Molly asked if it would bother me if she had the Oscars on TV in our room while I drifted off to sleep. I couldn’t think of a more sleep-inducing television experience than a bunch of self-congratulatory Hollywood communists patting each other on the back and giving shout-outs to their middle school drama teacher who believed in them when no one else did. So I was happy to oblige that request.
I did slightly wake up about an hour later when she started yelling “WHAT IS HAPPENING RIGHT NOW??” But I was still more interested in sleeping, so I just rolled back over and didn’t think anything of it.
When I woke up the next morning, Twitter was ablaze with a bunch of jokes that I didn’t understand. After I finally saw the footage, the jokes started to make sense.
If you somehow haven’t seen the glorious awkwardness of the moment, you can check it out here.
As it turned out, the producers of something called La La Land spent about two minutes basking in the glory of their “Best Picture” victory before the red carpet got pulled out from under them and they had to cede the stage to the rightful winners, the producers of something called Moonlight. They handled it with as much dignity and class as anyone could have asked for, but you know that it felt like a punch in the gut.
Unfortunately, I’ve seen retirement pan out roughly the same way for people who didn’t do adequate planning.
It usually looks something like this…
You announce to everyone at work that you’re retiring. Some are jealous of you, others are genuinely happy for you, some seem to be outwardly happy but are actually jealous and don’t want you to know it. But there’s a lot of uproar and cake and congratulatory Hallmark cards and then you ride off into the sunset. The trophy is yours.
Maybe a year goes by. Or it could be several years. But then you start hearing this little whisper in the back of your head that says, “Hey bud, unless you die a lot sooner than you’re planning to, you’re going to run out of money.”
“But I had almost a million dollars,” you say. “Isn’t that plenty?”
So you go on for another few months and the whisper turns into a much louder voice.
So you go to visit a financial advisor. You talk about how much you don’t miss your job and the trip you took to Europe and the 14-pound catfish that you caught. And then the conversation turns to your portfolio and you discover that the whisper-turned-shout was actually right all along…you’re going to run out of money.
You’re now faced with a choice. You can either significantly reduce the quality of your lifestyle for your remaining years, or you can go back to work.
And now you find yourself in the same boat as the La La Land producers—you’re giving back your retirement trophy that you only got to hold for a couple of minutes before somebody came along and told you that you didn’t actually win. You try to handle it with dignity and class, but there’s no denying that it’s a gut punch.
Imagine how things would have been different if Warren Beatty had been handed the correct envelope and he’d simply read Moonlight as the winner from the very beginning. Sure, the La La Land guys would have been disappointed that they didn’t win, but they wouldn’t have had to endure the pain of having that momentary taste of euphoria only to have it yanked away moments later.
Now, imagine if you’d started working with a competent planner and constructed a well-conceived retirement plan a few years before you actually retired. You would have discovered that you actually couldn’t retire at the age you were planning, and while you would have been disappointed, at least you found out in advance. So you continue working for an extra couple of years, nobody else knows any different, and then you can enjoy the lifestyle that you wanted…instead of enjoying it temporarily only to have it taken away later.
The bottom line is that I’m constantly amazed by the number of people who waltz off into retirement without a real understanding of whether or not they’re retiring at the right time, or any inkling of how much they can legitimately spend each year once they no longer have a paycheck.
So just be sure you’re holding the right envelope. It’s much better for everyone that way.
10 Things To Know Before You Go To Big Debt Grad School
Guest Blogger: Matt Miner is the CEO of Design Independence, a company offering personal coaching for individuals looking for help with things ranging from student loan debt management to job interview strategies to personal budgeting, as well as business owners looking for advice on sales management, recruiting and retention, and manufacturing process improvement.
Many of our clients at Carolina Wealth Stewards find themselves at a stage in life where they’re trying to help their children or grandchildren navigate their higher education experience. In some cases, this means providing financial assistance; in other cases it means simply providing guidance and advice during the decision-making process.
Matt Miner recently published an article to help provide some guidance on grad school decisions, and he’s been kind enough to share it with us here, so that you can pass the wisdom on to anyone who's trying to make a decision about grad school…
10 Things To Know Before You Go To Big Debt Grad School
1. Big debt will change your decision-making process (even if you don’t believe it will)
When you come out of school with BIG DEBT it will affect your decision process about everything from your monthly budget to the risk you can take in your career to your range of choices for entrepreneurship.
When I emerged from grad school, my minimum monthly student loan payment was about $1600. My income was too high for any of the interest to be deductible, so every penny of that payment was funded with after tax funds.
2. You don’t know how your desires and abilities will change over ten or forty years
When you borrow for school, you do not know how your life will unfold over the coming decades. You are signing up to make that payment, no matter what your desires or abilities become over that time. Your family will change. Your interests will change.
You’re also assuming you’ll get the type of job with the pay you want. While the strength of the school you attend will play a big role here, in every class there are some students that struggle with job placement. If you graduate into an economic contraction, which realistically affects perhaps three classes in ten (for example, 2001, 2009, 2010), even more members of your class will struggle, regardless of how strong your school is. And the ones who will struggle most are the ones with the weakest “why” for being at school.
