Investment Management

In this article, we examine the impact of a parent’s financial planning (or lack thereof) on their grown children.

Baby Boomers and (no) pensions

The Baby Boomer generation is the among first generations where pension income is likely not their main source of retirement income. In 1978, Congress passed the Revenue Act of 1978, which included a new section of the Internal Revenue Code, Section 401(k). Section 401(k) allowed employees to avoid being taxed on deferred compensation.

This meant that corporate employers were able to create plans, commonly called 401ks, that allowed employees to contribute to a retirement account using salary deferrals that were not taxed. As companies phased out pensions due to high costs and a changing workforce, more of the burden for retirement savings was shifted to employees.

However, not all Baby Boomers have saved what they needed to for retirement. And this lack of savings may end up impacting their grown children.

A recent article (link opens in new tab) from Yahoo! Money highlights this potential problem. The article cites an alarming statistic: “The median amount saved by those between 56 and 61 is $21,000, according to the Economic Policy Institute.”

Social Security may not be enough to make up the gap

I’ve talked in this space before about social security and how it may not make up the gap. According to Fast Facts and Figures about Social Security – 2019, as of December 2018 the average monthly retirement benefit for men is $1,627 and for women is $1,297. So the average retired couple, according to these figures, may be receiving about $35,000 per year from Social Security. Unless a couple has another income source, this average couple may have a pretty difficult time making ends meet. Now you can see why the median amount saved of $21,000 is probably not enough.

Grown children may have to help parents financially

And that’s where the grown children of Baby Boomers may be impacted. I personally know families who have had to make difficult choices in taking care of their aging parents. This could include parents moving in with their grown children and their family; grown children paying for some (or all) of Mom and Dad’s monthly bills; grown children quitting a job to care for a sick parent; and more.

Ask some uncomfortable questions

Do you know what your parents’ financial situation is? Even though the conversation might be difficult, in my view it’s always better to know the facts. Even if what you learn could be troublesome, it’s better to know in advance when you can do some planning around the possibilities than to be taken by surprise.

Do you have siblings? Talk things over with them and see how each of you might be able to help. And don’t forget to talk it over with your spouse as well.

Perhaps most important, make good saving choices now for yourself so that you don’t put your children in the same situation.

Need help with these conversations, or planning for your financial future? Contact Tree Fort Financial for help.

In this article, we examine a real life example of financial planning in action.

Several years ago, one of my clients came to me with a question.

Can I afford to retire early?

Jacki, she said, I really want to retire early. Can I afford to? (Some details have been changed to preserve client privacy.)

I did what financial planners do – I investigated. I asked a lot of questions, and did a lot of research. Let’s call my client Megan. I asked her: What do you imagine your life looks like if you’re not going to work each day? Would you stay in your current home, or live in a different style of home or even different state? What might you be willing to cut out of your current expenses, if you had to?

Then I did a lot of research. What social security or pension benefits, if any, would she qualify for? How much would it cost to live the way she wants in retirement? What would she do for healthcare, and how much would that cost? How much did she have accumulated in savings through her employer’s 401k and other resources?

After walking through several detailed scenarios and discussing the merits of each, Megan decided to retire. It might require some scaling back but at the end of the day, Megan felt the trade-offs were worth the extra time freedom she would gain by retiring early. She told me that she had confidence in her decision, and when her co-workers and loved ones questioned her (What are you going to do with all that free time? Are you sure about this?) – she could answer them confidently and with enthusiasm about what her life would soon be.

Can I afford to buy a sailboat?

Fast forward a couple years, and Megan’s enjoying retirement very much, but life is always different than you think it’s going to be. Megan called me with a new request: she really wants to buy a sailboat. She’s researched it, she says, and knows how much it will cost, where she will store it, how often she’ll use it, etc. She’s even been taking sailing lessons to brush up on piloting skills learned in her youth. She wants to know, can she afford it?

Fortunately, she had been following the initial financial plan we created a couple years earlier: living within her means, cutting back on unnecessary expenses, and investing the money she had available for potential compound interest growth.

After some more research, I was happy to be able to say, yes – spend the money on the sailboat! She was so excited to let me know when the boat was purchased, and has since spent many happy hours enjoying the boat with her friends and family.

When I think of what financial planning can do, I think of Megan’s sailboat.

I imagine Megan piloting the boat with confidence on a beautiful breezy summer afternoon, surrounded by good friends. The financial planning work she and I did together gave her the clarity to feel confident about some big decisions she made in her life. She understood the trade offs she might experience due to possible lower income in an early retirement. But she was able to make the decision that was best for her, with all the knowledge that a good financial plan can offer.

In the best case scenario, spending the time to work on a financial plan can deliver clarity around your finances in a way you never had before. And that clarity can lead to making more informed choices about what you do now with your money.

What’s your sailboat – or your dream for your future? What actions are you taking now to help you get there?

In this article, we examine how we can more be more mindful when it comes to our money.

Ask these questions before you spend

I recently came across a story (link opens in new tab) about the Japanese art of saving money which listed some questions which I love. The article says that before you pull out your wallet to buy that item, ask yourself these questions:

Can I live without this item?
Based on my financial situation, can I afford it?
Will I actually use it?
Do I have the space for it?
How did I come across it in the first place? (Did I see it in a magazine? Did I come across it after wandering into a gift shop out of boredom?)
What is my emotional state in general today? (Calm? Stressed? Celebratory? Feeling bad about myself?)
How do I feel about buying it? (Happy? Excited? Indifferent? And how long will this feeling last?)

https://www.cnbc.com/2020/01/08/how-this-japanese-method-of-saving-money-changed-my-lifeand-made-me-richer.html

The article mentions several other strategies for saving money (or, not spending money) which are also interesting, but these questions really spoke to me as they really focus on mindful spending.

