate.com/retirement/when-to-take-social-security/
  4. https://www.forbes.com/sites/jlange/2018/10/01/what-is-the-best-age-to-apply-for-social-security/#97e7e9a56d2b
  5. https://www.ssa.gov/benefits/retirement/

Financial Life Planning

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“People have the potential to live longer than any other time in history. This gift of extra time requires that we fundamentally redefine retirement and our life journeys leading up to it.” What is “Retirement’?  Transamerica Center for Retirement Studies

Financial Life Planning connects the dots between our financial realities, our values and the lives we long to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life goals. It is an financial planning and investing approach which helps people manage their portfolio.

Financial life plan focuses on the human side of financial planning, including people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, goals and resources.

George Kinder, known to most as the “father” of the life planning, is the founder of Kinder Institute. He views life planning as “a way of holistically delivering financial planning that focuses on delving into people’s real goals, beyond just their financial concerns, in an effort to help them use their money to deliver freedom into their lives”.

Financial Life Planning combines personal finance and wellness. It spends time to discussing life planning and to building an intentional life. There is more to living a life of freedom and purpose than money and wealth. To live a life of freedom and purpose, people are encouraged to consider George Kinder’s famous Three Questions, which are:

Question 1: Design Your Life

“I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours.”

Question 2: You have less time

“This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it?”

Question 3: Today’s the day

“This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done? ”

Society tends to attribute personal and professional success to the acquisition of material things and the accumulation of wealth. Most of us find ourselves inextricably caught in a cycle of earning, spending, and investing often induced by societal and peer pressures to fit into a perceived definition of success.

And in spite of this, how many times have we heard from even well-to-do friends, acquaintances and relatives that they are not exactly happy with how their lives have shaped up, how they don’t enjoy what they are doing, how they are drowning in debt or living paycheck to paycheck, or how they don’t have any time to pursue their dreams and interests?

If you look closely, there is a common undercurrent running across all these statements that we find ourselves ‘enslaved’ to a script or lifestyle broadcast by social media which was not exactly aligned to our values and innermost dreams.

No one ever wanted to spend more time in the office

“No one ever said on their deathbed ‘I wish I’d spent more time at the office.’ ” Harold Kushner

Having read many anecdotal reports regarding end of life issues, it is important what truly matters to most people in the end. Typically, people do not say that they wish they had earned more money, spent more time at work, or had one more side hustle.

Most often instead, they wish they had spent more time with family and friends. They had more experiences with those that they love. They had taken better care of their health and bodies over the decades. They had saved more and planned better for their retirement. And finally, they wanted to make sure that those they left behind would be taken care of once they were gone.

References:

  1. https://www.kiplinger.com/article/retirement/T023-C000-S004-retirees-build-a-financial-plan-based-on-you.html
  2. https://www.kinderinstitute.com
  3. https://www.kitces.com/blog/george-kinder-institute-life-planning-podcast-seven-stages-maturity/
  4. Podcast: #FASuccess Ep 015: Why Life Planning Is Simply Financial Planning Done Right With George Kinder

Estate Planning

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“I want to leave my children enough that they feel they can do anything, but not so much that they do nothing.” ~ Warren Buffet

Your Estate Plan

Although estate planning can be a complex task, a well-informed plan can make a big difference in what is left for your loved ones.

Source: Fidelity Investment

Here are a few steps you can take to begin thinking about your estate plan:

  • Gather important documents, and make sure that key family members know where they are.
  • Gather a list of all the things you own, noting any liabilities (like your mortgage) as well. Record the value of each asset (properties, collectibles, jewelry, etc.). Print copies of your most recent statements from your relevant accounts. Note the values and benefits from insurance policies.
  • Consider and write down your objectives for your estate plan. Who should get which assets? Who should get them if something should happen to your beneficiaries? Do you have minors who need care if something were to happen right now? Who should handle your assets if you become unable to make decisions about them? And so forth.
  • Review your will, if you have one in place.
  • Review and update the beneficiaries of your retirement accounts or insurance policies.
  • Review and update powers of attorney for matters of health care or other affairs.
  • Consider if you want to establish a trust, and prepare to talk to an attorney and experienced financial adviser about it.

We never know what could happen tomorrow. But we do know that having a solid estate plan can help ease the burden of your passing on your loved ones.

Revocable vs. Irrevocable Trusts

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

  • Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
  • Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
  • Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.Trusts are a powerful and beneficial tool when properly used.

There are two types of trusts: a revocable living trust and an irrevocable trust. Some other terms associated with trusts include “grantor” and “non-grantor” — which are the parties creating the trust.

With a revocable living trust, you still control the assets, can change the trustee at any time, or sell your assets while you’re living, because the grantor — the person who created the trust — is normally the trustee as well. The only benefit a revocable living trust provides is to ensure your assets bypass probate. It does not provide any immediate tax benefits. In fact, income from a revocable living trust is taxed to the grantor.

