CFP Board eNewsletter
May 2007
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CFP Board eNewsletter |
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| Getting Ready for Retirement I: The New Rules of Retirement |
The most recent Retirement Confidence Survey, published last month by the Employee Benefit Research Institute, is filled with alarming statistics — like the percentage of Americans (45%) who feel less confident that they will receive benefits from a traditional pension, or the percentage (40%) not currently saving for retirement at all. But perhaps the most alarming statistic of all is this: survey participants spent an average of 19 hours (just under two-and-a-half working days) planning for retirement. That’s more than the 11 hours they spent planning vacations but about equal to the time they spent planning for the holidays. Why is this alarming? Because Thanksgiving, Christmas and summer vacations last a couple of weeks at most; your retirement could last 20 or 30 years. And if you’re not prepared, you’re unlikely to have much fun in the sun during what used to be known as the ‘golden years.’ This four-part series of articles looks at how retirement is changing, and what you need to do to get ready for it. The shine has worn off retirement for three main reasons. First, we are all living longer, and so need to fund our lifestyles much further into old age. When retirement was invented 100 years or so ago, it was intended as a kind of final reward for workers worn out by a lifetime of industrial labor. Retirement was typically short, because people had shorter life expectancies. Today, in the West at least, life expectancies are rising all the time and a much smaller percentage of the workforce is involved in industrial labor. “People may be burnt out when they reach 65,” quips John E. Nelson, author of What Color Is Your Parachute? For Retirement: Planning Now for the Life You Want, “but they’re not worn out.” And many have a couple of decades of vitality still ahead of them. Second, Social Security is becoming less generous. Why? Because we’re all living longer, placing a massive financial strain on the system. Third, similar financial constraints mean that employers have shifted from defined benefit to defined contribution pension plans. In a defined benefit plan, your company pays you a specific amount per year for the duration of your retirement; in a defined contribution plan, you and your company set aside an amount of money per year to invest for retirement — but the payout depends on the performance of the investments. Defined contribution plans are obviously much more affordable for employers, but they are much riskier for employees. “Years ago the notion was that you worked until you were 65, got the gold watch, and then toddled off into a retirement that was reasonably financially secure,” says Tony Webb, an economist with the Center for Retirement Research (CRR) at Boston College. “But the shift from defined benefit to defined contribution plans changes the whole game.” When the game changes, it makes sense to change the way you play. So here are three Rules to keep in mind when playing the new retirement game. Rule No. 1: Retirement Isn’t What It Used To Be To get out of the danger zone, workers can do one of three things: 1) save more, 2) work longer, or 3) both. For many people, some form of work is likely to become a common feature of ‘retirement.’ The save more/work longer combination can be very effective, too. The CRR concludes that if people work just two years longer and save an additional 3%, they can substantially improve their financial security in retirement. Researchers are already coining new names for this new stage of life. “People are now talking about ‘phased retirement,’” explains Webb, “in which a person might work for the same employer but at a less demanding job and/or at reduced hours. Then there is ‘partial retirement,’ in which a person might work part-time for a different employer.” Larry Cohen of SRI Consulting Business Intelligence has divided retirement into four stages: pre-retirement, a period of accumulating assets; revolving retirement, when an employee reaches retirement age but remains in the workforce to delay using benefits; middle retirement, when a person continues part-time work but dips into benefits, too; and late retirement, when a person stops working altogether. Whatever you call it, retirement clearly isn’t what it used to be. Rule No. 2: Retirement Is What You Make It In What Color Is Your Parachute? For Retirement, Nelson presents a model of what he calls “retirement well-being.” Financial planning features prominently in it, but his concept also encompasses the social, psychological, and health-related aspects of retirement. According to Nelson, well-being results when all of these dimensions are integrated and in balance. “If you’ve worked for the same company for 30 years, for example, a lot of your social life is probably tied up with your job,” he says. “When you retire from that job, you could be retiring from 80% of your social network, too. Part of retirement preparation includes planning to keep those social networks alive.” Planning is also required to stay mentally engaged and physically healthy, Nelson says: “If your job has been the biggest psychological turn on you’ve ever had, then golf or gardening are unlikely to fill the same role in retirement. You have to plan for continued psychological engagement. And all of us arrive at retirement with the body we deserve. If you want to stay active in later life, you have to plan for that, too.” For Nelson, the bottom line is: Money is important in retirement, but just as important is a vision of what you want to do with your retired life. That vision can take you places that money alone can’t take you. Rule No. 3: Just Do It — Start Saving Now — James Geary
This is the first of four articles on retirement. Next month: The basics of saving for retirement.