We tend to get bogged down by stuff. There’s always another social media post of a cute outfit or gorgeous chef’s knife. There are ads everywhere, and even our friends tell us about all the latest stuff they happily purchased. But truly, when does stuff ever actually make us happy? That’s what I love so much about these questions. They ask us to think twice before buying. They remind me of the Marie Kondo question, does it bring you joy.

Some of the people I talk with are concerned that they spend too much and save too little. They know this is a problem, but they don’t know how to start to change this habit. That’s why I like to ask about life goals as part of the financial planning process – what do you imagine when you think of financial independence? If the way you use your money isn’t lining up with what you value, why not? I also sometimes ask people to look at their spending in a budget like I describe here (link opens in new tab).

The questions above could help in the moment of deciding to make a purchase. Being more mindful about what we purchase, pausing before pulling out the wallet or hitting the “buy now” button, is often a great first step in getting onto the path towards financial independence – or to whatever your financial goals might be. And they probably don’t include that cute new outfit.

In this article, we consider how psychology and softer sciences play a role in financial planning

Financial planning as a liberal arts based profession

Here’s a quote that for me, sums up so much of what I love about the art of financial planning. It’s from Dick Wagner’s book, “Financial Planning 3.0”.

“If we consider financial planning to be a liberal arts based profession, we need to know a lot about a lot, and then we need to know how it all fits together. Our client relationships and professional undertakings require us to engage in work and conversation encompassing geopolitical realities, the ever-unfolding miracles of the physical sciences, the anticipated tragedies of global warming, potential pandemics and peak oil as well as the mysteries of the spirit and multiculturalism. They take us all the way into the most intimate details of an individual’s personal aspirations. To work effectively with their money, we must grasp their most cherished family relationships and personal relationship with the divine. Our work requires us to see into the future even as we understand and appreciate the past. It forces to us to understand how intangible forces influence the survival of six and a half billion souls on a vulnerable planet. Face it, this work calls for wisdom and understanding on a par with any other profession or sensitive undertaking. No other profession needs more depth and breadth as essential aspects of its training and daily work.”

I recently heard an interview with a person who teaches financial planning classes at the university level, who recommends all her students take psychology classes. You may have the best financial analytical skills around, but you will have a hard time helping others with financial planning if you can’t communicate and understand why they make the decisions they do around money.

I feel strongly that my liberal arts degree has been a benefit in this profession. My degree taught me how to see the big picture; evaluate research and solve problems; how to communicate with others orally and in writing; what motivates people to make decisions, and more.

So much of our behavior around money seems to come from a place of emotion or deep-seated fears/anxieties around money. Here are some things I’ve heard clients tell me about money:

We never had enough growing up so I think I won’t ever have enough.

My parents always fought about money so I do everything I can to avoid money conversations with my spouse.

Money affairs should be kept private and not shared with anyone, even my spouse.

My mom lived check-to-check, racking up credit card debt while I was growing up so I don’t see any other way to be.

My dad was money-obsessed, so I’ve taken a different path. Maybe I should have learned a little more from him about money.

As an integral part of my practice, I strive to understand my clients’ emotions around money. I try to ask open-ended questions in my client interviews to help get at these underlying feelings around money. Questions like, How do you feel about the amount of money you have? How does your perspective on money differ from your spouse’s? What would you like your children to learn about money? What was your earliest memory of money?

I also try to let there be space in the conversation to allow my clients to feel comfortable to talk about what’s important to them and why. I find that when a safe space is created, people are willing to share these deeply personal feelings about money.

Ultimately, money is usually a means to an end. I think the way we use our money should be aligned with our life’s goals. I love learning what my clients imagine their life could be in the future. And I am so grateful that I have a chance to play a small part in helping them get there.

In this article, we look at millennials and retirement savings.

Millennial women may be saving less than millennial men

Millennials are the generation of people born between about 1981 – 1996, according to Wikipedia (link opens in new tab).

Recent research (link opens in new tab) indicates that millennial women are contributing 5% of their income towards a company retirement savings program like a 401k. But millennial men are contributing 8% of their income. Add to this the potential gender pay gap, and millennial women are saving even less.

On top of this, only 46% of millennial women feel confident about investing, according to this study (link opens in new tab). Another statistic from this same study: While a typical retirement costs $738,000, only 9% of American women have at least $300,000 saved. Of course, millennial women have some time to accumulate this amount of savings, but there’s no time to start like the present.

Start saving now – there’s no time like the present

It’s so important to save a portion of your income now, which can permit you to pay for yourself in the future when you are no longer able to work. With most people not receiving pensions from their employer, and social security typically only covering a small percentage of a person’s living expenses, the social safety net is not what it once was for retirees.

The good news is, millennials have a long time ahead of them in which to work, and save, for retirement. As a start, workers should typically save at least enough in their company’s 401k or other retirement savings program to earn the company match, typically around 3-5%. If they aren’t contributing at least this amount to their 401k, workers can be missing out on some valuable compensation which adds up over time.

Taking one step now towards saving, even if it’s a small percentage of your income, is still better than doing nothing. Talk to your financial advisor about your specific situation.

Get started now making good financial decisions for your future.