05/30/17

Try Mental Accounting To Make Your Retirement Dreams Come True

By Robert Powell, April 5, 2017, USA Today

You might not know what it’s called, but odds are high you do it – you craft systems that enable you to make countless decisions about money without breaking into a sweat. Or at least so writes Diane Garnick, the chief income strategist at TIAA and the author of a just-published white paper, Income Insights: Mental Accounting in Retirement.

According to her paper, this system – more formally referred to as mental accounting in the world of behavioral finance – “is an economic concept that suggests people code, categorize and evaluate activities based on a variety of subjective criteria, ignoring that funds are transferable.”

Others share that point of view. “Mental accounting is essentially the household equivalent of financial accounting, but it is often done without conscious thought,” says Richard Thaler, a professor at the University of Chicago Booth School of Business and author of Misbehaving: The Making of Behavioral Economics. “A primary insight is that people treat various mental ‘buckets’ of money as non-fungible, meaning that there are implicit rules against taking money from one account – the children’s college savings account – and spending it on something else, like a new TV.

And this system, according to Garnick’s paper, holds the possibility of delivering tremendous benefits. “With the right architecture, it can save us precious time, economize our thinking and increase our self-control,” wrote Garnick, who is also a board member at CFA Institute Research Foundation.

How so? Well, to understand ‘how so’ requires a bit of background. Prior to retirement, people routinely allocate some portion of their money to many buckets, and often over commit ourselves — 25% to housing, 25% to food, 25% to loans, and of course, another 50% to entertainment. “We don’t necessarily make the best decisions, but if we make a mistake we have time on our side,” Garnick wrote.

In an email, Garnick noted that mental accounting enables people to immediately discover which retirement goals they will be able to achieve. “This framework enables a 30-year-old to quickly see if they are saving enough to enjoy hobbies in retirement or if they will be just scraping by, ” she wrote. “The insight offered by mental accounting can be powerful since it gives people time to adjust their savings to meet their needs.”

Mental accounting in retirement

But come retirement, your mental accounting requires a change in mindset, wrote Garnick. Among other things, you no longer have time on your side should you make a mistake with your money.

So, rather than allocate some funds to many buckets all at once, Garnick proposes fully funding one bucket before moving on to the next. “This framework offers transparency into the age-old question of how much guaranteed lifetime income each household needs while simultaneously offering savers insight into which goals they are on track to meet,” she wrote.

For instance, instead of allocating 25% to housing, allocate a portion of your retirement income to funding necessities (housing, transportation, personal items, entertainment and taxes), then fund health care expenses, then emergencies, then fun or what some call discretionary, and lastly bequest.

And this change in mindset won’t be easy. “I think the most difficult aspect of mental accounting and retirement savings is when households switch over from saving up for retirement to spending down,” says Thaler. “This requires an entirely new mindset. Most of our lives we live on a budget: Spend less then you earn, and put some aside for later. Then they are confronted with the much more difficult task of taking a pile of money and making it last over an uncertain lifetime. Hard!”

Would a budget be better than mental accounting?

On the surface, it might seem a budget would be better than mental accounting. But that’s not necessarily the case. “While creating a detailed budget is ideal, many of us don’t invest the time necessary to start one, let alone maintain it with all of life’s unexpected expenses,” wrote Garnick. “Mental accounting provides a framework that enables people to make decisions at the margin without placing their economic future at risk.”

The four-box approach

To be fair, mental accounting resembles what some call the four-box strategy whereby you use guaranteed sources of income (such as Social Security, a traditional defined benefit plan, a guaranteed lifetime income annuity) to fund essential expenses, including recurring health care expenses, and risky assets (your retirement accounts) to fund discretionary expenses and bequests.

And that approach has merit too. “When it comes to retirement there are two kinds of people in the world,” wrote Garnick. Those with old-fashioned pension plans and those in the YOYO generation, which stands for ‘you’re on your own.’”

And both kinds of people, Garnick said, can be well served by securing guaranteed income that covers their necessities. This includes social security, a pension if you have one, and guaranteed lifetime income for the YOYO generation.

As for matching risky assets with discretionary expenses an expert said it’s a good strategy too. “If (investors) treat retirement accounts as long-term investments that should remain untouched, they are more likely to reach their financial objectives,” said Victor Ricciardi, a finance professor at Goucher College and co-editor Investor Behavior: The Psychology of Financial Planning and Investing.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

05/23/17

Who Holds The Purse Strings For Couples?