Online Resources AARP American Society on Aging The Motley Fool |
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| Noise |
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“Would you turn that racket down? I can’t even hear myself think!” If I had a dime for every time my father yelled that up to me as I sat in my room, blasting the music as loud as I could, I’d be a very wealthy man. Instead, I’m a hard-working financial planner who’s a bit hard of hearing. My dad used to say that there was so much noise he couldn’t even think straight. I was reminded of this recently while meeting with a prospective client. As he explained to me that he had avoided making any decisions because there seemed to be so much conflicting advice out there, it suddenly hit me. There is so much noise, he can‘t even think straight. I’m not talking about noise in the traditional sense, I’m talking about superfluous information and talk that can obscure the important message or signal. For those of you who knew life before cable TV, you probably remember trying to adjust the bunny ears on your TV set so you could get Benny Hill just a little clearer. Perhaps you even affixed some tin foil contraption to the antenna. That “fuzz” you were trying to get rid of is called white noise. Think of your goals and objectives as the TV station you’re trying to watch, and then think of the bogus advice out there as the white noise, obscuring your picture or vision, if you will. Every year, the popular financial magazines can’t wait to tell us what the top mutual funds of the prior year were. Every month they have some article about 10 stocks you should own now. There’s even some guy on cable jumping around all hopped up on caffeine and ranting about how he’ll make you rich by owning the thousand or so stocks he mentions in each 30-second segment of his show. There are 24-hour cable stations dedicated to nothing but money. Even radio is in on the action. I spend a good deal of time in my car, and my favorite station has business news every ten minutes. So every ten minutes while in my car I get to hear what the stock market is doing. But who cares what the stock market is doing in ten minutes? Are you retiring in ten minutes? Is your kid going away to college in ten minutes? I’m in the financial planning business, and I don’t feel the need to know what the market is doing every ten minutes, so why should you? All these often-conflicting messages make me think of one thing: all the stress they can cause you. All of these popular media outlets conspire to confuse the real issue. If you’re investing, you’re doing it for a reason, probably your retirement. Whatever the reason is, you have goals that you are planning to achieve, and investing should be a means to that end. However you got that notion in your head that investing is going to make you rich, get rid of it. That’s called gambling, and you might as well go to Vegas and put it all on red. At least you’ll get some free drinks and a show out of it. These magazines and TV shows have no idea who you are, what your risk tolerance is, or what your time frame is. The noise that they are creating is making you think that you need own these funds because they did really well last year. But who says they’ll do well again the next year? What about in 5 years or 10 years? If these magazines really wanted to help you make smart money moves, they would say, “Whatever it is that we told you to do last month, well, just keep doing that and stop wasting money on our magazine.” That’s right my friends, that’s what investing is. It should start out with a great strategy that takes into consideration who you are, what your goals, objectives and time frame are, what resources you have, and how high your tolerance for risk may be. Then you make minor adjustments as necessary and from time to time review your goals to make sure your strategy makes sense, given where you are in your life. And if your funds aren’t on So-and-So’s list of top funds, then who cares? As long as your investments are not consistently under performing their respective benchmark and peers, then they are probably just fine. It’s usually not worth the trading costs and tax consequences to change funds just because yours had one bad year. Much like you tried to do with the bunny ears on your old TV, you can fine tune your financial picture until your goals and objectives are crystal clear. Create a portfolio — either with the help of an advisor or on your own — which makes sense for you as an individual. Review your strategy a couple of times a year. Aside from that, let the markets do what they’re going to do. Don’t lose sleep over the market being down, you’ve got enough to worry about. Especially with that kid of yours upstairs blasting that music. Keep everything in the perspective of your long term goals and then simply tune out the noise. Can you hear yourself think now? — Howard Pressman, CFP®
Howard Pressman is a financial planner who helps young families, those nearing retirement and those already in retirement make sense of the seemingly complex world of personal finance. Howard lives in Washington, D.C. with his wife Erica and their dog Truman. He can be reached by e-mail here.
