Read an Excerpt
Retirement GPS
How to Navigate Your Way to A Secure Financial Future with Global Investing
By Aaron Katsman McGraw-Hill Education
Copyright © 2013 Aaron Katsman
All rights reserved.
ISBN: 978-0-07-181407-2
CHAPTER 1
Matching Retirement Lifestyle with Retirement Income
When I was 10 years old, I got my first job; I was a newspaper delivery boy for the West Seattle Herald. There were probably 50 subscribers on my route, a manageable number for a kid to deliver to once a week. But the Herald wanted me to deliver an advertising supplement to about 500 other homes as well. I was a good boy and delivered the supplements for a year. I wasn't too keen on delivering the advertising supplement, and after a while I figured that I could get away with just delivering the subscriptions. Sure enough, that worked.
For about a month.
Remember, this was Seattle, Washington, which gets about 38 inches of rain every year but doesn't get enough sunshine to dry it up. After about a month of leaving the supplements in my driveway, you can imagine the pulpy mess that greeted my supervisor when she drove past my house. If you also imagined that this did not end well for me, you were right. I was fired from my first job at the ripe old age of eleven and a half.
What's that got to do with a book about retirement? It taught me the folly of shortcuts. I find that in life, if you follow the rules, you'll be okay. Retirees who invest in get-rich-quick schemes almost always lose everything; those who don't save because they intend to win the lottery almost always end up with nothing.
Why I Wrote This Book
Plain and simple, most of the books, advice columns, and radio and TV programs on retirement planning rely on outdated notions of what retirement means in the twenty-first century. Also, too few of the authors of these books highlight international investment strategies and vehicles. In advising a global clientele, I've found that international investing is key in achieving personalized retirement goals. More on that later.
While my retired clients span the globe, they seem to have similar goals and needs—helping their children, more travel, philanthropy, and enjoying their newfound free time. Let's start with what real people, not paid spokespersons for financial services companies, have to say about their goals and expectations. The 2011 SunAmerica Retirement Re-Set Study poll revealed the following:
• Retirees have a new outlook. Today, 54 percent of Americans view retirement as a new chapter in their life, rather than a winding down—a significant increase over the 38 percent that held a similar view a decade ago.
• Retirement is being postponed. Preretirees say that they now intend to delay retirement by five years—from 64 to 69—in part as a result of increasing longevity, along with the 2008 recession and newly projected financial need.
• Retirement no longer means the end of work. Almost two-thirds of those polled say that ideally, they would like to remain productive and include some work in retirement so that they can stay active and involved.
• Financial peace of mind is now six times more important than accumulating wealth. In fact, 82 percent name it as their key financial goal.
• Unexpected multigenerational family assistance has become the new retirement wild card. Preretirees must balance their retirement plans with the possibility of their having to support aging relatives, adult children, grandchildren, and siblings. Nearly half of Americans 55 and older expect to be providing this support and, in a new twist on child-care, 70 percent of those believe that their adult children will need financial assistance.
I am convinced that most people writing pre- or postretirement information have never sat with a living, breathing client. Nothing is personalized. There is no focus on the client's goals. Nothing is real. They assume that a generic retirement lifestyle of walks on the beach and exotic vacations is a universal aspiration.
What about the person who wants to spend as little as possible during his lifetime so that he can leave a legacy to a favorite cause or to his family? I have several clients who have achieved that goal.
What about those who want to see their financial contributions take root in people and institutions during their lifetimes and who don't care to endow anyone after their death? I've helped people bring this to fruition, too.
I find that celebrity financial gurus dish out irrelevant information about going after returns that outperform market benchmarks when they should be helping people balance their retirement lifestyles with their retirement incomes. Anyone who doesn't take this approach is pitching products, not practicing financial planning.
"Wait," you say. "Outperforming the market is irrelevant?"
Yes, for most retirees it is irrelevant because what matters to retirees is financial peace of mind. The SunAmerica research backs this up.
The main financial difference between people who have retired and those who haven't is the source of their income. Retirees are funding their lifestyle choices with retirement income, and everyone else is funding their lifestyle choices with nonretirement income. No matter what your stage in life, you've got to balance your income with your expenses. That's playing by the rules.
The Biggest Financial Mistakes Retirees Make
I will set forth a new paradigm for a retiree's investment portfolio soon enough. Some of this advice you will embrace, and other parts you will ignore. Regardless of how much of your nest egg you decide to invest in the GPS retirement portfolio, I hope you'll avoid these top five mistakes that I see retirees make time and again.