By Karen Demasters, April 7, 2017, FinancialAdvisor.com

LIMRA, a research organization for the insurance and financial services industries, set out more than 50 years ago to find out who makes the financial decisions for young couples.

The firm has now completed its survey three times since 1965 and found that the person making the decisions, or whether the couple makes decisions jointly, has shifted over the years. The latest survey of 1,043 households of 25 to 44-year-olds with at least $35,000 in annual income shows decision-making is somewhat evenly split among the three categories considered by LIMRA: men, women and joint decisions.

Men are the financial decision-makers in 30 percent of the households and women in 34 percent. The couples in the report made joint decisions in 36 percent of the households.

In the first study in 1965, men were the decision-makers in a much smaller percentage of the households. In only 27 percent did men make the financial decisions, while in 39 percent it was the woman and in 34 percent it was both of them.

By 1990, the numbers had shifted. Men made the decisions 34 percent of the time, women 38 percent of the time, and couples together only 28 percent of the time. The financial decision-maker is defined by LIMRA as the person who pays the bills, keeps the budget and tracks expenses.

The decision-maker is 32 percent more likely to be extremely concerned about financial worries, including saving for retirement and maintaining the current standard of living should a wage earner become disabled or die. The study also found that 60 percent of couples do not strongly agree on their financial goals. In those cases, financial advisors must talk with both spouses, LIMRA says.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

05/15/17

7 Reasons to Work Part Time in Retirement

By Emily Brandon, April 10, 2017, US News & World Report

The financial benefits of a part-time job in retirement are obvious. You bring in some extra income, which gives your savings more time to grow. But many retirees also continue to work for the mental stimulation and social perks. Here’s a look at some of the benefits of getting a part-time job in retirement:

Social opportunities. If you do most of your socializing with colleagues at work, you might find retirement to be isolating. Retirees seldom get invited out to lunch to chat about the latest project or to company gatherings. A part-time job will give you new co-workers, customers or clients to chat with. You might decide to go out for drinks after work or get an invitation to the holiday party. “Some of the hazards of retirement, such as a lack of socialization, are really mitigated if you continue to work,” says Dr. Michael Roizen, the Cleveland Clinic’s chief wellness officer and co-author of “AgeproofLiving Longer Without Running Out of Money or Breaking a Hip.” “The people who don’t retire or who come back to work part-time live longer and live healthier with less disability.”

New challenges. After the initial thrill of sleeping in and relaxing wears off, you might want to try something new in retirement. A job can provide mental challenges that keep your mind active and your brain working properly. Writing a report, making a sale or learning how to use a new technology all take mental effort and provide stimulating new challenges for your retirement years. “Try to think of the things that you feel good about or passionate about or have an interest in,” says Sally Balch Hurme, author of “Get the Most Out of Retirement.” “Leaving your regular job allows you to explore something new.”

Physical activity. Without a job to go to, you might find yourself watching increasing amounts of TV. At a minimum, most jobs require you to get dressed and drive to your workplace. Some jobs require standing, lifting and other forms of physical activity. “The people who work are more physically active,” Roizen says. They are less likely to develop chronic diseases if they are still physically active in retirement.”

An identity. The first thing you are asked when you meet someone new is often, “What do you do?” Most people answer this question with their job title. Retirees often lack a simple answer. Your job typically says something about the role you play in your community. A part-time job can give you a sense of purpose and an opportunity to feel useful to someone else. “You can build on your past experiences, your past skills and your past colleagues to look for that part-time job, or you can create your own new part-time job based on your interests,” Hurme says. “Your enthusiasm for the topic or the area will put you ahead in becoming a successful employee.”

Extra income. Some people need to work in retirement to pay for basic necessities, while others earn a paycheck in order to improve their retirement lifestyle. A retirement job might make it possible to eat at nicer restaurants, take on more ambitious travel plans or spoil your grandchildren. A paycheck allows you to withdraw less from your savings every month, which gives your nest egg more time to grow and can help your savings last longer. “People don’t realize how much they can affect their prospects by retiring later,” says Steven Sass, a research economist for the Center for Retirement Research at Boston College. “You need less money and you have more in your 401(k) and from Social Security.”

Health insurance. Some part-time jobs come with health insurance, which can be particularly important for people who retire before age 65 and are too young to qualify for Medicare. If you can find a part-time job that provides health coverage, you might be able to retire at a younger age than you otherwise would. Just make sure you take care to enroll in Medicare when you turn 65 or leave the job providing the health benefits.