An irrevocable trust is completely different. It can be used when “gifting” assets in order to reduce a grantor’s taxable estate. Be aware that once you transfer assets to an irrevocable trust, changes are permanent and cannot be undone — or at best — can only be made through a lengthy process. You no longer have any control to sell investments inside the trust and will have to ask your trustee — typically your children or grandchildren — to do so. Since you don’t legally own the assets any longer, they’re either taxed at trust income tax rates or your beneficiaries’ tax rates.

By using a will or trust to legally ensure that you will not only protect the things you worked hard to achieve, you will have the final say about those assets — taking care of the people you love when you’re no longer here. That means not leaving such decisions to attorneys, state governments or the IRS.

References:

  1. https://www.kiplinger.com/article/retirement/T021-C032-S014-estate-planning-is-more-important-than-you-think.html
  2. https://www.fidelity.com/life-events/estate-planning/basics
  3. https://www.fidelity.com/life-events/estate-planning/trusts

Financial Goal Setting

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“If you are bored with life, if you don’t get up every morning with a burning desire to do things – you don’t have enough goals.” Lou Holtz

Research shows that our brains are a goal-seeking organism.  Whatever personal or financial goals we give our subconscious mind will allow it to work night and day to achieve them. However, one goal isn’t good enough for our subconscious minds.

Some goals take longer to achieve than others, like buying a house or saving for retirement. If you spend years working toward only one objective, you’re likely to get discouraged when it doesn’t happen right away.

But when you have multiple goals you’d like to achieve, goals that align with your values and beliefs, you have more to strive for, and more opportunities to check those goals off your list. And the accomplishment you feel every time you complete a goal will inspire you to accomplish even more of them

Actions overcomes fear

Jack Canfield, author of Chicken Soup for the Soul™, states categorically that “the biggest reason most people don’t achieve their goals and realize their dreams is that they don’t take action, and the number one reason people don’t take action is fear.”

“There is a one thing that 99 percent of “failures” and “successful” folks have in common — they all hate doing the same things. The difference is successful people do them anyway.” Darren Hardy

People whom achieve their goals versus those whom fail has everything to do with overcoming the paralysis of fear versus taking action. The people who achieve great success in life are the ones who are willing to take consistent action toward realizing their dreams. They consistently push through their fear and take steps to make their goals happen, no matter what others may think or say about it.

Goal achievers make countless small decisions, they plan and they take deliberate actions every single day that keep them on target toward achieving their dreams. Because without deliberate action, your goals simply are not going to be achieved.

No matter how ambitious the goals or how brilliant the plans, if you’re not prepared to take deliberate action to reach them, they’re not really goals at all—they’re just dreams.

Start with goals you can achieve

Every successful investing journey starts with a set of clear goals.

Appropriate financial goals for an investor should be specific, measurable, attainable, reasonable and timed with a deadline (SMART). Successful achievement of goals should not depend upon unrealistic or outsize market returns or upon impractical saving or draconian spending requirements.

Defining goals clearly and being realistic about ways to achieve them can help protect investors from common mistakes that often derail their progress. Here we show that:

  • Recognizing constraints, especially those that involve risk-taking, is essential to developing an investment plan.
  • A basic financial plan will include specific, attainable expectations about action steps and monitoring.
  • Discouraging results often come from not following a financial plan, chasing overall market returns, an unsound investment strategy that can seduce investors who lack well-grounded plans for achieving their goals.
  • Without a plan, investors can be tempted to build a portfolio based on transitory factors such as fund ratings—something that can amount to a “buy high, sell low” strategy.

Life financial goals

Make a list of financial goals you’d like to achieve in your life. Be as specific as possible. Include details such as when they will happen, where they will happen, how much you’ll make, what model you’ll buy, what size it will be, and so on.

Keep your goals somewhere you can review them every morning. Put your goals on a poster or piece of paper where you read each night before you fall asleep.

Keep goals at the top of mind, you’ll be more likely to make them a reality. Reaching your retirement savings goals starts with developing a retirement plan. Fidelity Investments has developed a set of retirement guidelines based on 4 key metrics:

  • Yearly savings rate,
  • Savings factor to help you see where you stand,
  • Income replacement rate, and
  • Potentially sustainable withdrawal rate.

“Unsuccessful people carry their goals around in their head like marbles rattling around in a can, and we say goals that are not in writing are merely fantasies.” Darren Hardy

Writing your goals down is the first step in turning your dreams into a reality. If you keep goals in your head you’re not likely to focus and work on them consistently. Thus, it is important to write down all your goals. Whether it’s short-term or long-term goals, it is essential to list every goal in writing.

Writing it down will have a powerful effect on your subconscious mind to help you visualize and achieve your biggest dreams. Remember, a goal is a dream defined and written down.

Make Goals Real by Writing Them Down

Goals are a very effective way to build your self-belief because properly set goals require you to stretch a little outside of your comfort zone; causing you to expand your comfort zone as you achieve the goal.

