How to Get Your Financial Life in Order on a Snow Day
Snow days can bring a welcome respite from the rush and bustle of everyday life. Suddenly housebound with nowhere to go and nothing to do, it can be a rare chance to just sit quietly watching the snow fall, or maybe to tackle some household projects you’ve been putting off. Here’s an idea that can combine deep thought with something you might have long neglected: Take some time to get your financial life in order.
Here are a few financial things to think about if you find yourself with a snow day:
Many people think that contributing to a 401(k) means they have “planned” for retirement. They may also think that the plan administrator for their employer’s plan is their personal “financial adviser.” If you dig a little deeper, you may find that many people are not sure what percentage of their income they are contributing or whether or not they receive an employer match, and how much of their contribution is matched, if any. Quite often, the last time they thought about their retirement plan was their first day with a new employer, when they were automatically enrolled with a default contribution of three percent. Is saving three percent of their salary enough to fund retirement? Maybe, but most likely not. People don’t know because they don’t take the time to find out.
Since a snow day provides the time to do some thinking, take a moment to envision what sort of retirement you want:
When do you see yourself retiring? A vast majority of people just give what they believe is an acceptable answer, such as 65 or 67. However, the age you plan to retire has a huge impact on how much you need to save NOW and how much discretionary income you can afford to spend. To put the question another way, when do you want to be in a position where you don’t have to work?
An ideal retirement plan should account for unexpected changes. Sometimes, because of a lack of planning, people are forced to work longer or forced to retire earlier than originally planned due to economic circumstances or poor health. Taking care of an elderly parent or a sick child can be financially catastrophic to personal financial goals if the plan doesn’t allow for such expectations.
Compared to your current income, do you plan to spend more or less in retirement? If you are living on $10,000 a month today, how does that number vary in retirement? Many people expect to downsize their standard of living when they retire but forget to think of those trips they’ve dreamed of but always put off because they didn’t have the time. Many people travel more in retirement, so those expenses should be included and considered in your planning. Even without travel, think about the money you may spend on the weekends when you’re not working. In retirement, every day is the weekend!
Are you saving enough? You can’t just assume that contributing the default amount to your 401(k) is going to get you to where you need or even want to be. If you need $10,000 a month in retirement income starting at age 65, it is wise to make sure you have enough money until at least age 95. People are living longer, and, if they haven’t planned accordingly, they may find they are running out of money and become fearful they will outlive their retirement accounts.
For example, if the goal is to continue living on $10,000 per month and we need 30 years of distribution, that total, not even counting for inflation, is 3.6 million dollars. Even at $5,000 a month, that is still a significant amount of money totaling a need of $1.8 million. What actions are you taking today to achieve that goal?
Have you thought about your withdrawal strategy, or taxes? It’s not only how much you save, but also how you save it and how (and when) you plan to withdraw it. If the market takes a downturn, will you be forced to liquidate depreciated stocks to raise cash, or do you have other funds you can tap that will allow your market based investments to recover? Are you contributing to other accounts other than employer sponsored retirement accounts, or is there an old 401(k) that is still sitting with a previous employer? What are the tax consequences of these accounts? People look at the money in their 401(k) as something that is all theirs, forgetting that it is tax-deferred money and the IRS is going to take a large chunk of everything taken out of that account. Roth accounts, amongst other strategies on the other hand, are not taxed on withdrawal.
If you’re not working with a financial adviser who can help you think clearly about these things, it can be absolutely financially catastrophic. You only get one shot at retirement. If you work ONE day past your retirement age goal, it should only be because you want to still be working.
A snow day might also be a good time to do a little college planning as well, assuming your kids don’t keep you too busy with sledding and other activities while they are off from school themselves.
Parents have many different views on the right approach to paying for college. Some parents are willing to do what they can, but they feel that paying for college is ultimately the child’s responsibility. Other parents are dedicated to ensuring there are funds to pay for college regardless of what school their children choose or its cost.
What is your stance? Are you saving for your children’s college education and to what extent? What does the timeline look like for when they’re going to college? Is all your money in the market? If yes, what happens if the market drops? Importantly, what sort of impact might your current savings plan have on the financial aid they could receive?
Be careful of cutting back your retirement contributions in order save for college. You can borrow for education, but you can’t borrow for retirement.
Retirement and college planning are what I like to call “offensive financial planning,” where you set a goal and take steps regularly to make it happen. It is equally important to consider “defensive financial planning,” where you put things in place to protect against the unforeseeable. If you or your spouse don’t make it home from work tomorrow, can the surviving spouse maintain the household’s standard of living on their income alone? If the answer is “no,” is there life insurance in place to replace that income? If there is, how did you arrive at that number? All the planning for retirement and college will be derailed if you haven’t put enough life insurance in place to ensure your family can maintain its standard of living.
All too often people may think they have enough insurance through their work, but the one or two times your salary that you typically get from employer-provided life insurance probably won’t cut it. It’s nice to have and it will help with immediate expenses, but it usually can’t form the basis of any real financial plan. Many companies allow you to purchase up to 5x your salary, which costs you pennies. However, frequently, employer life insurance disappears the minute your employment is terminated. What if your new employer doesn’t provide that benefit, or what if you are not insurable due to health issues or concerns? Typically the best life insurance you can have is a policy you own.*
If you were to ask your children the three most important things in their world, they would probably say, “1) my parents, 2) my home and 3) my friends.” As an adviser, I have no control over whether your children will lose their mom or dad, but I can help make certain that the surviving spouse, in their grief, doesn’t lose the home, thereby possibly losing the school their kids attend and their friends as well.
Many people ask me, “How much life insurance should I have if I have 0, 1, 2, 3, 4 kids?” It’s hard to place a dollar amount on how much life insurance one will need without sitting down and understanding one’s lifestyle. How much money flows into the house? How much flows out? What are the long-term goals? There needs to be a process of thought put behind it. A financial professional can help you answer these and many other questions.
Most importantly, there is no right or wrong amount of life insurance. It depends on what you and your family need the life insurance to accomplish. Everybody has a different relationship with money, and everybody has different needs.
A snow day is a great time to find the right professional that can help you. They will do their best to understand and respect your wants and needs, and simultaneously work to help you achieve financial security both defensively and offensively.
*Life insurance policies are subject to eligibility requirements, and contain exclusions, limitations and certain requirements to keep them in force.