Read an Excerpt
Chapter 1
Where Do You Stand Today?
Knowledge is the antidote to fear.
--Ralph Waldo Emerson
Ask people over the age of 50 what their financial concerns are and you'll hear answers ranging from "When can I afford to retire?" to "How do I make sure my spouse is taken care of after I die?" People over 50 represent a broad range of circumstances: Some are still working, others are happily retired. Some have plenty of money, others are just scraping by. Some are financially savvy, others are totally clueless about
investments and financial planning. But whether you are 55 and
working or 95 and living off your investments, you have one
thing in common with everyone else enjoying the last third of
life: You want to make sure your money will last at least as long
as you do. You want to be set for life.
You're probably more realistic about money today than you
were when you were younger. If you're not already a millionaire,
you no longer have dreams of becoming one. If you have managed
to accumulate a sizable nest egg, you want to make sure
you don't lose what you have. You no longer see money as something
to chase but rather a medium of exchange that will allow
you to live the rest of your life in comfort-- as long as you have
enough of it.
If you've managed to keep your financial life fairly simple
up to now, you may be finding that money matters get much
more complex as you get older. Keeping up with Social Security
and Medicare is challenging enough, but if you're also managing
an investment portfolio, taking individual retirement account
(IRA) distributions when you're supposed to, making sure your
family will be taken care of after your death, all while saving as
much on your income tax as you can, you know how challenging
and time-consuming personal financial management can
be. But the alternative is worse. By not staying on top of financial
matters, you could find yourself in desperate circumstances
just when you should be kicking back and enjoying life.
In this book you will read about the various parts of your
financial life that all work together to provide the ultimate goal
of financial security. And these parts really do all work together.
You can't manage an investment portfolio without thinking
about taxes. You can't draft a will that conflicts with IRA beneficiary
designations. You can't make decisions about when to
start collecting Social Security benefits without considering
other income from employment. So if you've managed to get
this far without understanding the basics of personal finance,
you have some catching up to do. And if you've been pretty
good about learning as you go along--brushing up on 401( k)
plans and investments while you were saving for retirement, for
example--you have a bunch of new stuff to learn as you get
older. Social Security rules. IRA distribution rules. Estate planning
rules. Long-term care insurance options. Of course, you
can hire professional advisors to guide you. But for your own
peace of mind, you'll want to have a basic understanding of
these matters so you can guide the advisors and be in control of
your finances.
HOW THIS BOOK IS DIFFERENT
This book is different from other retirement planning books in
several ways. It takes a new approach that reflects today's lifestyles and trends, addressing the various financial topics as they
relate to the way people live today. After all, what good is money
if it doesn't make your life better in some way?
Changing Ideas About Retirement
The classic notion of retirement--where you'd spend thirty or
forty years working for the same company, retire at age 65, putter
around the house for another seven-point-five years and
then die--has been replaced with a newer, healthier concept of
"retirement." Instead of age 65 marking the end of work and
the beginning of play (or doing nothing at all), people are transitioning
to "retirement" by cutting back their hours, shifting
from corporate employee to part-time or freelance worker, and
generally designing creative careers that give meaning and satisfaction
to their lives. In many cases this new concept of retirement
is not defined by age at all. Some people find themselves
totally burned out at 40; after transitioning to a more fulfilling
(and often lower-paying) career, they figure they'll work forever,
and happily so. Others are retiring from their primary careers at
the traditional age of 60 or 65 and finding a different form of
paid employment that brings far more satisfaction than their
long-held jobs ever did. They too plan to work forever, either
because they like the work or need the money, or both. Still others
receive their last paycheck, throw themselves into philanthropy
or volunteerism, and end up working harder than they
ever did when they were "working." So when we talk about
retirement, we are not necessarily talking about that period of
your life when you are not working anymore. Instead, we
are talking about the last third to half of your life, which may be
characterized by work (for pay or not) or play or all of the
above.
Family Planning
Our concept of family planning is not what you think. Rather it
is a strategy that incorporates the extended family into the
financial planning process to meet the needs of the sandwich
generation that is caring for 85-year-old parents at the same
time their 30-year-old children are moving back home. As much
as you may want to be financially independent and see your parents
and children be the same, in some families it just doesn't
work that way. They need you. And you may need them someday.