With clear and measurable goals, investors can create a realistic plan for achieving their objectives within a certain time frame. Make a list of your short-term and long-term savings goals.

If you write down your goals, you’re more likely to achieve them. Think of them as a road map to where you want to go—and make them practical and attainable. Take a simple approach:

  1. Divide your financial goals into three categories: short term (less than one year); medium term (one to five years) and long term (more than five years).
  2. Attach a dollar amount to each goal. For instance, a short-term goal might be a family vacation. How much will it cost?
  3. The more specific you can be, the more motivated you’ll be to work toward that goal.

Goal Attainment Requires Believing in Yourself

Everything you have in your life is a result of your belief in yourself and the belief that all things are possible. According to Jack Canfield, the four most important steps to learning how to believe in yourself are:

  • Believe it’s possible. Believe that you can do it regardless of what anyone says or where you are in life.
  • Visualize it. Think about exactly what your life would look like if you had already achieved your dream.
  • Act as if. Always act in a way that is consistent with where you want to go.
  • Take action towards your goals. Do not let fear stop you, nothing happens in life until you take action.

Incorporate and practice these four steps.

Mistakes Investors Make

One of the biggest mistakes investors regularly make when goals and a plan are absent is to confuse investing with stock picking. Ask many people how their money is invested and they quickly tell you the latest hot stock they’ve purchased and the investment thesis that explains why they think it’s going to take off.

Saving for retirement and building an emergency fund should be the highest priorities, followed by other long-term financial goals, like college, travel, or a house. You can contribute a small amount to each goal or pick a couple to focus on first. Decide how much you need to save to reach those goals.

Sources:

  1. https://www.jackcanfield.com/about-jack-canfield/
  2. https://www.fidelity.com/viewpoints/retirement/retirement-guidelines

Retire On Your Terms | Financial Literacy

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Updated:  March 8, 2020

 “If you have $1 in your bank account on the day you die, you had more money than you needed in your lifetime to live.”

This quip brings perspective and can reinforced one extremely important aspect of retirement: ‘putting together a plan and sticking to it’ is vitally important.

Life is unpredictable, so any plan you make for retirement has to be flexible and you must accept the undeniable fact that you can’t control everything life delivers can afford personal freedom and peace of mind in retirement.

Retirement is a great time to discover new passions and interest by taking classes, finding one-on-one instruction, or joining groups and organizations. The key to a happy retirement isn’t how much free time you have, it comes down to how well you’ve planned for retirement and how you manage whatever free time you have.

There is adage in business management…‘you can’t manage what you don’t measure’. This adage is true for business management, and is also true for personal finance and retirement. You cannot manage your personal finances or your financial readiness for retirement unless your measuring your current financial status and progress.

It is important to measure those financial activities or results that are important to successfully achieving your personal financial goals. The time to plan for retirement is now. Planning for retirement starts with having a ballpark idea of longevity and how much money you will need in retirement. Yet, many Americans are not financially prepared or have planned for their post-working years. Only 54 percent of non-retired respondents to the FINRA Investor Education Foundation’s National Financial Capability Study (NFCS) said they have some kind of retirement account.

42% of Americans have saved $10,000 or less for retirement

This statistic suggests a significant number of Americans aren’t on track to meet their retirement goals. That shouldn’t be surprising given the plethora of potential obstacles: Pensions are less common and health care costs continue to skyrocket higher. Additionally, you may need to figure out how to put your kids through college, but you might be paying off your own student loans or credit card debt at the same time.

If you’re off track, you can take a few simple steps to get right back on the road.

  • Save as much as you can, as often as you can. If you’re years away from retirement, you’ll likely benefit from the compounding effect.
  • Stay in the workforce longer (more on that in a moment) or decrease your living expenses. This may be an especially viable option if you’re close to retirement.
  • Plan and focus on what you can control and what’s important to you—planning provides perspective on what you can do to meet your goals
  • Financial experts advise that equities need to be a larger portion of retirees’ portfolios during retirement for several reasons including longer life expectancy and lower interest rates.

Retirement readiness is achievable by most Americans. But, it requires that Planning and being financially prepared for retirement become a key priority for American families. Yet, research reveals that a majority of Americans are not confident they are financially or emotionally prepared for retirement. Additionally, only about one third have an actual plan in place. Nearly a third worry they will outlive their retirement savings and many already plan to work part time during retirement.

Longevity

Use the Social Security Administration’s Life Expectancy Calculator to help determine how many years of retirement you might need to plan and save for. As a rule of thumb, a retiree should expect to live thirty (30) to thirty-five (35) years in retirement.

How Much Money

Many retirement experts estimate you’ll need between 70 and 85 percent of your pre-retirement income to maintain your standard of living after you stop working. But that formula might be too simple, and possibly too low, to account for what you’ll actually spend. For instance, you may require more if you have expensive hobbies or plan to travel a lot. You may also need more if you or your spouse are in poor health and have substantial medical expenses.

