Cut Expenses, Retire Sooner

While we use robust retirement planning software to carefully consider retirement readiness, many of these scenarios end up strikingly close to the familiar “four percent rule”. The four percent rule suggests that you can start with 4% withdrawals from a diversified portfolio, increase your spending to keep up with inflation, and you are highly likely to have your money last for a full retirement of 30 years or more. (Bengen, 1994, Journal of Financial Planning)

Under the four percent rule, If you have one million dollars, you can retire and withdraw $40,000 a year in the first year. If you need $5,000 a month ($60,000 a year), you would want a nest egg of at least $1.5 million. If your goal is $8,000 a month, you need to start with $2.4 million. 

We spend a lot of time calculating your finish line and trying to figure out how we will get there. Once we have that target dollar amount for your portfolio, then we can work backwards and figure how much you need to save each month, what rate of return you would need, and how long it would take. Is your investment portfolio likely to produce the return you require? If not, should we change your allocation?

What we should be talking about more is How can you move up your finish line? When you reduce your monthly expenses, you can have a smaller nest egg to retire and could consider retiring sooner. In fact, under the four percent rule, for every $1,000 a month you can reduce your needs, we can lower your finish line by $300,000. Think about that! For every $1,000 a month in spending, you need $300,000 in assets! 

If you can trim your monthly budget from $5,000 to $4,000, you’ve just reduced your finish line from $1.5 million to $1.2 million. It’s not my place to tell people to cut their “lifestyle”, but if you come to the conclusion that it is in your best interest to reduce your monthly needs, then we can recalculate your retirement goals and maybe get you started years earlier. 
Cutting your expenses is easier said than done, but let’s start with five key considerations.

1. Determine your fixed expenses and variable expenses. Start with your fixed expenses – those you pay every month. Housing, car payments, insurance, and memberships are key areas to look for savings. Personally, I like to see people enter retirement having paid off their mortgage and being debt free. In many cases, it may be helpful to downsize as well, which can reduce your monthly costs or free up equity to add to your portfolio. Downsizing or relocating often also lowers your taxes, insurance, utilities, and maintenance costs. 

Your house is a liability. It is an ongoing expense. Often, it is your largest expense and therefore the biggest demand on your retirement income needs. (And now 90% of taxpayers don’t itemize and don’t get a tax break for their mortgage interest or property taxes.)

2. Insurance costs are surprisingly different from one company to another. Unfortunately, it does not pay to be loyal to one company. If you’ve had the same home and auto policy for more than five years, you may be able to reduce that cost significantly. If you’d like a referral to an independent agent who can compare top companies for you and make sure you have the right coverage, please send me a reply and I’d be happy to make an introduction.

3. When creating your retirement budget, make sure to include emergencies and set aside cash for maintenance and upkeep of your home and vehicles. Just because you didn’t have any unplanned expenses in the past 12 months doesn’t mean that you can project that budget into the future.

You will need to replace your cars and should plan for this as an ongoing expense. If you can go from being a two or three car family to a one car family in retirement, that could also be a significant saving. If you only need a second car a few days a month, it may make sense to ditch the car and just use Uber when you need it.

Read more: Rethink Your Car Expenses

4. Healthcare is one of the biggest costs in retirement and has been growing at a faster rate than general measures of inflation such as CPI. This can be very tricky for people who want to retire before age 65. If you don’t have a handle on your insurance premiums, typical costs, and potential maximum out-of-pocket expenses, you don’t have an accurate retirement budget.

5. People retire early usually start Social Security as soon as they become eligible, which for most people is age 62. This is not necessarily a good idea to start at the earliest possible date, because if you delay your benefits, they increase by as much as 8% a year. If you have family history and personal health where it’s possible you could live into your 80’s or 90’s, it may be better to wait on Social Security so you can lock in a bigger payment.

Read more: Social Security: It Pays to Wait

Reducing your monthly expenses can significantly shrink the size of the nest egg needed to cover your needs. We will calculate your retirement plan based on your current spending, but I would not suggest basing your finish line on a hypothetical budget. Start making those changes today to make sure that they are really going to work and then we can readjust your plan. 