So rather than deny this interdependence among generations,
it's better to accept it and plan for it. Without necessarily
commingling funds or transferring assets to family members
(unless it makes sense to do so, either for estate planning or tax
reasons), you may want to consider your parents' and/ or children's
financial circumstances when doing your own financial
plan. You'll be looking at potential inheritances as well as
potential future obligations-- necessary information if you are
to get an accurate picture of your financial future. Involving the
generations in financial planning requires total candor among
family members, but it's important for everyone's peace of
mind. If anyone has trouble talking about sticky financial issues
(which often suggests deeper family dynamics), you may benefit
from a meeting or two with a professional counselor.
Your Situation is Unique
Periodically you will see statistics such as "two-thirds of investors
plan to work during retirement." Some people find these statistics
interesting because they like to see where they stand in relation
to others; others find them irrelevant because they have
nothing to do with them. We want to stress that your financial
situation is totally unique and that you should take statistics,
rules of thumb, and one-size-fits-all financial tenets with a grain
of salt. You've probably heard it said that the average retiree
needs an income of 60 to 80 percent of his or her pre-retirement
income during retirement. If you find this rule of thumb helpful
because you don't want to go to the trouble of filling out a
post-retirement budget, then go ahead and use it. But if you
plan to travel a lot, go back to school, or finance an expensive
hobby, you may need even more income during retirement
than you had when you were working. If this is the case, the 60
to 80 percent rule doesn't help you at all. So please understand,
when you read generalizations in this book or anywhere else,
that you need to take a closer look to see if the generalizations
apply to you. If not, ignore them.
Knowledge-Based Planning
The information you need is out there. All you have to do is find
it. There is no excuse anymore for skipping some essential
aspect of financial planning because you don't know where to
go for information. For example, everything you could ever
want to know about Social Security is now on the Internet. If
browsing through all those web pages is not your style, you can
always get a phone number (see Chapter 7) and talk to a live
person. Or go to a bookstore. Or to the library. Or you can call
your accountant, attorney, stockbroker, or insurance agent.
Reading books like this will give you an overview of what you
need to know, including some specific details on certain matters,
but no one source has everything you need for your particular
situation. And that's the key to staying informed without going
into information overload. Confine your learning to your specific
circumstances and find out what you need to know when you need to know it. It's pointless, for example, to memorize all the minimum mandatory IRA distribution rules when you're not even close to 701/2. In addition to taking up precious brain cells, the rules could change before you get there. It's important to have some familiarity with the rules, however, so you can plan ahead and arrange your accounts to best advantage. Just don't
dwell on details you're not ready for yet. That said, you are
hereby granted permission to skip over the sections in this book
that you are not interested in learning about right now. And if
you encounter a section that is too basic for you, please understand
that we are writing to a broad audience that includes people
who are just starting to learn about finance. We recommend
that you skim over it to make sure you're not missing anything
and skip ahead to the parts that apply to you.
Things Will Change
No matter how meticulously you plan your financial future, the
one thing you can be sure of is that your plans probably will
change. In order to do financial planning, you need to make
certain assumptions. Some of these assumptions are easy and
seemingly within your control-- at what age you plan to retire,
how much you spend on basic necessities each month, whether
you plan to work during retirement. Other assumptions are
nothing more than a shot in the dark-- how long you'll live,
what rate of return your investment portfolio will earn over the
next thirty years, how many more grandchildren you'll have.
The inability to make predictions with absolute certainty should
not keep anyone from planning ahead. After all, life is supposed
to be a mystery. The key to successful planning is to incorporate
flexibility into the plan. By checking your plan regularly and factoring
in new information as soon as it becomes available, you
can achieve that delicate balance between taking control and
allowing life to unfold as it was meant to.
WHERE DO YOU STAND TODAY?
What You Have
The first step in planning your financial future is knowing
where you stand today. There are several components to this
self-assessment. One is the usual financial stuff-- what you own,
how much it's worth, where your assets are invested. To find out
where you stand, add up everything you own (your assets) and
subtract everything you owe (your debts and liabilities). What's
left is your net worth. One of the goals of this book is to help
you make that number bigger.
What You Know
Another component of your self-assessment is what you know,
or your level of knowledge about financial matters relevant to
your situation. You probably already have a pretty good idea of
what you need to know. In fact, if you picked up this book after
having looked at the table of contents--well, there's your list of
need-to-know items right there. Other questions will come to
mind as you go along, so it might help to keep a piece of paper
handy so you can jot them down as they arise.
What You've Done
A third component of your self-assessment is what you've done
or accomplished. Now, these items can range from something
as easy (but important!) as updating your IRA beneficiary to
something as complex as putting into place an entire estate
plan. The checklist at the end of the chapter will give you an
idea of the things you may need to do to plan ahead and get
your affairs in order.
