Category Archives: Costly Retirement Planning Mistakes

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Your Life Experiences Affect Your Money Decisions

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A financial advisor was trying to get the business of a wealthy, retired man in San Diego. At their previous two meetings, the advisor talked about making big returns on the client’s money and had the client pegged as an “aggressive” investor. At the next meeting, the advisor was going for the “close” and had fancy charts to cement his presentation and what he thought was a sure sale. As the client sat stoically the advisor asked, “You seem somewhat distracted. Have we missed something?”

The client proceeded to tell the advisor that he didn’t like his strategy and his proposal to invest in risky stocks made him somewhat angry. He explained that his father died penniless after investing too aggressively in the stock market. He went on to explain that his father lost his manhood and his money and that wasn’t going to happen to him.

The lessons in this story are two-fold. First, the advisor failed to ask the right questions. Secondly, he didn’t respect how the client’s life experiences impacted the way he viewed money, which he would have learned had he asked the right questions. We are a product of our environment and life experiences. We either learn from them or we are destined to repeat the mistakes of those who influenced us.

My parents were hard-working people. My father was a career Marine and my mother a stay at home mom. We lived paycheck to paycheck during my childhood though I never felt I lacked anything. My parents never had enough money to even think about saving for retirement as they were busy paying for necessities for my brother, sister and me. So they never thought about retirement income. Fortunately, my father had two pensions and Social Security so they ended up in a financially ok place when my father retired from the City of San Diego.

As a result of my life experiences, I had a keen interest in money and finances growing up. As a kid, I sold flower seeds door to door and I had two paper routes to earn spending money. In high school, I worked at the local drive-in theater.

Not only did I want to have a more comfortable financial life than my parents, but I also wanted to know all about personal finance. That thirst for knowledge drove me to a career in financial services. I have certainly made my share of financial mistakes along the way; too much credit card debt in the past, investing in a “sure thing”. The good news is that those mistakes have made me a better teacher and advisor. They have also made me more prepared for retirement than I probably would have been otherwise.

How about you? What lessons can you take from your life experiences with money? Here are three suggestions to make the most of those experiences:

  1. Write down the mistakes you and/or your parents made with money. Be specific. How do you feel about them? Have they helped or hindered you?
  2. What lessons have you or can you take with you to improve your personal financial life? Write them down in a Financial Journal.
  3. Write down your short and long-term goals in your journal. These could be to get out of debt (long-term), start saving for a grandchild’s college education (long-term), decreasing your spending (short-term), not using credit cards (short-term), etc.

Finally, as we learned from the story at the beginning of this post, find a financial advisor or coach who you trust and who asks the right questions to get to know you and your financial life. There is no such thing as one size fits all when it comes to your unique financial goals and concerns. Don’t let anyone short change the experience for the sake of their personal gain. You are in charge! Please leave your comments below. You can also check out my FREE personal budgeting course here.

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3 Ways Good Habits Can Increase Your Retirement Income

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Over the past several months I have read two excellent books about habits and how they influence our lives in some good and some not so good ways. If you get a chance, please pick up a copy of The Power of Habit by Charles Duhigg and/or Atomic Habits by James Clear. Both books offer some practical advice on how habits can build us up as well as serve as roadblocks to achieving our goal of becoming the best version of ourselves. In this post, I offer three ways that habits can benefit you in building your retirement nest egg.

  1. Start small. As James Clear points out, “habits are the compound interest of self-improvement.” If you have a big goal like saving $100,000 in your retirement account you won’t necessarily start by saving $1,000 every week if you haven’t saved anything to date. You start by looking at why you haven’t saved anything. Perhaps you are spending $50 a week on Amazon.com. The things you buy are not really necessary so you agree that every time you get the impulse to buy on Amazon you will put $25 in your retirement account. Once you feel good about that new habit you might increase it to $50 then $100, etc. You are using the same trigger that used to cause you to spend money on Amazon and you have replaced it with a deposit to your retirement account.
  2. Focus on what you want to become. In the example above, instead of focusing on the $100,000 focus on who you want to become – a savvy retirement saver who builds a comfortable nest egg to provide income for life. You can identify with that transformation versus a dollar amount. It is like losing weight. Instead of focusing on the pounds you want to lose, focus on the vision of the healthier version of yourself who will enjoy life more once you lose the weight you want to lose.
  3. Focus on your system instead of goals. If you want to save more money for retirement then focus on your system for getting there instead of the goal itself. Charles Duhigg in The Power of Habit speaks of the cycle of a habit. There is a “cue” then a “routine” then a “reward”. If you have a cue that leads to a bad habit yet the reward is positive then perhaps you can keep the cue and the reward just replace the routine. That is what we did in the example above. We replaced the shopping on Amazon with putting money in your retirement account. That is a system that works, in this example. What cues do you have that lead to bad spending habits? It could be boredom, hunger, a need to be social. How can you replace the unproductive behavior with a better routine? Maybe it’s paying with cash when you get an impulse to buy something on credit that you really don’t need.

