Before the big drawing of the Power Ball last week, everyone was talking about what they would do with the money if they won. Dreams of quitting work, buying a vacation home, news cars, taking care of family members, there are a lot of hopes and dreams attached to a lottery win. Reality from the standpoint of a lottery winner that I spoke to is; if you collect your winnings incorrectly, it may be the worst thing to ever happen to you.
The gentleman I spoke to just collect his winnings in his name, deposited the check in his bank account, met with a lot of financial people but never moved the funds to any investments. Within 5 years it was all gone. He had family members coming out of the wood work, charities calling at all times, his didn’t know how to say no.
Here is what anyone who wins the lottery should consider:
Don’t tell anyone that you have won. A secret is only a secret if it is not shared.
Set up a Trust to collect your winnings. The Trust will be named, not the individual, as far as the public is concerned. You can also let those who come knocking on your door for money that your Trustee makes all of the financial decisions.
Have your wish list at hand for those items that are just frivolous purchases. Scratch that itch and get it out of your system.
Make sure you have current Estate Planning in place. You want to make sure your heirs can handle your good fortune and make it last for generations.
A large part of my practice is putting together, and tweaking retirement plans for my clients. You know what they say about the best laid plans…..I say, expect the unexpected.
Things happen that we cannot control such as, getting laid off two years before your planned retirement, or a family member getting so sick that you now have to be a primary caregiver. There are all types of family emergencies that we would not think twice about tapping into our reserves to help resolve. Just think if you pulled $20,000 out of your retirement account to help with a family emergency when you were age 60, you might not have enough time on your side to make up for that generous withdrawal. You will now have to look at your retirement plans and decide what you will pull back on, or completely cut out. If you had made this type of withdrawal in your 50’s, you may pay a tax penalty, but you would have time on your side to allow your assets to replenish. The thing is, can you expect these emergencies? Most of us cannot.
Imagine that you retired in 2007 with a very healthy retirement portfolio, then the market crash of 2008 occurred, what could you do? One thought is to rein in your spending until you can recover. While no one likes to cut back their lifestyle in retirement, often due to the unexpected, change is necessary.
My advice is to save as much as you can pre-tax through your company retirement plan, add additional savings outside of that in a variety of investments from cash accounts to equities. Hire a professional to help you manage your retirement investments so they can, without emotion, re-balance your portfolio regularly, and hopefully not get hurt too much when an unexpected event enters your retirement.
I get more calls from my female clients vs. their male counterparts telling me that there is a family emergency and they need to pull funds from their retirement account to help. It pains me to liquidate the funds but I know they have no place else to turn. These withdrawals add to the double whammy of most women earning less, therefore, they save less than their male counterparts.
We are conditioned to be the caregivers. It makes sense that when a loved one is in trouble, we throw on our capes and rush to help them. We need to start turning the cape around and be a little selfish once in a while or we will be no good to anyone.
Women in their 60’s today carry much more debt than past generations. Carrying debt in our later years, with waning earning power, and the illnesses that often come with aging, means women are worse off financially. At some point if nothing can be done to increase your earning power, you need to start saying “no” to family members in financial need, plow into your debt to get rid of it, and save for your own retirement.
If we are not good to ourselves, we will be good to no one.
When I started in the investment business in 1983, there were a handful of mutual fund companies you could deposit money with and that was the extent of your choices. Today, there are open-end funds, closed-end funds, exchange traded funds, plus any number of stocks and bonds to choose from. Where does an investor go? Here are a few tips to follow:
First you need to know your time horizon for how long funds can stay invested, then when will you have to convert invested funds to income. Along with your time horizon, knowing your risk tolerance is very important. To that end, we have an extensive risk questionnaire that all of our clients complete.
Make sure you are diversified. This is a statement that I have repeated numerous times over the years. Having a variety of funds, i.e., different companies such as large cap vs. small, or growth vs. value, as well as foreign and domestic, will provide a measure of protection during volatile times.
Do your homework when hiring a professional to help you. As CFP professionals ®, we have ongoing, extensive continuing education as well as a high fiduciary standard to uphold. Ask questions about fees as well as other types of services that will be provided to you.
Investing is a big deal – this is not gambling. We are here to help you throughout your investing life.
SHARE YOUR VISION OF WHAT RETIREMENT WILL BE LIKE.
Perhaps you are anticipating years of travel and adventure while your spouse is envisioning staying home and relaxing, gardening or playing golf. You should talk about issues such as how much time you will spend visiting your children and grandchildren and whether you want to explore new interests or volunteer.
DISCUSS HOW MUCH TIME YOU WILL SPEND TOGETHER.
You will probably discover there are some things you enjoy doing together and others you do not, and you should agree upon how much time you will allow each other to enjoy your individual pursuits. The fact that your spouse doesn’t want to spend all of his or her time with you doesn’t mean he or she doesn’t love you. It’s a rare couple that truly enjoys being together 24 hours a day.
TALK ABOUT HOW ROLES AND IDENTITIES WILL CHANGE.
