Posted: April 6th, 2011 | Author: Joe | Filed under: Retirement | Tags: Debt, Retirement, Retirement planning | 2 Comments »
This is a sad story about Susanna Wilson, 70, who never planned for the future. She has no retirement savings and now realizes she “can never retire”.
Not to seem heartless, but this is another example of poor (or no) planning, and bad choices. Not everyone is born a good decision maker, and some are better than others. But by and large, decision making is a skill and it can not only be learned, but it can be improved.
I offer this story to my readers as a means to learn form another’s mistakes, and remind ourselves of the importance of proper planning and not letting our emotions rule our decisions entirely.
Planning is important.
Despite owning a several businesses (a clothing line, perfume maker for example) and earning $65,000 a year in the 70′s she never saved a dime for retirement. Being self employed, she could have saved up to 25% of that per year in a Keogh plan – tax deferred! That’s $16,000 per year in her account, and off the top of her tax bill!
Following your heart and ignoring your head can be costly.
Her free spirited ways led her to leave University of California, Berkeley before graduating to follow and marry her college sweetheart, a “minimalist sculptor and sometimes rock musician.”
I’m not saying you have to be Mr, Spock all your life and let your passions wither on the vine in a desert of logic, but if it was truly meant to be, then it would still be meant to be after she graduated college. Postponing would have at least given her a degree – an important commodity in the decades following her stint at Berkeley in the late 1950′s.
Besides, in all likelihood, she would have realized it wasn’t meant to be and she could have saved herself one of her eventual two divorces. Incidentally, Divorce is also a costly “life event”, especially for Ms. Wilson since she never received any alimony.
There are always possibilities.
Flash forward to today and things look bleak. Ms. Wilson lives on her social security check of $900 a month, and a one day a week job at a local jewelry store for $12.50 an hour.
She’s got a house with a $5,477 mortgage, and about $9,000 in credit card debt. The credit card debt is from living expenses, so her income is clearly not enough to get by.
The good news in all this is her house. She inherited it with no mortgage, but had to take out a mortgage to pay for repairs. That leaves her with more than $150,000 in equity and since she’s over 62, she’s a candidate for a Reverse Mortgage. In fact, she’s probably a poster child for one!
A reverse mortgage would get her a monthly check from the bank. Not to mention, it would eliminate her mortgage bill in the process. Increased income, and decreased expenses – it’s all around winning!
Read Susanna Wilson’s story here.
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Posted: February 28th, 2011 | Author: Joe | Filed under: Retirement, Tips | Tags: Home Buying, Investing, Mistakes, Retirement, Saving, Tips | No Comments »
Yahoo! contributor Kris Calhoun recently wrote an article for their “First Person” column titled: First Person: How I’m Sabotaging My Retirement wherein he chronicles some of the money mistakes that have cost him the most.
I for one congratulate Kris for his honesty and willingness to examine and learn from his mistakes. After all, if we can’t learn from our mistakes then we are not only doomed to repeat them but no good will possibly come from them either.
It’s a cliche that we need to learn from our mistakes, but I’ve often thought that we should learn from other people’s mistakes as well.
And so I’d like to offer my thanks to Kris for sharing some of his mistakes, so that we may all learn from them.
Know who you are
Kris states that one of his biggest financial mistakes was buying a house:
“The home I purchased in 2008 is probably the worst thing I could have done to hurt my financial future…. At the time, my wife and I thought we were doing things the right way. We put a nearly 45% down payment on the home, took out a 5.35% fixed rate, 15-year mortgage, and made extra payments along the way.”
So far so good, right? I mean many people who bought homes in the last five years in particular are struggling, due to declining values, evaporating equity and job instability. But those don’t seem to be a factor for Kris.
He states how he did everything right, financially speaking – hefty down payment, low interest fixed-rate 15-year mortgage. These are exactly the things you should do to mitigate the effects of the housing crisis. In fact, I’d say Kris was ahead of the game since most people can’t afford to do these things, yet he did.
The real mistake Kris made was in not knowing himself and his spouse:
“we really don’t like the area we chose and have found that home ownership just isn’t for us (I worry about things constantly and am afraid to go on vacation anymore for fear that something will happen to the house)… I’m kicking myself for ever allowing myself to be talked into home ownership (I’ve always been more of an apartment kind of guy)”
So his mistake is really costing him more of his mental health and happiness, which in turn causes financial problems when he can’t recoup his costs when selling his house.
The lesson here is to know whether you’re inclined to be a homeowner before you become one. Home ownership is not something to be taken lightly or dabbled in – it’s a serious commitment of time and money.
Weigh the pros and cons of job hopping
The next mistake Kris shares with his readers is his career change from hotel management to freelance writing.
There are some obvious hits to your financial bottom line here:
- reduced income (at least short term)
- reduced consistency of income
- reduced (or non-existent) benefits like:
When you freelance, you are responsible for all the stuff your employer used to take care of. You’re on the hook for paying for heath care and contributing 100% to your retirement plan – all on a lower salary!
Kris may eventually earn more as a freelance writing, but it’s going to be a lot tougher than hotel management.
For the record, Kris made the switch to spend time with his newborn son. It’s a goal I can admire, since my wife made a similar choice 8 years ago and we’ve been living on a single income ever since. But these kinds of career moves take a lot of planning to make them work…
Risk avoidance investing
Perhaps because of his move to freelance work, Kris admits his investing style is much too conservative. This is a good thing, when you need the funds relatively soon. But for a retirement that’s decades away, low risk, low return investing choices are more detrimental.
He says his holdings are primarily in low-risk, income style assets. There are easy ways to get higher returns with little to no effort, and still remain diversified so sticking to fixed income with retirement 30 years away is a needless mistake, in my opinion.