Extend Your Car Warranty for Free

When it comes to saving money, there are two expenses which will make or break your budget: your home and your cars. If you keep those expenses below your means, you will have a surplus to save and invest. That’s how you generate wealth. 

Unexpected car repairs are the worst. You can spend thousands and it feels like you are just flushing your money away. That’s why we love car warranties: they help extinguish our fear of repair bills. For a lot of people, when their car warranty runs out, they want to get a new car because they can’t stand the thought of a catastrophic repair bill. 

But buying a new car every three or four years exposes you to the steepest part of the depreciation curve. Most cars will lose 50 to 60 percent of their value within five years. Owning new cars is trading the mere possibility of car repair bills, which might not happen, for the certainty of significant depreciation, which is inevitable.

Of course, car dealers would love to sell you an extended warranty. It’s one of their most profitable areas. That alone makes me think they are not worth it. You are spending $2,000 to buy a $1,000 warranty. And the insurer probably only pays out 50 to 80 cents in claims for every dollar in premiums it receives. It seems like you would be betting against yourself. 

I don’t usually endorse products or services here in my newsletter, but I came across a benefit which I think many of my readers might enjoy. It’s a way to provide protection against unexpected car repairs. This might allow you to keep your vehicles for longer and then direct more savings into your investment portfolios. (Selfishly, I will make more if my clients have larger investment portfolios, but hopefully that’s a goal we can both agree on!)

There is a company called BG Products which makes fluids for cars and trucks. They make motor oil (including synthetic), transmission fluid, brake fluid, anti-freeze/coolant, steering fluid, etc. BG offers a Lifetime Protection Plan that when you use their product regularly, if that component breaks down, they will reimburse you for the cost of the repair, up to a specific limit.

Best of all, they will cover your car, even if you don’t start using their fluids until 50,000 or 100,000 miles. That means that if you have a car with 80,000 miles, past the manufacturer’s warranty, you can actually add protection to your vehicle today. They offer double the protection if you start before 50,000 miles, so you might want to start sooner if you can. 

There is no limit on miles. As long as you continue to change the fluids within the specified number of miles, your car will be covered. You could keep your car for 300,000 miles and it would still be protected.

Here are the service intervals required for the Lifetime Protection Plan. If your manufacturer suggests more frequent changes, I would follow those instructions. To stay under this protection plan, you need to replace fluids before reaching these limits.

Engine Oil: 10,000 miles

Coolant: 30,000 miles

Transmission Fluid: 30,000 miles

Power Steering: 30,000 miles

Brake Fluid: 30,000 miles

The BG plan will reimburse repairs if these components break, but not for normal wear and tear. You would have to get the repairs done and then submit your receipts for reimbursement, which are subject to the following limits:

Plan 1, started before 50,000 miles: $4,000 coverage

Plan 2: started between 50,001 and 100,000 miles: $2,000 coverage

Full details of covered components HERE.

BG Products are not available in stores, you have to find a shop which uses them. Here in Dallas, I have used M2 Auto Repair, near Love Field. I’ve had a great experience there and can recommend them. If you talk to Eddie, the owner, please tell him I sent you.

If you’re not in the Dallas area, you can find a BG Dealer here. I have not filed a claim with BG, so I cannot vouch for that process, but obviously it is going to be very important to be able to document that you did have the services performed within the mileage limits and that the repairs required were on the specific parts covered by the protection plan. 

It doesn’t cover electronics, which is an increasingly large component in modern cars, but can give you some peace of mind over mechanical failures. If you’ve used BG and had a claim, please send me an email and tell me about your experience. 

I am aware that other fluid makers offer warranties, including Mobil 1Castrol, and Valvoline. In reviewing their warranty pages, they may offer similar benefits, but I think it may be more difficult to document proof of eligibility, and they don’t cover all of the systems that BG Products covers.