FINANCIAL SITUATION-- WHAT DO YOU HAVE AND WHERE IS IT?
If you have a pretty good idea of where you stand without going
through the formal process of creating a financial statement, far
be it from us to make you fill in little blanks with numbers. However,
there's a reason people use financial statements: so everything
will appear in one place. If you've got account statements
scattered all over the house, you'd have to do some serious
paper shuffling to find out how you're doing. But if you have all
the latest numbers written down on one sheet of paper, you can
check your net worth at a glance and easily track your progress
as you go about making your net worth bigger. Also, having
everything in one place will allow you to see if you are properly
diversified according to the disciplined investment program
you're going to start after reading Part II of this book.
At the very least, you'll want to pull all of your papers
together and make a list of your accounts so this information
will be available to your next of kin in case of an emergency.
Of course you don't expect to get hit by a truck tomorrow--
nobody does--but if you did, you'd want your spouse/ children/
attorney to know where your assets are. And if you ever
decide to work with a financial advisor, he or she will need to
know what you have in order to develop a comprehensive
investment program or financial plan. So do everyone a favor.
When you're finished reading this book, gather together all of
your important papers, including the following:
- Statements of bank and credit union accounts: checking,
savings, term accounts
- Statements of investment accounts, including any
mutual funds or annuities held outside your brokerage
account( s)
- Copies of any stock certificates or bonds in your custody
(with a note telling where the original certificates are
located)
- Statements of retirement accounts, including 401( k)
plans, IRAs, SEP-IRAs, and any pension or profit-sharing
plans
- Tax returns
- Safe deposit box information: location of box, location
of key, contents of box
- A copy of the deed to your house
- Insurance policies: life, health, disability, auto, house,
long-term care, "Medigap," excess personal liability
(umbrella)
- A list of the names and phone numbers of your financial
advisors: attorney, accountant, stockbroker, insurance
agent, financial planner, investment advisor, business
manager
- An outline of your family tree, showing parents, siblings,
children, and grandchildren
- A copy of your current will or trust (if any)
- Powers of attorney
- Other important documents: birth certificates, passports,
adoption documents, military service records,
marriage certificate, divorce decree from prior marriage
When you do get around to creating your financial statements,
they can be as simple or as elaborate as you wish. The
more detailed they are, the more ways you can analyze your
financial situation. However, if big-picture information is all you
need for now, just concentrate on the two broad categories: net
worth and income.
Net Worth
Your net worth is everything you own minus everything you
owe. It's a snapshot at a given point in time and almost certainly
will be different from the snapshot you take next month or next
year. Depending on where you are in life, your net worth will
either be rising or falling. If you are still working and contributing
to retirement and investment accounts, your net
worth should be rising as you build assets for later in life when
you'll be pulling money out to live on. If you are already in the
withdrawal stage, you may be seeing a gradual decline in net
worth from one year to the next. This is nothing to be alarmed
about as long as the draw down is occurring according to plan
and not happening too fast.
Income
Unlike your net worth, which is a snapshot in time, your income
statement covers a period of time, usually one year. Your
income statement shows how much money flowed into and out
of your possession during the period in question. You've heard
the phrase "easy come, easy go"? Income statements show this
better than anything else. If you're one of those people who
spends money without thinking about it too much, your income
statement can be very revealing. By pulling out canceled checks
and credit card bills and putting expenditures into categories,
you'll be able to see exactly how much you spent on clothes or
cosmetics or greens fees or whatever your particular weakness
happens to be. But this is no time to be hard on yourself or your
spouse for spending too much money. Right now you're just collecting
information so you can make plans for the future. So
gather up your last twelve months' worth of bank statements,
bills, and canceled checks and add up how much you earned
and how much you spent. For the sake of your sanity (and peace
in the family), try to be as dispassionate, unemotional, and non-judgmental
about it as possible.
KNOWLEDGE BASE--HOW MUCH DO YOU KNOW?
Some people live an entire lifetime without understanding very
much about finances. Other people are very financially savvy,
learning about investments, retirement plans, estate planning,
taxes, and insurance as they go through life, increasing and
updating their knowledge all the time. Most people fall somewhere
in between. They know enough to keep up but feel
guilty/ nervous/ stupid at times because they don't know everything.