Retirement Planning

Only 1 out of 10 workers has prepared a formal financial plan

Without a plan, you may be more prone to react to market events, and you might even make rash decisions. A plan provides perspective, brings clarity to your current situation, and shows you how to make changes to your spending and saving habits. It can give you knowledge to accept responsibility for your life and the confidence to address the unknown and market volatility.

Retirement Planning Requires a Plan

 “The goal of retirement planning is to create a plan. It feels silly to come out and say that, but from what I’ve seen, most investors never actually take the step of creating a concrete plan. Instead, they read a few articles about various retirement planning topics and they leave it at that. (And many investors don’t even do that much.) The more specifically you’ve planned how you’ll manage your portfolio — and your finances in general — the less likely it is that you’ll have to go back to work or dramatically reduce your spending later on in retirement.” Mike Piper, Can I Retire? How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less

Individuals have to take responsibility for their financial security after retirement. Unfortunately, the majority of Americans do not appear to have done much retirement planning. Forty-one percent of FINRA Foundation NFCS respondents have tried to figure out how much they need to save for retirement, while 54% have not. The act of planning for retirement has proven a strong positive indicator of retirement wealth.

When putting together a retirement plan, goals “must-have” essential expenses should take precedence over “nice-to-haves” or discretionary expenses.

Workers who were able to retire by choice were happier than ones whose retirement was thrust on them: 69 percent of the retirees who retired by choice were satisfied with their lifestyle but only 36 percent pushed into retirement said they were satisfied.

The happiest retirees are engaged in some kind of meaningful activity or actively employed, are in good health and are more connected in the physical world. In short, activities and social engagement are good for a retirees health and wellness.

The happiest retirees “eat well, sleep soundly, play often, exercise at least three times a week and maintain strong social connections. The happiest pre-retirees and retirees believe “good health” as the No. 1 key to happiness in retirement.

Save smart in accounts earmarked for retirement.

Whenever possible, use tax-advantaged savings accounts like 401(k)s to save money on taxes and boost retirement security. Contributions to a traditional 401(k) are not subject to income tax withholding and are not included in your taxable wages—and earnings on Roth 401(k) contributions are tax-free. In 2020, contribution limits increased, so you can contribute up to $19,500 to your 401(k)—and if you’re aged 50 or over, you can contribute an additional $6,500 for a total of $26,000.

Any day is a good day to start, or increase, your retirement savings and investing, and step up your planning. Understand that saving and crafting a plan for retirement is a long-term process.

References:

  1. *https://money.cnn.com/2018/03/16/retirement/average-retirement-savings/index.html
  2. http://fortune.com/2018/04/18/americans-save-less-than-10000-for-retirement/
  3. The National Financial Capability Study (NFCS) is a project of the FINRA Investor Education Foundation (FINRA Foundation).
  4. https://www.retireonyourterms.org/about-us
  5. https://vanguardblog.com/2018/11/08/financial-worries-start-planning/

The Wealthy Next Door

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To accumulate wealth, you should start by reading and studying the behaviors of people who have successfully accumulated wealth and achieved financial independence.

In the groundbreaking financial book, “The Millionaire Next Door: Surprising Secrets of America’s Wealthy”, written in 1996 by William Danko and Thomas Stanley, found that people who appear wealthy may not actually be wealthy.

Their findings reveal that people who appear wealthy tend to overspend or live paycheck to paycheck. They often overspend on symbols of wealth like luxury vehicles and large homes — but actually have modest or negative personal net worths. On the other hand, wealthy individuals tend to live modestly in middle-income communities, drive modest vehicles, and shop at Costco Warehouse.

Lessons Learned from “The Millionaire Next Door” are enlightening on how the wealthy actually spend and save. Instead of appearing to be wealthy, they tend to:

Understand that Income Does Not Equal Wealth

It is a fact that higher-income households tend to have more wealth than lower- and middle-income households. But the size of a paycheck explains only approximately 30% of the variation of wealth among households. What really matters is how much of the income is not spent on discretionary things, but is saved and invested. On average, wealthy individuals invest nearly 20% of their income. And, it finds that those in the top quartile of wealth accumulation are prodigious accumulators of wealth (PAWs), according to Danko and Stanley

Work with a Budget

The majority of wealthy individuals have a budget. Of those who don’t, they have what the authors called “an artificial economic environment of scarcity,” more commonly known as “pay yourself first.” In other words, they invest a good chunk of their income before they can spend any of it. As the authors wrote, “It’s much easier to budget if you visualize the long-term benefits of this task.”

Manage their Spend

Nearly two-thirds of the wealthy can answer know how much their family spends each year for food, clothing, and shelter. In contrast, only 35% of high-income non-wealthy answered yes to this question. The wealthy manage and track their spending.

Have Defined Financial Goals

About two-thirds of wealthy have clearly defined short-, intermediate- and long-Term goals. Many of the wealthy are retired and have already reached their goal of financial independence.