I’d also love to hear from you if you have ever filed a claim with another oil company and what result you received.  Regular maintenance is an important part of keeping your car healthy, and it’s great to see a company stand behind its products. I’m no expert on cars, but I have spent a lot of time looking at spending behavior. Any techniques which can help us spend less over the life of our vehicles will help you achieve your other financial goals. So, even if you don’t end up using the Lifetime Protection Plan, just knowing you were covered may provide you with the extra confidence to keep you car for 150,000 or 200,000 miles.

How Much Income Do You Need In Retirement?

Many people significantly underestimate how much income they will need to maintain their lifestyle in retirement. We’re going to point out how people underestimate their needs, explain why a common “rule of thumb” is a poor substitute, and then share our preferred process.

If we begin with the wrong budget, then our withdrawal rates, target nest egg, and portfolio sustainability are all going to be inaccurate, which is very difficult to correct after you’ve retired.

In general, when I ask someone to estimate their monthly financial needs, they use a process of addition. They think of their housing expenses, utilities, taxes, food costs, etc., and try to add those up. Unfortunately, the number many arrive at can be significantly too low, and here’s how I know.

They tell me that they spent $5,000 a month, or $60,000 last year. But I ask how much they made and they tell me $150,000. How much did they save last year? $30,000. To me, that suggests they spent $120,000, not $60,000. If they only spent $60,000, they would have saved more than $30,000. You either spend or save money; if it wasn’t saved it was spent, even if that spending wasn’t discretionary.

Here’s why most people fail with the “addition method” of trying to create a retirement income budget:

  • They don’t include taxes. Taxes don’t go away in retirement; pensions, Social Security (up to 85%), and IRA withdrawals are all taxable as ordinary income.
  • Unplanned expenses such as home repairs, emergencies, or car maintenance can be substantial and fairly regular, if not consistent or predictable.
  • Your health care costs may be much higher in retirement than you anticipate, especially in the later years of retirement.
  • You may finally have time to pursue activities which you did not have time for while working, such as travel, golf, or spoiling your grandchildren. With an additional 40 hours a week available, you will likely be spending money in new ways.

Some financial calculators use a rule of thumb that most retirees will need 75% (or 70-80 percent) of their pre-retirement income. This is called the “replacement rate”. And while there have been a number studies that confirm this 75% estimate as an average, its applicability on an individual basis is poor.

We know for example, that lower income people will need a higher replacement rate than higher income people. That’s because the lower income levels may have had a lower savings rate, a smaller proportion of discretionary spending, and little tax savings in retirement. Higher income workers may have been saving more and find significant tax savings in retirement, and therefore have a lower replacement rate.

Instead of trying to use an addition method or a one-size-fits-all rule of thumb, I’d suggest using subtraction:

  1. Begin with your current income.
  2. Subtract any immediate savings you will experience in retirement, including: the amount you were actually saving and investing each year, payroll taxes (7.65% if a W-2 employee), and work expenses, if significant.
  3. Examine your sources of retirement income and if you calculate any income tax reduction, subtract those savings.
  4. Consider any increases in retirement spending, starting with health care costs and discretionary spending (travel, hobbies, etc.). Add these back to your spending needs.

Unless you are planning to have paid off your mortgage, substantially downsize your house, get rid of a car, or stop eating out, I think most people will initially continue their spending habits in retirement very much the same as they did while they were working. Like everyone else, retirees spend a significant portion of their income on things which they did not want (property tax, income tax, insurance) and on things which were not planned (replacing a roof, medical expenses, etc.).

Underestimating your retirement income needs could lead to some very painful outcomes, such as depleting your nest egg, being forced to downsize, or impoverishing your spouse after you pass away. You have to still plan for occasional expenses, such as replacing a car, home repairs, and emergencies, in a retirement budget.

If you’ve calculated your retirement income needs and your planned budget is significantly less than your pre-retirement income, please be careful. When the number you reached through addition isn’t the same number I reach through subtraction, it’s possible you are not budgeting for some costs which you currently have and are likely to still have in retirement.