Mistake 1: staying on autopilot. I recently met with a well-off American lawyer who was here in Israel visiting his children. He asked to meet with me because he wasn't happy with his investment advisor. His broker of many years had retired, and the new one he had been assigned to had never taken the time to get to know him. His now-retired broker had made a practice of calling the busy lawyer with interesting ideas and both portfolio and market updates, and he missed that kind of personal service. The lawyer was also disappointed with his investment returns and thought that his portfolio should have performed better based on the market's performance during the same period. When I asked him why he hadn't transferred his account to a different firm, he said that he was very busy and hadn't had the time to get around to it.
Investors need to stop running on autopilot. They need to take control and make sure that their money is working efficiently. This doesn't mean that you have to become a do-it-yourselfer; instead, keep in touch with your advisor on a regular basis to make sure your investments are doing what they are supposed to be doing.
Mistake 2: lack of organization. Too often, I learn that retirees have multiple investment accounts with different firms, which makes it difficult for them to supervise and evaluate their investments. When a client has multiple accounts, her financial advisor should be sitting on top of her entire situation. The professional should not just focus on one account, but rather should assess everything and see how the client's entire financial situation fits her goals and needs. In short, your financial advisor should be like a corporate chief financial officer (CFO).
Mistake 3: budgeting. I volunteer for an organization that helps get people out of debt. I can't tell you how many times I sit with someone and he tells me that he earns $5,000 a month and spends $5,000 a month, but for some reason he is always in debt. Nine times out of ten it is because he forgot about annual expenses when he formulated his monthly budget. Annual items could be car insurance, a vacation, or anything else that isn't a day-to-day expense, including home maintenance. When budgeting, always remember to take annual expenses into account. To help you with your monthly and annual budgets, I've included a budget worksheet in Appendix A.
Mistake 4: keeping too much in money market funds. Part of any financial plan is to keep enough funds to cover between three and six months of expenses on the side, totally liquid, in case of an emergency. This is generally referred to as an emergency fund. I often see investors keep more and more money in money market funds. While seven years ago money market funds were used as a strategic asset because they carried a decent yield, now they pay virtually nothing. Nada, as we say in the vernacular. Keep your emergency fund in the money market, but get the additional money invested and starting to work for you.
Mistake 5: locking assets outside your own reach. As retirees age, they usually don't add someone to the account who can make changes on their behalf. I advise retirees to give a child or a trusted relative trading authority. This way, if they are not able to fully supervise the account, it doesn't become frozen. There are many ways to go about this that provide for checks and balances. Perhaps you will want to require two signatures from a list of three possible signers. Perhaps you will draw up a power of attorney. Consult with your family and your advisors to devise a plan and instruments that work for you.
Funding Your Life Goals
No matter how you're funding your retirement—whether from investments, rents, royalties, pensions, or government assistance—you've got the same issue of balancing income and expenses in retirement that you had during your working life. Sure, you have different goals and constraints in retirement than you had in earlier phases of your life, but the need to fund your life goals is constant.
Far too often, financial planning conversations are centered on investing when they should be focused on funding your life goals. Clients and prospective clients call me all the time asking if they should invest in this fund or that opportunity, and at first they're surprised when I confess, "I don't know." The reason I don't know whether a particular investment is a good choice for the client is that most clients haven't defined their life goals. They come to me with account statements and ask me what to do with their money instead of telling me what they want to do with their lives and asking how to fund the journey.
How Much Money Do You Need in Order to Retire?
The amount of money you need in order to retire is based on how much you'll be spending in retirement, plain and simple.
It's a great maxim of many financial planners that, if you play your financial cards right, you will need less income to live in retirement. They reason that once you've retired, you don't have to commute to work, pay as much in income taxes, fund your children's college educations, or make mortgage payments. My experience is that most people need a nest egg that will provide the same amount of income in retirement as before, even if the categories of expenses have changed.
How can this be? Take a look at some of the life events that may happen during your retirement:
• Your home may be paid for by the time you retire, but you still have to maintain it, and you may have to remodel it someday because it's run-down or to accommodate a wheelchair.
• Your adult children need financial help. The SunAmerica study showed that 70 percent of respondents anticipated that they might need to provide some level of financial assistance for their adult children. Sometimes this means that the adult children move back in with their parents and bring the grandchildren along.