Dedicate Time To Financial Planning and Education

Creating a budget, goal setting and financial planning all take time, but the wealthy were willing to spend it. Danko and Stanley found that people they labeled “prodigious accumulators of wealth” (PAW) spend many hours per month planning their investments. In fact, they found “a strong positive correlation” between investment planning and wealth accumulation. Each week, each month, each year, the wealthy plan their investments.

Buy and Hold Smaller Homes

Your purchase of a home — and how often you choose a new one — will determine your ability to accumulate wealth. According to The Millionaire Next Door, that wealthy family has been next door for quite a while. Half of the wealthy have lived in the same house for more than 20 years.

Stay Married

The majority of wealthy people are married and stay married to the same person. Several studies have shown that people who are married accumulate more wealth than those who are single or divorced. Conversely, it’s important to partner with someone who possesses similar healthy financial behavior and habits.

Buy and Hold Pre-Owned Vehicle

The majority of wealthy individuals own their cars, rather than lease. Approximately a quarter have a current-year model, but another quarter drive a car that is four years old or older. More than a third tend to buy used vehicles.

Live Happier Lives

Bottomline, living below your means is the one sure way to accumulate wealth and to live happier. Since, there exist a peace of mind living below your means and saving money. Danko and Stanley’s research indicates that, “financially independent people are happier than those in their same income/age cohort who are not financially secure.”

Essentially, when it comes to financial security and retirement planning, adopting the lifestyle of the wealthy means you can save more toward your financial goals and destination. That’s a formula that can help anyone to accumulate wealth and achieve financial independence.

  • References:
    1. Thomas J. Stanley, and William D. Danko, The Millionaire Next Door: The Surprising Secrets of America’s Wealthy Paperback, November 16, 2010
    2. https://www.getrichslowly.org/nine-lessons-in-wealth-building-from-the-millionaire-next-door/

    Seniors Are Stressed About Income in Retirement. What To Do. – Barron’s

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    A large number of American workers closing in on retirement are showing anxiety not just over how much they’ve saved but also over how to manage their different income sources during their post-career lives.

    A new study by Charles Schwab found that most pre-retirees—defined as those within five years of retirement—have at least one fear about their income in retirement. The findings were gleaned from a survey last summer of 1,000 Americans aged 55 and older with $100,000 or more in investable assets, half of whom fell into the pre-retiree cohort. 
    — Read on www.barrons.com/articles/most-seniors-stress-about-income-in-retirement-heres-what-theyre-most-worried-about-51582977602

    Financial Planning

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    It’s not about how much money you earn. It’s what you do with the money that matters.

    According to Schwab’s 2019 Modern Wealth Survey, more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a written financial plan feel that same level of comfort. Those with a plan also maintain healthier money habits when it comes to saving and demonstrate good investing behavior.

    The goal of financial planning is to make your money goals a reality. Smart financial planning and long term investing involves in the utmost, spending less than you earn, saving and investing a modest amount each month, and accumulating wealth to end up with the financial assets to retire comfortably for 30 years or more.

    Developing a financial plan will require an investor to identify their short-, intermediate- and long-term goals, and to create a long term investment strategy for achieving them. Think of a financial plan as a written planning guide to remind you of what you want, where financially you want to be in the future, and what it will take to get there. Despite the benefits of planning, Schwab’s survey shows that only 28 percent of Americans have a financial plan in writing.

    Financial Self assessment

    A sound financial plan begins by outlining the investor’s goals as well as any significant constraints. Defining these elements is essential because the plan needs to fit the investor’s current reality. Before creating a financial plan, individuals should first perform a quick self-evaluation:

    • Are you currently spending more than you earn?
    • How much have you already saved?
    • What is your current net worth?
    • Have you created an emergency fund with three to six months of expenses?
    • Are you saving for kid’s college, retirement, or to purchase a home?
    • How much money is available for investing?
    • What is your risk tolerance?
    • Are you buying a stock for fundamental or technical reasons?
    • Which investing style do you prefer (e.g., growth or value, trend or countertrend)?
    • Determine your view of market sentiment: Is momentum generally tilted up or down?

    Simple Financial Plan

    “I believe that the biggest mistake that most people make when it comes to their retirement is they do not plan for it. They take the same route as Alice in the story from “Alice in Wonderland,” in which the cat tells Alice that surely, she will get somewhere as long as she walks long enough. It may not be exactly where you wanted to get to, but you certainly get somewhere.” Mark Singer, The Changing Landscape of Retirement – What You Don’t Know Could Hurt You

    Regardless of the reams of evidence of how critical planning remains, Americans are not spending the time or resources to plan for their financial future or plan for retirement. However, it is relatively straightforward to create a plan. A simple financial plan will include many of the following parts:

    • A personal net worth statement—a snapshot of what you own and what you owe. This will help you know exactly where you stand, and also give you a benchmark against which you can measure your progress.
    • Cash flow is essentially income minus expenses—exactly how much money comes in and goes out every year, and understand if it is sustainable in the long term. The foundation for a budget includes identifying fixed and what’s discretionary expenses and if necessary, devise a debt management plan.
    • A budget–helps to manage your money, to consider your immediate needs and wants, and to prepare you to achieve your long-term financial goals
    • An Emergency fund–ensure adequate cash on hand to cover three to six months of living expenses to handle any unplanned expenses or loss of income.
    • A debt management plan—is a crucial part of becoming financially responsibilities. Debt can be used smartly to achieve one’s financial goals, or debt can be used poorly to buy things a person may not need with money he or she does not have.
    • A retirement plan—specifying how much you need to save each year to achieve the lifestyle you and your family hope to maintain. This includes a recommendation on how best to maximize Social Security benefits, to incorporate any pension funds and to utilize personal savings.
    • An analysis of how current investment portfolio aligns with short, intermediate and long-term goals.
    • A plan for college education funding offspring.
    • A review of employee benefits, including equity compensation or deferred income planning.
    • A review of insurance coverage—the key is to make sure that you have the right types and amounts and that you aren’t paying for unnecessary coverage.
    • Planning for special needs—for a child, parent, or other dependent.
    • Recommendations for creating or updating your estate plan, including charitable giving and legacy planning

    Financial planning and managing your money:

    1. What are your long term financial goals including a retirement number and what does financial independence look like for you and your family lifestyle dream.
    2. Determine and track your financial net worth (assets – liabilities)
    3. Figure out your personal cash flow (income – expenses) that reflects the money coming in minus money going out…determine the source of money and where it is going…develop a budget.
    4. Align your financial goals to your spending.  Connect your spending habits to your priorities. Objective is to become financial independent in both the short and long term.
    5. Manage health, home owners, automobile, personal liability, long term care and life insurances to manage and mitigate your personal risks.
    6. Avoid debt and reduce taxes legally by starting your own business or investing in tax free or deferred assets.
    7. Create an investment plan and strategy for purchasing assets such as equities, real estate or a business. A plan helps an investor focus on long term goals and helps remove emotions (greed and fear) and bad behaviors from investment decisions.  Markets will always go up and down.  You only lose money if you sell assets and lock in the loss.  Buy real estate in great locations and companies doing sensible things and participate in global growth.
    8. Have a trust and estate plan in place to protect your assets. Ensure your goals and desires for your assets reflect your values and objectives.

    Retirement and Financial Planning and Goals 

    “Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” Pablo Picasso

    The first steps of retirement planning are to define your long term retirement and financial goals, to establish your number, and write a retirement plan. 

    Any sound financial plan requires that you figure out your retirement expenses in advance. And, a retirement can now last 30 years. A retirement plan isn’t something you set up once and then leave unattended. A successful retirement plan takes patience, attention, and discipline.

    • Planning for retirement involves identifying assets and sources of income, and matching against retirement expenses.
    • Planning for retirement involves setting financial, health and emotional including spiritual retirement goals.

    An individual may have a higher probability to achieve their goals if they have a specific savings number and long-term goals in mind, which can help keep an individual on track along the way. It gives someone a target against which they can measure progress.

    Key elements of a strong financial plan:

    • An emergency fund
    • A budget to determine cash flow and calculating net worth
    • Paying down and avoiding debt
    • Health and disability insurance
    • Start saving and investing early, pay yourself first and put it on automatic
    • Pay yourself first
    • Create long term goals
    • Saving and investing for retirement and/or college
    • Saving and investing for shorter term goals like vacations or a home purchase
    • Trusts, wills and estate planning

    It is important to find creative ways to spend less — such as exploring local or nearby attractions that are free or less expensive.

    After creating your financial goal or plan, you are bound to have times when you don’t reach your goals or you diverge from your plan. But, just like with a diet, if you make a bad food choice, it doesn’t mean you throw out your new way of healthy eating or exercising. Same thing with financial goals and plan. Americans aren’t saving enough for retirement.

    But how much is enough? Strategies to calculate the size of the nest egg you’ll need for your  golden years. But then life happens, and in life there are unknown variables and unexpected events that can throw a wrench into even the best-laid plans. Still, it’s better to have a plan, rather than to fly blindly into the sunset.

    • One popular rule of thumb is that you’ll need to have saved 10 times your final annual salary by the time you are 67.
    • Another way to calculate this ultimate goal is to look at current living expenses—annual or monthly—and assume that, in retirement, you will incur about 80% of those expenses.
    • Some retirement planning professionals suggest using “the 4% rule” to determine how much retirees can withdraw from their retirement account each year in order to provide a continuing income stream. 

    Sock away as much as you can.

    Power of Compound Interest

    Use the power of compound interest —which is interest earned on top of interest — to potentially enhance returns.  Because compound interest builds on itself over time, investors who start early tend to have a significant advantage over those who wait,

    compounding-no-amtd

    Calculate how much money you may need once you get to retirement.