23 Ways to Save Money

A penny saved is a penny earned. I write often about how much you might need to invest for retirement, college, and other financial goals. While I can help with the financial planning strategies and investment advice, it’s up to each client to save the cash required to meet these goals. And this crucial first step is often easier said than done!

There is some amount that each family is comfortable saving. Unfortunately, for many of us, the amount we need to save is often much larger than the amount we’d like to save. Here are 23 ways to save money, hopefully with little or no sacrifice on your behalf.

1. If you pay off your credit card monthly, use a cash back rewards card rather than a debit card, cash, or check. I put everything I can on the credit card – and have gotten back $907 so far this year.

2. Drop your landline and use your cell phone as your one and only phone. You still have a landline?

3. Drop cable or satellite for Netflix or another streaming service. We probably watch too much TV as a society, myself included. Read a book instead.

4. Buy used items online, from Craigslist, or at local sales.

5. Sell your unneeded items on Craigslist. Cash is better than a tax deduction of the same amount.

6. Wait to buy items on sale. Never pay full price. There are a number of apps that scan barcodes and will show you reviews and prices of that item.

7. Get a programmable thermostat. For every degree you adjust the thermostat, you may see a 3% change in your utility bill.

8. Replace light bulbs with LEDs. Prices have come down quite a bit in the last three years. They use a fraction of the electricity and will last for years. I’m a fan of the Cree floodlights.

9. DIY Home Energy Audit. US Department of Energy instructions here.

10. Compare your Texas electric rates at PowertoChoose.org. These tend to creep up after your initial guarantee period is over.

11. Shop your home and auto insurance every three years.

12. Save money on pets: 5 Ways to Save Money When Adopting a Pet.

13. Volunteer. Looking for something fun and interesting where you can make the world a better place? Find an organization doing great work and volunteer! You don’t have to spend a lot of money to have an interesting and satisfying weekend.

14. Prepare meals at home or eat at home. If you are going to eat at a restaurant, lunch is usually much less expensive than dinner.

15. Shop at Target? Get the Red Card for 5% off and free shipping. Sign up for the Cartwheel app for additional discounts.

16. Shop at Walmart? Download the Savings Catcher app. You scan your Walmart receipt and if they find a lower price elsewhere, they refund the difference to you.

17. The car advice I always give, the short version: Keep your current car for as long as you can. When you must buy your next vehicle, buy used and pay cash.

18. You don’t save much by doing your own oil changes. But if you are mechanically inclined, you can save a lot of money by doing your own brake jobs and other routine maintenance and repairs. Check YouTube for video instructions.

19. If your car is out of warranty, find a reputable independent mechanic rather than having all work done at the dealership. Develop a relationship with one mechanic.

20. Cheapest local gas prices: gasbuddy,com.

21. Do you need two cars? How often? Could you get by with one car plus using a Taxi or Uber a few days a month?

22. Don’t want to spend hours tracking a monthly budget? Read my tips about Reverse Budgeting and putting your savings on autopilot.

23. For inspiration, I subscribe to a number of frugality blogs which share ideas, frugal fails, and a chance to read about others’ journey. Media bombards us with a message of consumption, but not everyone buys into the materialism they’re selling. We all need a reminder from time to time that “more stuff” or the “latest and greatest” is neither the source of happiness nor financial independence! Make your goals the top priority for your cash flow.

How to Succeed at Financial Resolutions

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I know that New Year’s Resolutions are often lampooned as pointless and misguided, but I, for one, love the idea that people can change and take steps to improve their life. To me, a resolution is the wonderful intersection of optimism to motivate you and realism to recognize that it takes hard work to accomplish worthwhile goals.

Fidelity Investments has undertaken a New Year Financial Resolutions Study for seven years and found that individuals who started 2015 with a financial resolution feel more optimistic, are more debt-free, and feel more financially secure than individuals who did not make a resolution. The key to succeeding with a resolution, in my experience, is having the ability to translate a desire into a clear objective, determining how to accomplish that goal, and then having the discipline to stick to your plan.