3. Growing your annual pay from $80,000 to $130,000 results in a ~30% increase in take-home pay after accounting for taxes and loan repayment, not a 62.5% increase.
Even if you graduate in a decent or great year and get the job you want, here’s how the math will work.
The average student entering an elite business school is walking away from perhaps $80,000 in annual cash compensation.
My assumptions for the following calculations are:
1. Single filer
2. Standard deduction
3. No dependents
4. 10% of gross pay deferred to 401(K) plan
5. Ignore state income taxes
At $80,000 per year, you’re paying payroll taxes (employee portion only) of $6,120 (6.2% Social Security Tax and 1.45% Medicare Tax) and Federal income taxes of $11,184, leaving you the following to invest, fund your lifestyle, and give away.
Annual Salary: $80,000
Payroll Taxes: ($6120)
Federal Income Taxes ($11,184)
401(K) deferrals: ($8,000)
Take-home pay: $54,696 per year or $4558 per month. You can reference some of my assumptions here.
The average student graduating from a top-ten business school is will earn in the neighborhood of $130,000 in their first full year out of school.
At $130,000 per year, you’re paying payroll taxes of $9232 (6.2% Social Security Tax on first $118,500 (2016) and 1.45% Medicare Tax on $130,000), and Federal income taxes of $22,899, leaving you the following to invest, spend, or give away.
Annual Salary: $130,000
Payroll Taxes: ($9232)
Federal Income Taxes: ($22,899)
401(K) deferrals: ($13,000)
Take-home pay: $84,869 per year, or $7072 per month. You can reference some of my assumptions here.
But now, based on an average loan balance of $106,000, you have a monthly loan payment of $1177 ($106K at 6% for ten years). Your true increase in take-home pay is from $4558 to $5895 ($7072 - $1177). This is a $1337 increase in monthly pay, and now you have outstanding debt of $106,000.
Also, your family life may be getting more complicated. You’ll want to find more money to save, either so you can retire someday, or perhaps to invest in a business. Your career desires may begin to change.
4. Borrow no more than absolutely necessary to finish your program. You’ll have to decide what is absolutely necessary, but it has something to do with “living like a student,” rather than living like a rockstar.
When you lever up for school, it is imperative that you borrow no more than absolutely necessary. Here’s why: Time isn’t money. Throw that axiom out. Time is life. When you give your time to anything (typing some words into a computer, having breakfast with your children, or working at the office for twelve hours) you are spending your life.
For every dollar you borrow, you are trading your future life (with interest!) for that dollar. And although fancy, high-stakes meetings, four star hotels, and black cars are enticing, let me share one fact and one opinion.
A fact: employers are no more generous with compensation and perquisites than they have to be to get and keep the employees they need. It’s a pure trade: their money, your life.
An opinion: unless you love the work, the juice is not worth the squeeze. There is nothing ultimately satisfying about fancy meetings, elite hotels (between midnight and 6 am please!), and car service when you’re apart from those you love, ragged out from long days, and working toward what is ultimately someone else’s goal.
Read the rest of the list at Design Independence...
BREAKING NEWS: The News Might Break You
Mark Twain said, “If you don’t read the newspaper, you’re uninformed. If you do read the newspaper, you’re mis-informed.”
Swap out “read the newspaper” for “watch cable news” and that’s still a startlingly accurate assessment more than 100 years after he said it.
Consider the following comments that clients have emailed to me in the last couple of weeks:
1) “I may be more nervous than some people, I’m a serious newshound. However, I’m getting extremely cold feet about the political situation. I know stocks continue to go up on business’ reaction to Trump’s policies, but I simply can’t imagine that his craziness isn’t going to catch up with him, and us.”
2) “I’d wanted to keep my accounts conservative until after the election, because I thought Hillary was going to win and I assumed the market would tank. But I have to say I’m PUMPED about President Trump and wondering if it’s time to get more aggressive. I think we’re going to see a terrific 3-4 years in the market. Would you agree?”
3) “Why is the market still going up? Do people not see what’s happening in our country? There’s a new protest or riot every day. I’m going to stop watching the news and start watching The Bachelor instead. I might end up dumber, but at least I’ll be able to sleep at night.”
Those comments represent some different worldviews, but all three of these folks have one thing in common—they consume a lot of news.
Think back to the way that you got your news a few decades ago. You had the morning newspaper and the evening news.
People actually paid significant sums of money to advertise in the newspaper, which meant newspapers were able to actually pay reporters and practice journalism.
The evening news lasted a half hour and was designed to inform you about the major stories happening both nationally and internationally. There was no time for discussion, just state the facts and move on.
These methods weren’t perfect (clearly Mark Twain had some issues), but there were some advantages that they had compared to media today.