    There are several common financial retirement concerns individuals have. Managing risks are important for retirees because retirees don’t have time to wait for a recovery of the economy or the market after a down period.

    • Investment Loss – One of the biggest financial fears retirees may have is investment loss. Because the markets move cyclically, there’s a good chance you’ll experience a market downturn during retirement.
    • Running Out of Money – Once you’re close to or in retirement, a market decline cannot be weathered and running out of money becomes a serious concern.
    • Major Health Event – As we get older, it’s common to see an increased need for health care. It’s natural, as a retiree, to worry about a major health event that can set you back financially. But it’s possible to prepare to some degree for such events.
    • Inflationary Effects – Inflation is sometimes considered the “quiet killer” of retirement. Over time, prices rise, making your money less valuable. A dollar today is worth more than a dollar tomorrow. Keeping up with inflation is an important part of retirement planning.

    Although it may seem like a long way off, starting earlier can help you accumulate wealth and deal with unexpected bumps along the way. It’s important to consider:

    • What do you want out of retirement?
    • How much do you currently take in and spend?
    • How much will you need to maintain a comfortable lifestyle?

    As a rule of thumb, you’ll need between 60-80%* of your current income to maintain your standard of living, but this will vary based upon how soon you enter retirement. To help you estimate these considerations use our tools below.

    Financial independence and building wealth comes with the knowledge and financial literacy. It’s okay not to spend more than you earn and sacrifice short term benefit for long term financial independence. Think about the end goal — to secure your well being physically, emotionally and financially!

    Manage Your Investments and Cash Flow

    It’s easy to put things off until tomorrow… or maybe the next day. But with retirement, planning for cash flow (income) and nest egg are required today. And contributing regularly can help you accumulate assets faster.

    Developing a financial plan, monthly budget and learning to stay within their boundaries will help you make these contributions. Additionally, your financial plan and budget will help you track your spending, cash flow, net worth and develop the discipline that can help you when you finally enter retirement.

    When creating a budget, carefully weigh competing demands such as:

    • Paying off debt
    • Managing a mortgage
    • Taking a vacation
    • Raising a family
    • Saving for college or retirement

    See how these financial considerations – and waiting to invest for retirement – can cost you in the long run.

    Implement Your Plan

    After assessing your situation, it’s time to look into available choices and then start investing. When weighing your options, consider:

    • How involved you want to be in managing your assets.
    • Whether there are any benefits to using your employer’s retirement plan.

    Depending on your answers to these questions, some products may be better suited to your needs. If you’re the do-it-yourself-type, an index fund that mimics the S&P 500 may be the best choice. For those who aren’t comfortable with or don’t want to be managing their assets closely, a managed portfolio such as a target date fund might be the right way to get started.

    Evaluate and Adjust Your Plan

    It’s important to monitor your financial plan and investment strategy regularly. As your situation changes, you may need to adjust your allocations or investment strategy. No matter what plan you’re using, or whether you’re doing it on your own or with the help of a financial advisor, it’s important to evaluate your progress from time to time.

    The starting point for financial planning start with goals you can achieve. If you don’t know where you’re going, how can you plan to get there? So before you get into the details of saving, budgeting and investing, take time to think about what’s most important to you and what you want your money to achieve.

    • Have an financial plan that is simple, goal oriented, realistic and actionable.
    • Understand your plan, follow it, and adjust it when things change in your life.

    Put your plan into action.

    • Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
    • Don’t wait. If you invest now, you’ll start earning sooner.

    Stay on track.

    • Do periodic checkups to keep your portfolio healthy.
    • Keep in mind that long-term goals are more important than short-term performance.

    References:

    1. https://www.aboutschwab.com/modernwealth2019
    2. https://www.brownleeglobal.com/saving-vs-investing/

    10 Money Lessons He Wished Heard — or Listened to — When Younger | MarketWatch

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    Updated: February 23, 2020

    Jonathan Clements, author of “From Here to Financial Happiness” and “How to Think About Money,” and editor of HumbleDollar.com., is the former personal-finance columnist for The Wall Street Journal. He has devoted his entire adult life to learning about money.

    That might sound like cruel-and-unusual punishment, but he has mostly enjoyed it. For more than three decades, he has spent his days perusing the business pages, reading finance books, scanning academic studies and talking to countless folks about their finances.

    Yet, despite this intense financial education, it took him a decade or more to learn many of life’s most important money lessons and, indeed, some key insights have only come to him in recent years.

    Here are 10 things he wished he’d been told in his 20s—or told more loudly, so he actually listened:

    — Read on www.marketwatch.com/story/10-money-lessons-i-wish-id-listened-to-when-i-was-younger-2020-02-12

    1. A small home is the key to a big portfolio. Financially, it turned out to be one of the smartest things he had ever done, because it allowed him to save great gobs of money. That’s clear to him in retrospect. But he wished he’d known it was a smart move at the time, because he wouldn’t have wasted so many hours wondering whether he should have bought a larger place.