In other words, a New Year’s Resolution is just a small scale financial plan. Here are three categories of financial resolutions and how to best achieve those objectives:

1) That one thing you’ve been putting off. A lot of times, people have something they know they should be doing, but haven’t started. Maybe they don’t know where to begin, are overwhelmed by the number of decisions they will have to make, or maybe there just never is enough time.

Here are some classic examples of financial needs that many organized, otherwise responsible people have not “gotten around to”:

  • Starting a college fund for children or grandchildren.
  • Securing a term life insurance policy to protect your spouse or loved ones.
  • Establishing your will and estate planning documents.

If these are on your “keeps me up at night” list, give me a call and we will accomplish these in no time. You haven’t done this before, but we do this all the time. Start now and you could have these New Year’s Resolutions wrapped up before the end of January!

2) Save more. Many families worry they are not saving as much as they should. For some, it may be setting up an emergency fund; for others it may be saving for retirement, college, or other long-term goals.

Whatever your investment need, you are more likely to be successful when you put your saving on auto-pilot with electronic monthly contributions. When you pay yourself first every month, most people find they don’t even miss the money. Spending often takes up whatever amount we don’t save; if we recognize this, then we can also understand that it is usually very easy to adjust our discretionary expenses when our saving is automatic.

While the 401(k) is the classic example of automatic investing, we can just as easily use the same approach for an IRA, taxable joint account, 529 college savings plan, or any other type of investment vehicle. Saving more doesn’t happen by accident. You can’t wait until next December to do something if you expect to be a good saver in 2016.

3) Reduce Debt. If you are looking to reduce your spending to get out of debt, you can follow the same advice of making automatic monthly payments. Focus on paying down your highest interest rates loans first.

If you’re not sure where your money goes every month, your first step is to get better organized. Technology can be a big help; consider an app like Mint or Quicken to track your spending. Increasing your self-awareness is an essential step towards changing behavior.

A financial planner can help you with all of your financial questions and goals. Besides bringing expertise, training, and real world experience, a planner can also offer two of the most important elements of success: a concrete plan and accountability to stay on course.

If you are thinking about including financial goals in your New Year’s Resolutions, don’t go it alone, give me a call! I’m here to help.

The Benefits of an Older Car

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The average car on the road today is 11.5 years old today, according to USA Today. Today’s cars are more dependable and long-lasting than ever and yet for many consumers, transportation remains their second largest expense after their home.

Last November, I purchased a used car, and not the typical 2-3 year old gently used vehicle, but a 2002 Toyota 4Runner with 179,097 miles. I wanted a larger vehicle to transport my three big dogs and wanted something I wouldn’t worry about getting muddy or scratched.

Admittedly, I have been leery of older cars. What if they break down? The last thing anyone wants is to have unexpected large expenses trying to keep a dying vehicle on the road. And I especially do not want to have an unreliable or unsafe vehicle when it is 102 degrees in July or 20 degrees in January.

Well, I’ve lived with my old car for a year now and will give you a full report, including a breakdown of all my costs. I drove the car almost every day and put just over 11,000 miles on this year (the photo is my current odometer reading: 190,182 miles). During that time, it has been 100% reliable (knock on wood…). The car has always started and worked perfectly. I have had zero breakdowns and no unplanned maintenance.

As a student of behavioral finance, I think people’s car buying choices are interesting to study. Most of us buy what we want, but then create a rationalization that sounds good for why we “need” a new car. Oftentimes, it’s really about projecting an image of success or trying to fit in with others in the office, neighborhood, or group of friends.

Many people prefer a new car, under warranty, to avoid the unpleasantness of having to pay for car repairs. This is known as “loss aversion”, which means that the pain of a $500 loss is much more intense and memorable than the satisfaction of a $500 gain.

Getting a new car every three years may cost $400 or $500 a month regardless of whether you lease, finance, or pay cash. With an older car, your depreciation can be very small, and instead your main expense is typically maintenance. You may end up spending $800 twice a year in repairs and upkeep. That sounds terrible, but which co