Habits can be extremely helpful on the road to financial peace of mind. As the authors Cleary and Duhigg explain, habits need to help us become a better version of ourselves. In other words, they need to become part of our identity. Good habits shape our identity which is why good routines are critical to success in forming good habits. Habits can change our beliefs about ourselves. Pick one routine this week that you will work on changing that will lead to better spending habits.

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Conquering Debt at Age 60

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U.S. Consumers who are 60 or older owed over $600 billion in credit cards, auto loans, personal loans and student loans last year. That is an increase of 84% since 2010 which is the largest increase of any age group. This information comes from TransUnion data, one of the biggest credit bureaus in the country. $86 billion of that debt is from student loans.

Many older Americans took out loans to help pay for their children’s college education and are still paying them off. Others took out student loans after the financial crisis in 2008 to retool their skills after losing jobs during the economic downturn.

This information presents a dichotomy or sorts. We hear about how the Baby Boomers are the wealthiest generation, yet we struggle to fund a retirement, so we end up working the rest of our lives in many cases. Compounding matters is the crushing debt that many Boomers face in what are supposed to be the stress-free years of retirement.

With this reality in mind, what are some ways to attack the debt problem when we are 60 or older? Here are five strategies to conquer debt when you are 60:

  1. Face the music – this may seem trivial, yet the reality is that many people resign themselves to being in debt for the rest of their lives. That doesn’t have to be the case. First you must come to terms that you have debt and have a desire to eliminate it or pay it down significantly and that you are willing to change the habits that created the debt in the first place.
  2. Target high interest debt first – look at the interest rates on the debts that you have and commit to tackling the highest interest debt first while keeping up with the minimum payments on the other debt as well. It can take years to pay off debt by just making the minimum payment. That is why it makes sense to target the highest interest debt first. Once you pay off the highest interest debt then tackle the next highest and so on. By being more strategic in attacking your debt you will pay it off faster and save more interest as well.
  3. Look at refinancing options – if you have reasonably good credit you can find a lender that will consolidate your debt at a lower interest rate. That can mean a lower monthly payment and a shorter time frame to pay of your debt. Do your homework to compare interest rates being charged. Also, if you are refinancing student debt keep in mind you will give up some of the perks for federal loans such as repayment plans based on income as well as debt forgiveness programs. Consider this option as a great option to save money over time on interest costs.
  4. Pay down your balance as soon as possible – you can do this by making more than the minimum monthly payment each month. Check with your lender and see if your extra payments will go toward interest or principle. Some will apply your extra payment to interest which doesn’t help pay down the debt. You want to have that extra payment pay down the principle. So, call your credit card company or lender and ask them how you can apply extra payments to the principle. Be sure to check that you are not being charged for making extra principle payments. You may be able to avoid the fees by tacking the extra payment onto your monthly payment.
  5. Develop a budget – If your debt is due to a lack of a monthly budget then consider starting one. It takes discipline to live within your means. We live in a world of get it now and pay later. That doesn’t work and it wreaks havoc on family life and retirement. Check out my Budgeting That Makes Sense course. It’s free and will give you a guideline to stick to a budget.

Everyone has a reason for accumulating debt. Sometimes it is due to poor budgeting habits while others can’t avoid it due to employment or other family circumstances. Regardless of the reason it doesn’t have to wreck your retirement. Be intentional, have a plan and work your plan each month. Before you know it, you will have made a big dent in your debt and then it will be gone. Once you are debt free you can enjoy your retirement savings and live your retirement on your terms.

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Long-Term Scare

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I find it interesting how many people take their health for granted. Not only when they are in their 20s and 30s but even in their 50s and 60s. It’s as if we can will good health in spite of the reality that we can’t. The need for long-term care insurance is greater today than ever before which is why I have titled this article “Long-term Scare” because the consequences of not being prepared for health care in retirement are scary.

Only about 10 million people have long-term care insurance in the United States even though about 58% of us will need long-term care by age 65. Let’s define long-term care. Long-term care involves a variety of services designed to meet a person’s health or personal care needs during a short or long period of time. These services help people live as independently and safely as possible when they can no longer perform everyday activities on their own. The services can be provided at home or in a hospital or other care facility.

With the risk so high, why do people avoid buying long-term care insurance? A lot of the reasons mirror why people don’t buy life insurance. They feel they don’t need it, it’s too expensive, Medicare will cover long-term care or a family member will take care of them if they get sick. Let’s take a look at each of these reasons.

First, many people feel that they don’t need long-term care insurance. When you are younger than 50 you are probably correct, which is why most people who buy long-term care insurance do so in their mid-50s. As we get older the risk for a long-term care event increases. Stroke, a fall, cancer or any number of illnesses can strike at any age buy certainly the frequency increases as we age.