No room for error
Lastly, kris admits to something I think a lot of people can relate to: Things are OK at the moment, but that’s mainly because expenses have been relatively low.
In other words, when prices start to rise and inflation really takes hold then things are going to get really bad. Without steady increases in income and with the cost of living rising daily, your standard of living will decline and at some point saving for retirement at all becomes a dream for another day.
Since we can’t control the global economic landscape, the best thing to mitigate this is to create as many side income streams as possible, cut your expenses as much as you’re comfortable with, and be involved in local and national elections to ensure that fiscal restraint and responsibility once again take hold in government.
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Posted: February 24th, 2011 | Author: Joe | Filed under: Retirement | Tags: 401(k), Investing, Opinion, Retirement | No Comments »
I came across this article today and what really caught my eye (besides the stark numbers) was that Baby Boomers who are now just reaching retirement age are referred to as “The 401(k) generation.”
It’s true that the 401(K) came into prominence during their working lives, but I would hardly consider them “The retirement savings plans that many baby boomers thought would see them through old age.”
The article seems contradictory too. On the one hand, we are told that these Boomers have relied on them for retirement, and then we’re told that one reason the 401(k) has fallen short for these Boomers is that they never really contributed enough with any consistency. Which is it?
Also, the 401(k) came into heavy use in the 1980′s. These Boomers were well into their 30′s by then. Did they wait until then to start saving?
I realize I’m being a bit over the top, but only because the article doesn’t really portray the situation correctly. For example, it doesn’t really go into how this generation was caught at the crossroads between pensions and individual retirement accounts. That’s a circumstance of the times, and doesn’t really mean that the 401(k) plan has failed as a vehicle for retirement savings.
One thing is certain, retiring boomers have tough road ahead.
Personally, I consider my own generation and the current (X and Y) to be the generation of the 401(k) because we know that social security will not be viable for us and we are responsible for our own retirement. I encourage you to read the article because it may just scare you into action on your own retirement planning!
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Posted: February 24th, 2011 | Author: Joe | Filed under: Real Estate, Retirement, spending | Tags: Auto loans, Car loans, childcare, college tuition, Housing, Mortgages, Retirement, spending, Student Loans | No Comments »
I came across this article on Yahoo! finance that details the 5 things that consume 50% of your lifetime earnings and thought I’d share it with my readers.
It’s kind of a catchy headline, right? I know anytime I see something about spending 50% of my income, I tend to take notice. But it’s more or less the big ticket items you’d expect. Here’s the list, and what I think about each. Feel free to add your thoughts in a comment.
1. House.
This makes sense since it’s ultimately what led to the collapse of the subprime housing market and implosion of the all those risky mortgages. Too many people simply bought too much house, and could no longer delay the inevitable with ever cheaper credit.
How much is too much?
Experts recommend no more than a third of your annual income should be spent on your housing payments. It’s important to keep in mind that this includes school and property taxes, which are often taken out of your monthly payment. You should also include homeowner’s insurance and upkeep and maintenance costs. An easy way to get a general idea of how much this should be is to assume 2-3% of the home cost. It also pays to shop around for the best mortgage before you start looking at houses.
photo by asianjournalusa.
2. Car Payments.
The fact that a person’s home is a large chunk of their income makes a lot of sense, but too many people spend just as much on their car. Sometimes, they even spend more! In fact, according to the article, most people can “comfortably afford” to spend 1/3rd of their income on car payments – no wonder some many are so deep in debt!
As with buying a home, a car has many additional costs that people often forget – car insurance, maintenance, gas, parking and other transportation costs. Buying a used car that’s 1-3 years old with low mileage is a much better choice.
photo by A. Belani
3. Children
It will cost $220,000 to raise a child from diapers to age 18.
If this statistic is true, I’m in a lot of trouble! 
I have 3 children, so that’s pretty much my retirement we’re talking about. My feeling on this is that raising a child costs more than it should. For example, there are so many little things I see parents buy for their infants that are simply non-sensical. A baby (who isn’t even walking yet) doesn’t need a pair of $40 designer shoes!
My wife and I get many hand-me-downs and second hand baby items – strollers, clothes, toys, etc..- that keeps the cost down, and the kids don’t know or care. Obvisouly there is a point at which the child becomes aware that they don’t have the latest gizmo, gadget or toy but that’s where we step in as parents and teach them that being materialistic isn’t so good anyway. BEsides, kids today just aren’t tought the value of a dollar anymore.
Also, I see a lot of stories and know a few personally, of parents who mortgage everything – including their house, several times – to make sure that junior never goes without. i understand the desire of a parent to ensure the best possible everything for their kids, but many time this backfires and they simply end up spending more than they should.
photo by seanmcgrath
4. Education
My parents helped out a little with my tuition to community college, but I paid most of my way myself. But parents today seem to think a free ride to college is a right these days. At the same time, the cost of higher education just keeps going higher , even outpacing inflation incomes and seemingly everything but the U.S. deficit.
How much is too much?
The recommendation is that you don’t borrow more than you can pay back in 10 years. For example, if your dream job pays a median income of $50,000, don’t borrow more than $50,000 in student loans. The problem I see with this is that most kids have no idea what they want to do when they graduate, and even the ones who do aren’t likely to have an idea of how much the profession would pay. But this is where the parents come in.
photo by m00by
5. Retirement
I think is is one of those cases of wishful thinking. Most people probably should spend as much, if not more, on their retirement savings as they do on their car and student loan payments but I think for most people, retirement savings isn’t on the top 10 list of expenses, much less the top 5.
photo by quadriman
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