    2. Debts are negative bonds. From his first month as a homeowner, he sent in extra money with his mortgage payment, so he could pay off the loan more quickly. But it was only later that he came to view his mortgage as a negative bond—one that was costing him dearly. Indeed, paying off debt almost always garners a higher after-tax return than you can earn by investing in high-quality bonds.

    3. Watching the market and your portfolio doesn’t improve performance. This has been another huge time waster. It’s a bad habit he belatedly trying to break.

    4. Thirty years from now, you’ll wish you’d invested more in stocks. Yes, over five or even 10 years, there’s some chance you’ll lose money in the stock market. But over 30 years? It’s highly likely you’ll notch handsome gains, especially if you’re broadly diversified and regularly adding new money to your portfolio in good times and bad.

    5. Nobody knows squat about short-term investment performance. One of the downsides of following the financial news is that you hear all kinds of smart, articulate experts offering eloquent predictions of plummeting share prices and skyrocketing interest rates that—needless to say—turn out to be hopelessly, pathetically wrong. In his early days as an investor, this was, alas, the sort of garbage that would give him pause.

    6. Put retirement first. Buying a house or sending your kids to college shouldn’t be your top goal. Instead, retirement should be. It’s so expensive to retire that, if you don’t save at least a modest sum in your 20s, the math quickly becomes awfully tough—and you’ll need a huge savings rate to amass the nest egg you need.

    7. You’ll end up treasuring almost nothing you buy. Over the years, he had had fleeting desires for all kinds of material goods. Most of the stuff he purchased has since been thrown away. This is an area where millennials seem far wiser than us baby boomers. They’re much more focused on experiences than possessions—a wise use of money, says happiness research.

    8. Work is so much more enjoyable when you work for yourself. These days, he earn just a fraction of what he made during my six years on Wall Street, but he is having so much more fun. No meetings to attend. No employee reviews. No worries about getting to the office on time or leaving too early. he is working harder today than he ever have. But it doesn’t feel like work—because it’s his choice and it’s work he is passionate about.

    9. Will our future self approve? As we make decisions today, he think this is a hugely powerful question to ask—and yet it’s only in recent years that he had learned to ask it.

    When we opt not to save today, we’re expecting our future self to make up the shortfall. When we take on debt, we’re expecting our future self to repay the money borrowed. When we buy things today of lasting value, we’re expecting our future self to like what we purchase.

    Pondering our future self doesn’t just improve financial decisions. It can also help us to make smarter choices about eating, drinking, exercising and more.

    10. Relax, things will work out. As he watch his son, daughter and son-in-law wrestle with early adult life, he glimpse some of the anxiety that he suffered in my 20s and 30s.

    When you’re starting out, there’s so much uncertainty — what sort of career you’ll have, how financial markets will perform, what misfortunes will befall you. And there will be misfortunes. he’d had my fair share.

    But if you regularly take the right steps—work hard, save part of every paycheck, resist the siren song of get-rich-quick schemes—good things should happen. It isn’t guaranteed. But it’s highly likely. So, for goodness’ sake, fret less about the distant future, and focus more on doing the right things each and every day.

    You can follow Jonathan Clements on Twitter @ClementsMoney and on Facebook at Jonathan Clements Money Guide.

    10 Rules for Financial Success – Barron’s

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    “Wealth isn’t about how much money you make – wealth is about how much money you save and invest.”

    The true measure of financial success isn’t how much money you make—it’s how much you keep. That’s a function of how well you’re able to save money, protect it, and invest it over the long term.

    Sadly, most Americans are lousy at this.

    Even after a decade of steady economic expansion and record-breaking stock markets, almost two-thirds of earners would be hard-pressed to cover an unexpected $1,000 expense—a medical bill, car repair, or busted furnace—and more than 75% don’t save enough or invest skillfully enough to meet modest long-term retirement goals, according to Bankrate.com.

    Even wealthy families aren’t getting it right: 70% lose wealth by their second generation, and 90% by their third. “Shirtsleeves to shirtsleeves in three generations,” as a saying often attributed to Andrew Carnegie goes.

    What’s at the root of these bleak data? Stagnant salaries amid rising costs of health care, education, housing, and other big-ticket necessities have put a major strain on folks of all ages. But advisors point to a deeper issue: an almost universal lack of financial literacy.

    “This is a much bigger problem than most people are aware of,” says Spuds Powell, managing director at Kayne Anderson Rudnick Wealth Management in Los Angeles. “I’m constantly amazed at how common it is for clients, even sophisticated ones, to be lacking in financial literacy.”

    The ten rules for financial success are:

    1. Set goals
    2. Know what you’ve got and know what you need
    3. Save systematically
    4. Invest in your retirement plan
    5. Invest for growth
    6. Avoid bad debt
    7. Don’t overpay for anything
    8. Protect yourself
    9. Keep it simple
    10. Seek unbiased advice

    — Read on www.barrons.com/articles/10-rules-for-financial-success-51558742435