The expense argument is real. Long-term care is not inexpensive. The average cost of a policy for a 55-year-old couple in 2019 was $3,055. For a 60-year-old couple, it was $3,400. However, there are a number of hybrid products that can overcome that excuse. For example, some life insurance policies will allow you to use part of the death benefit for long-term care expenses without penalty. Some annuities have riders available that will pay for long-term care expenses. Talk to a financial advisor about these options.

Medicare will cover long-term care is one of the most common misunderstandings. Here is what Medicare will cover:

  • Skilled nursing care. Medicare helps to pay for your recovery in a skilled nursing care facility after a three-day hospital stay. Medicare will cover the total cost of skilled nursing care for the first 20 days, after which you’ll pay $170.50 coinsurance per day (in 2019). After 100 days, Medicare will stop paying.
  • Home health care. If you are homebound by an illness or injury, and your doctor says you need short-term skilled care, Medicare will pay for nurses and therapists to provide services in your home. This is not round-the-clock care. Generally, it’s for no more than 28 hours per week. With your doctor’s recommendation, you may qualify for more.
  • Hospice. Medicare covers hospice care. Hospice is care you get to make you more comfortable when you are in the last stage of life with a terminal illness. You’re eligible if you are not being treated for your terminal illness, and your doctor certifies that you probably will live no longer than six months. You can get care for longer than that, as long as your doctor says you are still terminally ill.

Finally, getting a family member to care for you if you need long-term care can be disastrous for you and your family. Many spouses end up needing long-term care themselves after attempting to help a loved one with the requirements of daily living such as lifting and transporting. Most of us are not qualified or equipped to take care of someone who needs long-term care. It is a heavy burden to place on a loved one.

My grandfather lived the final months of his life in a Medicaid facility because he didn’t have the resources to be cared for in a more fitting facility. My parents cared for him at home until it became unreasonable to do so. Medicaid is meant for the poor. Please make that your last resort. Consider your options today. Relieve your family of the potential burden and enjoy the peace of mind knowing that you will be cared for in the event you need long-term care!

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Getting Rollovers Right

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“Tis the season”, as many people say this time of year. The Holidays are a season of celebration of many varieties. It is also the time of year when many people choose to change jobs or “retire” from one career to start a new career. Often left out of the celebration is the company retirement plan that gets left behind many times without much thought. We live and work in an era of defined contribution retirement plans. Yes, it’s not our father’s or grandfather’s retirement plan.

No longer does the company provide a guaranteed pay check in retirement in the form of a pension or “defined benefit” plan, as they are called in financial services parlance. For most of us, the benefit is “undefined” because we are responsible for putting some of our hard-earned money into 401(k) plans and the like. It’s a self-service retirement these days and the more we save, the better off we will be.

Even more reason to make sure that you don’t leave that retirement plan behind at your former employer unless there is a good reason to. Here are 5 Rollover Mistakes and How to Avoid Them.

  1. Leaving your plan at your employer – This one is a little tricky because with some research you may find that it makes sense to leave your 401(k) with your former employer’s plan sponsor if it is an exceptional plan. My advice is to engage a financial advisor to review your plan to see if that is your best option. Usually it is not but don’t take any chances. In some cases, your employer won’t allow you to leave it so check with your human resources department for your options.
  2. Missing the 60-day Rollover Deadline – So, let’s say you have decided to rollover your retirement plan into an IRA at your bank or credit union. The 60-day window starts as soon as your money leaves your original account. Again, my advice is to work with a trusted financial advisor, so you don’t have any unnecessary delays. You can transfer the funds from your old plan to an IRA tax-free if you complete the transfer within the 60-day window. The penalty is steep if you whiff on this one. The whole distribution will be taxable in one year. If you are under 59 ½ you will also pay a 10% penalty.
  3. Not paying off loans before rolling over – I see a lot more of this situation today as many people have taken out a loan against their 401(k). If you don’t pay off any outstanding loans before you do a rollover, the outstanding loan amount will be considered a distribution by the IRS and you will pay taxes on the amount of the loan. Again, if you are under 59 ½ you will get socked with the 10% penalty.
  4. Cashing out or taking an indirect rollover – It can be tempting to take some of your retirement funds directly and use them to buy an RV or a boat or a new car. Some people do this with the intention of replacing it within the 60-day window. Keep in mind, any funds you don’t replace within the 60-day window will count as a distribution and will be subject to taxes and a penalty. My advice is to leave the funds intact and avoid spending the money.
  5. Failing to consider a Roth IRA – We love the benefits of tax deferral. Unfortunately, it doesn’t last forever. At some point we will all have to pay taxes on your retirement funds. If you roll your retirement funds into a Roth IRA you will pay taxes on the funds in the year that you do your rollover, yet future investment earnings will be tax-free. If you can tolerate the tax hit, you won’t have to worry about paying taxes on your IRA distributions in the future. Talk to a financial advisor to do an analysis to see if the Roth Rollover makes sense for you.

    If you are thinking about retiring in the next five years or so, check out my Retirement Ready Checklist. It’s free!