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| Beyond the Dog Food Fallacy: How to Prepare a Personal Cash Flow Statement |
No, the ‘dog food fallacy’ has nothing to do with what you feed your pooch. It does, however, have everything to do with your own financial diet — how what you earn and spend affects your ability to reach your goals. Authors Mary Claire Allvine and Christine Larson coined the term ‘dog food fallacy’ in The 7 Most Important Decisions You’ll Ever Make: What Happy Couples Do to Achieve Their Dreams. (Some editions of the book are called The Family CFO.) The authors argue that couples should run the financial aspects of their relationship like a business; jobs like investment manager and chief financial officer (CFO) should be assigned, and economic decisions should be evaluated for affordability and cost-effectiveness, just as in the corporate world. They also suggest that couples convene annual board meetings (in suitably romantic locations, of course) and prepare the same crucial financial documents that businesses do to measure the success of an enterprise. One such key document is the cash flow statement. A cash flow statement is not a budget, Allvine and Larson are quick to point out. “It doesn’t prescribe what a family should or shouldn’t spend on specific categories,” they write. “It’s a way to track and adapt your habits over time. You keep an eye on what you’re actually doing and focus on what’s moving you toward your goals — and what’s setting you back … By revealing your true spending patterns, the cash flow statement identifies risks and opportunities that affect your ability to achieve your dreams.” Preparing a cash flow statement is pretty straightforward. Start with your own and your partner’s incomes from any and every source — including salaries, bonuses and commissions as well as income from interest, investments and rental properties. Make sure you record your net income, though: the amount you receive each month after all deductions for tax. Total up these figures to determine your “Cash In” amount. Next you need to determine your operating costs, the money you spend to keep your relationship running. Your operating costs “are your monthly expenses and investments all rolled into one,” Allvine and Larson write. It’s important to break down these costs into at least two categories, the authors suggest: fixed costs (expenses that can’t be easily changed, like rent, mortgage or loan payments, insurance premiums, and 401(k) contributions) and variable costs (expenses that can be easily changed, like utilities, groceries, home maintenance, and entertainment). Tally up your fixed and variable expenses separately, then add them together to get the amount of your “Operating Costs.” But watch out for the dog food fallacy, which kicks in when you track your spending in too great detail — knowing exactly how many cans of Purina Puppy Chow you purchase each week, for example. The dog food fallacy is “the misperception that more information automatically gives you more power. Actually, too much information — like how much you spend on dog food — makes it harder to plan because you can’t see the big picture.” To get the big picture, subtract your Operating Costs from your Cash In. What’s left is your Retained Earnings. As an illustration, say your Cash In is $1,000, your fixed costs are $500 and your variable costs are $400, giving you a total of $900 in Operating Costs. Subtract $900 (your Operating Costs) from $1,000 (your Cash In) and your Retained Earnings are $100. You have just completed your cash flow statement. Should you want to increase your Retained Earnings — to save for college or retirement, for example, or to buy a home — then it’s time to dig deeper into your operating costs. “You need to understand the patterns of your operating costs so you can take money away from one category (like entertainment) and put it toward another (like buying a home) when necessary,” Allvine and Larson write. “You can’t make those changes unless you have a handle on which of those elements you can control … If you need to increase your retained earnings in order to fund a new goal, the money will most likely come from your variable costs.” A monthly cash flow statement is an important tool for tracking income and expenditures. If you’re spending more than you’re earning, it will show you. If you need to free up money for a new goal or an unexpected expense, it will make budgeting easier by helping you identify costs you can trim back on. In short, your personal cash flow statement can help keep you out of the financial doghouse.