This is especially relevant if you will no longer be the primary breadwinner, or you receive a great sense of fulfillment from your work. If one of you will retire before the other, each person will go through the emotional process of separation from work on a different timetable. The spouse who retires first will probably transition into the role of primary homemaker, and then the roles will change again when the other spouse retires.
PURSUE SOME OF YOUR OWN INTERESTS AND MAINTAIN SOME SEPARATE FRIENDSHIPS.
One spouse shouldn’t assume that he or she will automatically be included in the social circles the other spouse has developed. Nor should either spouse feel like they have to spend less time with their friends in order to spend more time together. This can be a difficult adjustment in cases where a working spouse relies heavily on his or her co-workers for socialization during their working years.
TREAT YOURSELF TO DATE NIGHTS.
While you work, you and your spouse probably have limited amounts of time to spend together, especially if you have children. After you retire and you are around each other most of the time, being together will become commonplace. It’s easy to take your time together for granted. At least once a month, plan a night out to share an activity that you both enjoy.
By the time most of my clients reach retirement, we have been working together and planning for a number of years to assure they have a comfortable retirement and can fulfill their retirement dreams. Research through the Employee Benefit Research Institute shows that close to 63% of retirees have far too little saved for retirement. Here are three things to avoid so you don’t put your dreams at risk.
You don’t have a periodic financial checkup.
I like to meet with my clients for a face-to-face review and update at least every 6 months. This allows me to keep up to date on what is going on in their lives, and keeps them up to date on their investments and whether they are on target to reach their retirement goals.
Your do not have an investment strategy.
Everyone works better with directions of some kind, whether it is driving some place, or building a piece of furniture. This holds true for your interments also. We look at risk tolerance, time for your investments to re-invest, and when you have to make withdrawals, to name a few of the roadmap items when planning your retirement.
There is not a plan in place to replace your income.
You have to figure out how to turn all of your retirement savings into a regular income. Decisions need to be made regarding what accounts to access first for income, when do you have to withdraw from your retirement accounts and how much. And how much should you withhold for income tax? Having a successful plan for replacing your income will avoid a lot of stress in retirement.
Growing up, my parents managed their money through a checking and savings account at the bank. There was not a lot of choice beyond the bank for the average family, but that was all they knew or take advantage of in most cases. Today, things are very different. You can manage your money much better than your parents did. Here are a few steps how:
Diversify your investments:
Again, the bank was king. Depositing money in a CD was about as risky as many of our parents would get. You have a huge choice between open-end mutual funds, ETF’s (Exchange Traded Funds), and stocks to name a few. Just make sure that you are truly diversified as to they type of investments you have. I have seen accounts with a huge number of holdings but everything was a Large Cap US stock fund.
Plan for a long retirement:
Most everyone is living longer today. Lifestyle and science have done a lot to extend the average life expectancy. My clients’ plan for 30 years or more in retirement – that’s much longer than our parents planned to experience.
Put your financial wellbeing first:
Many of our parents put our education before their own retirement savings. Today, there are many different grants, loans, and scholarships available to students. Your kids can find ways to pay for their education, and you can help, but not to the detriment of your own retirement savings. Do you want to live with your kids in your retirement because you did not save for yourself? Most of my clients do not.
Learn about the financial world:
In many families, talking about money is taboo. If this holds true for you, there is a lot of information available online. Budgeting is key, as well as paying yourself first. Take some time to learn about money.
I recently recalled a conversation I had with a young client about 20 years ago. The client said to me, “If I only had XX $$’s in income, everything would be perfect.” My client felt that if they made “a lot” of income, and then could have a pile of money, everything would be fine. My client was missing the point. The income is not the issue.
No matter how much income you make, and are able to save, how you spend that income and savings is the real point. No one likes to put together a budget as it is time consuming and can often be a slap of reality that many do not want to face. A budget is a good thing. Knowing what you are spending on a required and discretionary expense and being able to control the spending is the real issue.
The advice is simple but not always easy to follow:
Pay yourself first through emergency fund and 401k savings.
Start a slush fund for big ticket purchases
Live below your means
Being a good spender is really the issue.
I started in this business in 1983, since then, communication has changed drastically. Back then, if I was not available a pink message slip went into my slot on a message wheel kept by our receptionist. Now, I can take a call or answer an email from anywhere. You would never know if I was in my office or helping you from my gym. Calls can be forwarded to my cell or home phone just as easily as to my desk, and I can reply to an email from anywhere I have secure internet service. But don’t ask for my cell number, try to send me a text, or ask me to text you.
As you might think, my industry is a highly regulated one. There is a clear separation that I keep between my work devices and my personal devices. Here is the reason why:
Our firm’s written Supervisory Procedures (WSPs) prohibit texting, especially from personal devices. Such policies are in place to protect consumer, adviser and firm (and markets) by ensuring that all electronic communications are fully documented and available to discovery procedures in the event of a dispute or legal claim.
So please don’t be offended, I do want to talk to you, just not via text.