A bit of background: During our family reunion this year, which we held in the beautiful Outer Banks of North Carolina, I was asked to provide some financial planning advice to our family of 35. Unfortunately, this never happened given we were all intent on other activities. Had I had a chance to replay the week, here is a list of 10 items I would consider as financial hacks of sorts that presumes one is already doing the obvious to prepare for retirement:
1. Budgeting sucks. Instead consider reverse budgeting.
Let’s be honest. Everyone hates budgeting. I haven’t met one person that enjoys doing it, and I’ve talked to hundreds of families. Instead, focus on what you need to save every year and hit that target. If you need to save $30,000 each year to spend what you want in retirement, focus on saving that number. Once you have the automatic savings plan in place, spend the rest. How you spend the remainder, doesn’t matter!
2. Consider setting up a Health Savings Account.
If your employer offers a high deductible health plan, and your family is relatively healthy, consider switching to that plan and setting up a Health Savings Account (HSA). A HSA is a smart move since it provides you with the tax benefits associated with investing in a traditional IRA and a Roth IRA. You’ll get a tax break on the money contributed (like a traditional IRA), and if the money is invested, the growth of the earnings overtime can be withdrawn tax free as long as they’re used to pay healthcare expenses down the road (like a Roth IRA). If you have the cash flow to pay medical expenses out of pocket, definitely consider this approach.
3. Keep an emergency fund.
Keep 3-6 months of living expenses in a savings account or stuffed under your mattress. Since it is to be used only for emergencies (such as unexpectedly losing your job or having a medical emergency), you shouldn’t invest this money in the market. This prevents you from taking on credit card debt, which is the number one no-no when ensuring your financial wellbeing. This also brings me to my next point.
4. Absolutely do not carry a balance on your credit card.
Credit cards are good, if you don’t carry a balance. Here is my simplified debt breakdown: Mortgage (in reason) = good; home equity line of credit = okay but dangerous if you still don’t control your spending; credit card debt = bad. Don’t have any.
5. Diversification is your friend.
Mutual funds and ETFs help you avoid company-specific risk. Small cap and value stocks have shown to have higher expected returns over time, so overweight these sectors of the market to increase your total return. And don’t forget about international investing. The U.S. only accounts for around half of the total investable stock universe.
6. Be very aware of fees. All fees. Especially fund and advisory fees.
Look at the mutual funds for which you have invested. If you do not know how to find out how much you’re being charged for each fund, ask your advisor or type in the fund ticker at Morningstar.com. Then click on the expense tab. Anything with an expense ratio higher than 0.75 means you’re paying too much for the privilege of being in their fund as compared to others with similar performance. Also look to see if there is a 12b-1 fee. These are also bad. A few fund families that have high expenses are American Funds, Franklin Templeton, Columbia, Oppenheimer, and John Hancock. Choosing lower cost funds will likely lead to better after cost performance.
Also, if you have an advisor and they don’t help you with anything outside of picking investments, you should probably look for a new advisor. A fee-only advisor.
7. Have an estate plan.
You each have children. Therefore, you should each have an estate plan. Get a will, financial power of attorney and healthcare directives in place. This will ensure your wishes are executed when you die, that your children are cared for by the person you want, and that you are able to choose who will act on your behalf in case you’re incapacitated.
Another issue for those with children in college – get a power of attorney for them too by designating a parent as their agent. This will allow you to protect their interests if something happens to them while in school (depending on the state on where their college is located, if they are an adult at age 18 or 21, and you can no longer make decisions for them).
8. Don’t sacrifice your retirement to pay for college.
It seems in today’s society parents expect to pay the entire college bill for their children. This is a wonderful aspiration to have, though it is often times unachievable, as you sacrifice saving for retirement. Remember, your children can take a loan for college and have their entire working life to pay it off; you cannot take a loan for your retirement income.
9. Plan to spend 100% of your pre-retirement spending in retirement.
Many studies and rules of thumb say that when you retire, you’ll spend about 80% of your pre-retirement income. From what I’ve seen, recent retirees will spend 100-120% of their pre-retirement income in retirement. That’ll be the case for at least the first 10 years. Free time is expensive. Then as your body slows down, your travel and spending slows down. Expect to spend 70-80% of your pre-retirement income during the latter 15 years.
10. Get a financial plan in place.
A plan will allow you to be intentional with your money, provide perspective on where you are today, and provide a roadmap for where you need to go based on your goals. It will tell you how much you need to save, what allocation you should have in stocks and bonds, what insurance coverage you need, as well as tell you how to think about taxes. You will gain peace of mind knowing that you have a high probability of achieving your goals if you follow the steps in the plan, rather than hope and pray that everything will work itself out in the end (I have found with financial planning that hope and praying do not usually result in the best outcomes).
These are the ten things I would’ve told my family if the time was available. I figure this will have to take the place of this speech. Feel free to reach out if you have any questions on the above items, or if you want to get a plan in place.
Thank you for reading!
Alex Perkins, CFP®