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| Financial Alerts |
In February, the Federal Deposit Insurance Corporation (FDIC) issued an alert about fraudulent “phishing” e-mails that claim to be from FDIC and that seek to obtain personal or financial information. Since that alert, FDIC has learned of a new type of e-mail being distributed. This new e-mail claims to be from FDIC and asks bank customers to download and install on their computers a “ProBank” software program that purports to combat fraud. If you receive one of these fraudulent e-mails, don’t take any action to download or install ProBank, as FDIC believes it is a malicious software program designed to obtain personal information from consumers and businesses. FDIC does not send unsolicited e-mails, nor does it ask for detailed personal information. Read more about this and other alerts regarding fraudulent e-mails at: Almost all of us have received “cold calls” from salespeople trying to sell products or services we haven’t requested information about. Although cold calling is a legitimate way for many businesses (including investment firms) to reach potential customers, the Securities and Exchange Commission warns consumers that cold calling is also used by scam artists trying to sell fraudulent products and investments. Learn about things you can do to limit the cold calls you receive, red flags to look out for when you do receive a cold call, your rights as a consumer and much more at: Recent economic growth in China and strong performances by the Shanghai and Shenzhen Composite Indices have generated a lot of talk about low-priced "China" stocks. But some of the companies being promoted have no actual connection to China's stock markets. Learn how to avoid becoming a victim of these “China” stock scams, what you should know about the risks of investing internationally, and how to evaluate the risks associated with any investment at: |
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Read more about these and other financial alerts.
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| Free Answers to Your Financial Questions: CFP Board’s Free Financial Planning Clinic, August 4, 2007, Boston |
Each month, “It’s Your Turn” provides information about free publications or online resources that can help you take control of your finances and learn more about financial planning, such as the free online “The Fundamentals of Personal Financial Planning” course at the University of California, Irvine featured in last month’s newsletter. There’s a lot you can learn from reading about financial planning, but there’s also much more to be gained from individualized answers to your financial questions. The good news is there are plenty of financial planners across the country who are qualified to answer your questions. What’s even better is the many financial planners involved in volunteer programs that offer answers to your financial questions at no cost. Many of these free programs make good use of communication technology — both old and new. More and more newspapers, media outlets and public libraries across the country have regular programs that allow readers to submit their personal finance questions by mail, by phone, by e-mail or through the Internet without providing personal identifying information. Answers to selected questions are often shared publicly for educational purposes. Some local media outlets and other organizations even have occasional call-in programs where financial planners staff phone banks and provide immediate answers to those who call in with questions. The Financial Planning Association’s (FPA) “Ask a CFP® Professional” program allows people to submit general financial planning questions through the FPA Web site. The questions are submitted anonymously to a team of CFP® professionals who are members of FPA, and each question receives an individual response, with one question selected each week for posting on the FPA Web site as the “Question of the Week.” Many FPA chapters across the U.S. also hold community outreach events that often include no-cost opportunities to ask financial questions to financial planning professionals. To find contact information for the FPA chapter near you, visit the Find an FPA Chapter page of FPA’s Web site. If you plan to be in the Boston area on August 4, 2007, you’ll have a great opportunity to receive free answers to your financial questions at CFP Board’s Financial Planning Clinic. From 10:00 a.m. to 2:00 p.m. at the Sheraton Boston Hotel, more than 150 CERTIFIED FINANCIAL PLANNER™ professionals from around the country will be available for informal, one-on-one discussions about any type of financial question and concern. The volunteer financial planners will be seated at tables designated for different financial planning topics, so attendees can simply choose topics they’re interested in and head over to the appropriate tables. The CFP® professionals at the clinic will not be allowed to sell any products or services at the Financial Planning Clinic. They’re not even allowed to hand out business cards. The Financial Planning Clinic furthers CFP Board's charitable mission to create public awareness of the importance of financial planning and the value of the financial planning process, and there are no strings attached.
Those attending the Financial Planning Clinic will receive an informative 15-minute briefing designed to help them get the most out of their time at the Clinic. Attendees will also receive a Financial Planning Resource Booklet with helpful financial planning information, and there will be opportunities to attend educational workshops on topics such as cash flow and money management, college planning and estate planning. To register or learn more, visit www.CFP.net/clinic. Whether you’ve worked with a financial planning professional before or you haven’t yet decided if you could benefit from professional financial planning assistance, free personalized financial planning information can be a great way to learn more about your own financial situation and the benefits financial planning has to offer.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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