• Your parents need financial help. We're living longer, after all.
• Your medical expenses increase.
• You need to move out of your home into a more expensive residence where your medical needs are better served. Or perhaps you need skilled care in your own home.
• A cause that's important to you needs financial help.
• Your grandchildren deserve some spoiling. Or perhaps they need a college education that their parents can't afford.
• Your nest egg loses value.
• You want to do more with your golden years than sip coffee at your own kitchen table. If you want to have your coffee at a coffee shop every day, you've got to pay the barista.
• You lose a life companion. Now you must dig deeper into your wallet when you seek companionship by going to movies or learning a new hobby.
In spite of the Great Recession, some people haven't gotten the message that you can't live beyond your means. Here's a case in point. A retired couple from the American Midwest called to inquire about hiring me as their financial advisor. It soon became apparent that we were not a good fit. They had lost two properties in foreclosure, and they carried tons of credit card debt despite their ages (late sixties and early seventies). They told me that they had turned over a new financial leaf and wanted to start saving, even if it was only a couple of hundred dollars a month.
When I asked what they intended to do about their high-interest credit card debt, they said that they would default on it. I told them that they had an ethical duty to repay at least the principal to the credit card companies: "You took the money; you have an obligation to pay it back."
FIND YOURSELF IN ONE OF THESE STORIES
Ask yourself which of these options feels right to you. Most people want to blend these options a bit, but one will resonate overall.
• I want to save as much money as possible to leave to the next generation (save now to endow after death).
• I want to use my money during my lifetime to support the next generation (give while living).
• I want to enjoy things during retirement that I couldn't enjoy during my working life and still leave something behind for others (enhance my standard of living and leave something behind).
• I want to race my money to the grave and leave only enough to bury my corpse (spend now).
You need to listen to that little voice that says "yes!" to one of these options. Sometimes it helps to find yourself in a story, so here are four that illustrate the options just given.
Save Now to Endow After Death
Electrical engineers Aadi and Vanita live in a Boston, Massachusetts, suburb. With the exception of Vanita's 10-year hiatus while she was nurturing their two preschool children, they worked for the same company for nearly 40 years and are 3 years into retirement. They are fortunate to have both a defined-benefit pension and a 401(k), but the company has discontinued health insurance for retirees. Their children are married with families of their own; they are financially self-sufficient and will receive the proceeds of the couple's life insurance policies.
In addition to a mortgage-free home and $125,000 in savings, Aadi and Vanita own an apartment building that is currently valued at $5 million, but with a commercial loan balance of just under $2 million that is due in the next two years. The property generates sufficient income to pay the balance of the loan. Through a planned giving program, they have pledged the building to an organization that builds medical facilities in rural communities in India. The agreement includes a provision that up to $500,000 of the value can be diverted to their needs, but they are committed to leaving the entire value with the charity. They spend their time helping this organization reach out to other Indian expatriates who are in a financial position to help with its humanitarian work. This involves a moderate amount of travel, which they enjoy.
Aadi and Vanita have enough income to live comfortably in retirement, but Aadi's recent heart attack has made the couple appreciate the need to allocate some of their retirement nest egg to cover healthcare expenses throughout the rest of their lives.
Give While Living
Lincoln and Doris have been blessed with six children, all living near their parents in Charlotte, North Carolina. Since their children and now their grandchildren have always been the center of their lives, they want to provide for them as best they can during their retirement. When one of the kids needs orthodontics, her grandparents pick up the tab. Sundays are always spent around the large dining room table, and the grandchildren are now spilling over into the family room at card tables. Lincoln and Doris never miss a grandchild's dance recital or soccer game, and they plan to take each grandchild on a trip to a foreign country of the child's choice to celebrate his high school graduation.
Doris who is 62, is a medical social worker at a hospital and would like to reduce her hours significantly; Lincoln is an accountant, but not a partner in the firm, and at age 64, he is ready to retire. They will spend about $60,000 on themselves and their family yearly. While they have social security benefits of $35,000, they must make up the difference from the $1 million in their IRAs and 401(k)s. This means a balancing act of capital preservation and lifestyle choice so that they will not need to liquidate their paid-for home worth $500,000 for many years to come.
(Continues...)
Excerpted from Retirement GPS by Aaron Katsman. Copyright © 2013 Aaron Katsman. Excerpted by permission of McGraw-Hill Education.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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