Well, let us tell you, nobody knows everything. Have you
ever looked at the tax code? Do you know how high all the
prospectuses of every mutual fund offered in the United States,
if placed in one giant stack, would reach? Do you know how
many million pages on the World Wide Web are devoted to
financial matters? Face it. You'll never know everything. The key
to handling this knowledge thing (or lack thereof) is to know
what you need to know and to become comfortable with a certain
level of ignorance-- as long as you are willing and able to
obtain information as you need it.
Now, the reason some people remain blissfully ignorant of
financial matters is that they have no reason to study up on the
subject. If someone else is handling all that stuff for you, why
should you go to the trouble of reading dry, boring financial
books and straining your brain to learn about tax rates and
price to earnings (P/ E) ratios? People who fall into this category
do have a point. If you have nothing to do with managing
an investment portfolio, you have no reason to be concerned
with P/ E ratios, nor should you feel guilty about it. But we've all
heard horror stories of people (usually women) who let their
spouse take care of all the financial matters and who become
totally lost when he dies. Suddenly they become the custodians
of all these assets they've never heard of before (what's a mutual
fund? what's a REIT?), and they become paralyzed with fear. In
some extreme cases, they don't even know how to obtain spending
money to buy groceries after their husband's death. They
aren't sure whom to trust. (Is the stockbroker who just called
trying to rip me off, or is he someone my husband trusted and
worked with for years?) They don't know whom to call for
advice or even what questions to ask. They feel lost and alone.
So at the risk of sounding sexist and authoritarian, we will issue
the following warnings:
Wives: Start becoming familiar with your family's financial
situation. Know what assets you own and where they are. Find
out whose name( s) they are in. Figure out what you would do if
your husband died first. Know the names and phone numbers
of the advisors your husband has been working with: stockbroker,
attorney, accountant, insurance agent, business manager,
and others. Better yet, get to know the advisors yourself so you'll
feel comfortable working with them on your own if it ever
comes to that. Above all, overcome your fear and reluctance
about financial matters now, while your husband is here to
guide and support you.
Husbands: Understand what it must be like for your wife to
be in the dark about the family finances. Help her, guide her,
push her, if necessary, into learning what she needs to know to
survive on her own. Spend a day going over all of your papers.
Schedule joint meetings with your advisors. Keep her updated
as you go along by sharing monthly statements and talking
about investment decisions. Understand that the learning
process will take time and patience, and please, give her that. It
doesn't do much good to be meticulous in your financial affairs
if everything falls apart after you're gone.
Parents and Children: The same goes for you. Parents: You
never know when a child or other family member will need to
step in and take care of your affairs. Why not make it easy
for them by showing them where things are and signing the
necessary documents so they can take over if you need them to?
Children: Start becoming familiar with your parents' financial
situation and keep an eye on how they're handling things.
And if your knowledge of financial matters is lacking, brush up
now, especially on matters affecting people your parents' age,
such as Social Security, IRA distributions, estate planning, and
the like.
PREPAREDNESS--WHAT HAVE YOU DONE
AND WHAT DO YOU NEED TO DO?
The following list is not meant to be exhaustive because everyone's
situation is unique. The more complex your financial situation
is, the more likely you are to rely on professional advisors
for information about what to do and when. But even if you
have an entourage of advisors, it's a good idea to stay on top of
these things so nothing falls between the cracks. And if you are
managing your own finances with little outside help, it is crucial
for you to be aware of the various checkpoints so you'll be sure
to do the right things at the right time. See if any of the following
items belong on your to-do list.
- Do you have an easy-to-use recordkeeping system for
keeping track of all your financial matters?
- Have you listed your financial goals and what you want
to achieve with your money?
- Do you have a reserve fund for emergencies and
unplanned expenses?
- Do you have the right kinds of insurance in the right
amounts?
- Have you calculated how much income you will need
when you retire (or when you enter the next phase of
life, if you plan never to retire)?
- Is your investment portfolio, including regular and
retirement accounts, positioned as it should be for your
risk tolerance, income needs, tax bracket, and long-term
goals?
- Have you determined what your Social Security benefits
will be and at what age you will begin collecting?
- Do you know what your work options are later in life
and how you can prepare for them now?
- Do you have a will?
- Does your IRA beneficiary designation reflect your current
wishes?
This self-assessment is by no means exhaustive. To manage
your financial affairs properly as you grow older, you must have,
know, and do a lot of things. You must have enough assets to
generate the income you'll need throughout your lifetime. You
must know enough to properly manage your affairs or to guide
the professionals who will be assisting you. And you must do
certain things at certain times in order to stay in good financial
shape. But first, you need to think about your life and how you
really want to live.