Set your own schedule. Working 40 or more hours per week with a limited amount of vacation time makes it difficult to fit in all the other things you want to do. A part-time job boosts your leisure time, but also maintains your connection to the workplace. You might be able to work half days, a few days per week or for only part of the year. The rest of the time you are free to pursue hobbies, relaxation or travel. Work is less stressful when you aren’t required to be there quite so much.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

05/1/17

The 7 Elements of a Successful Retirement

By Nick Ventura, April 12, 2017, Marketwatch.com

Start with well-defined goals, and revisit them at least annually. The closer you get to retirement, the more often you should sit down and think about your overall retirement strategy. In Ernie Zelinski’s “How to Retire Wild, Happy and Free,” the author makes the argument that setting your retirement goals expands far beyond managing your finances. Retirement planning should encompass all areas of your lifestyle, from where you live and where you travel to how you spend your day and what truly are your income requirements. Cookie cutter percentages and rules of thumb serve merely as benchmarks. Successful retirement planning requires flexibility and the willingness to look at all aspects of your life.

Many people get great satisfaction from work. So, if you are retired, and you like to work, pick something you like to do and gain emotional satisfaction from that activity. This includes working for charitable causes, hobbies, family involvement, etc. These “jobs” may or may not come with financial remuneration. But that’s not the point; many people derive emotional satisfaction and self-worth from working.

Another aspect of retirement is lifetime learning. Staying relevant in today’s technology economy requires a willingness to learn and adapt. Consider this: most medical professionals would agree that 20% to 30% of medical knowledge becomes outdated after just three years. Keeping current on technology and medicine will certainly enhance your retirement success.

Budgeting is more than setting a top-line spending number based on a pre-arranged percentage. Often times, we work from the bottom up, exploring what a client actually spends, instead of what they think they spend. It is not uncommon for individuals to drastically underestimate their spending on non-essential items. How much is your cell phone bill? Cable bill? Groceries? Starbucks?! We encourage clients to look at these as recurring payments. Not $140 a month, but $1,680 a year. Big difference, right? Getting as granular as possible is liberating when planning your retirement income.

While many planners suggest that a client will need two-thirds of their working salary to live comfortably in retirement, our experience shows that they may need anywhere from 50% to 150%. That’s a big range. Only by taking the time to define your goals, and the expenses that accompany them, can we put an accurate “spend” and “income” figure on a retirement portfolio. Even the best crafted budget has to be flexible. Emergencies happen. Grandkids happen. Sadly, health concerns happen. For both positive and negative circumstances, budgets can, and will, expand and contract. Build contingencies into your budget and income plan for a successful retirement.

Let’s consider income. Retirement income can come from many sources. Social security, pensions, retirement accounts, annuities, dividends, even earned income. As financial planners, we often hear stories from clients who “forgot” that they had earned an pension from an employer that they had left decades ago.

Take the time to go through your employment history and discover what benefits you may have forgotten. The impact could be meaningful from a cash-flow perspective. Inheritances can also create retirement income. Again, we often see clients receive an inheritance and immediately spend it. We’d rather go with the gift that keeps on giving – by investing the inheritance along the same lines of a retirement asset and creating a lifetime income stream.

Invest for your whole life. Just as your budget is not going to be static during your retirement years, the idea that your investment portfolio should never change is obsolete as well. We live in a world of massive disruption and change. Years ago, retirees would abide by the rule taking 100%, subtracting their age, giving them the “appropriate” allocation to the equity market (blue chips only!). Today’s world does not permit such simplicity of thought.

This philosophy created an asset allocation for retirees that was heavily dependent upon the fixed income markets. Risk in today’s fixed income markets is considerably less predictable. When creating income in a portfolio, investors should examine many different sources of income. Is it time for fixed or variable rate income sources? Are dividend producing stocks inexpensive or overvalued? Is real estate a proper asset to produce income? In finding these answers, a successful retirement income stream can become multifaceted and flexible.

Some investors have opted for “all-in-one” strategies, where a glide path mutual fund encompasses their entire retirement portfolio composition. These funds become gradually more conservative the closer an investor gets to retirement. Some funds manage “to” the retirement date, while others manage “through” the retirement date. If you own one of these vehicles, do you know what the fund is designed to accomplish? These funds use historical data to project out into the future the ideal asset allocation. We don’t know what the future holds, and advocate investments that have the ability to be flexible.

Successful retirement comes down flexibility. Flexibility of goals. Flexibility of income streams. Flexibility of spending. Flexibility of retirement investments. Flexibility of the overall plan. As you design your retirement plan, take the time to build in flexibility. It will help build peace of mind, and lead to a more successful retirement.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®