Look at the current media landscape. Nobody reads an actual, tangible newspaper anymore. As everything moved online, less credible news outlets suddenly started being viewed as having the same credibility as the well-established journalistic beacons of the past. Because the barrier to entry in the media world was now so much lower (it’s much easier and cheaper to launch a website than it is to print a newspaper), we ended up with an ever-increasing number of “news outlets.” Because of the increased supply of media, it became much harder for the outfits practicing actual journalism to find the ad revenue they needed, which resulted in cutting staff (meaning fewer journalists) and more salacious headlines and stories to increase page views (meaning less actual journalism).
The evening news, which used to last a half hour, now runs 24 hours a day. On three different major networks. Unfortunately, there’s just not that much news worth reporting, so we end up with four-person panels debating a topic to death and “experts” from different sides of the aisle yelling at each other until we’re all convinced that there will be a civil war commencing tomorrow afternoon.
So what we’re left with is a lot of hysteria. Most people live either in a state of intense fear that the republic is coming to an end or a state of euphoria based on the belief that the current leadership is leading us to the promised land. If you were in the state of euphoria a year ago, you’re probably catatonic right now. And vice versa.
All of these emotions are reflected in the investment world. Both intense fear and unmitigated euphoria are feelings that you shouldn’t be allowing to dictate your investment decisions.
Back to our three clients that we mentioned earlier. The good news in all three of those cases is that they have an advisor—me—to keep them from making any hasty decisions about anything. But for every investor who has a coach to prevent them from leaping off a tall building, there’s probably six or seven more who don’t have any guidance and end up making the hasty decision. That’s one of the main reasons that the market can be so volatile. The highs are higher than they should be and the lows are lower than they have to be.
I don’t advocate living in a bunker and ignoring current events, but be careful how much you allow the media to dictate your emotional state. That’s not good for your mental health or your portfolio.
Rich People
Rich people always get blamed for stuff that isn’t their fault. Or, depending on who you ask, they always get away with everything that is their fault while other people take the blame.
And to make things even more complicated, you’ll also find a lot of conflicting definitions about who’s rich and who isn’t.
Some say that you can identify a rich person by the six-figure income. Others would say it’s the seven-figure net worth. Some would gauge your wealth by the size of your home, the quality of your car, or the person who designed your clothes.
I’ve been to Kenya and they use different metrics there. It usually involves donkeys. To quote my friend David Muchai, a lifelong citizen of Kenya:
“Look at this man over here. He has two donkeys. He is very rich.”
Or later: “That man has one donkey. He is doing well.”
And finally: “Look at that man pulling his cart. He is poor. He doesn’t have a donkey. He is using human donkey.”
Here’s a couple of fun facts about Muchai that have nothing whatsoever to do with our discussion today. First of all, he loves Kenny Rogers. I’m still not sure why. Also, he always wears a Chicago Bears hat. Asked him once if he was a big Bears fan. He shrugged, “They are the ones that send the hats.” I’m pretty sure he’s never seen a football game.
In any event, it’s hard to get a consensus on who’s rich and who isn’t. So, perhaps it’s helpful to clarify what a “rich” person looks like when it comes to retirement planning. Consider the following two clients:
Client #1: Husband and wife combined make about $85,000/year. They have just over $350,000 in savings and they plan to retire in the next 3-4 years when they both turn 66. They’ll need a gross income of about $5,000/month to maintain their lifestyle and also enjoy the traveling that they want to do once they retire.
Client #2: Husband makes about $250,000/year, wife doesn’t work. They have a little more than $2 million in savings. He’s 58 and wants to retire at 60. To achieve their desired lifestyle, they’ll need about $14,000/month in gross income, plus another $10,000/year for travel.
So which of these clients is wealthy?
Client #1 is, by far, the wealthier of the two.
Contrary to popular thinking, I don’t measure a person’s wealth by how much money they have or how much they make. It has much more to do with the ratio of their assets to their spending.
Let’s think about situation #1. They’re going to retire at full retirement age for Social Security. They both earn an income (and both have for 40+ years), meaning they’ll both have a decent Social Security benefit since they’re waiting until full retirement age to start taking it. In fact, their combined Social Security benefits will account for $4,350 in monthly income.
That means we’ll need an additional $650/month to meet their needs. This means drawing down about 2.2% of their portfolio each year. Very realistic and easy to achieve. They could actually retire a year earlier than they planned and be just fine.
On the other hand, the gaudy salary and account balance touted by Client #2 doesn’t mean that they’re in great shape. He wants to retire at 60, which is two years before he can start Social Security. That means that all of their income in the first couple of years will need to come from savings.
This means a drawdown rate of 8.9% in the first couple of years. Completely unsustainable!
We also have a catch-22 with Social Security. If we start it at age 62, he’ll be getting $2,150/month. Add in a spousal benefit for her (which is equal to half of his benefit) and we have a household total of $3,225/month. Now the drawdown rate on the portfolio is still 6.9%. Still way too much.
Suppose we wait to start Social Security at a later date. Sure, we’ll have a larger benefit, but that also means more years of drawing down that portfolio at a rate of 8.9%. The portfolio will be cut in half by the time we start Social Security.
Unfortunately, our society is much too conditioned to focus on total assets.
Client #1 always says they need to work until they’re 70, because they’ve always been under the impression that “you have to have a million dollars to retire.” I meet with them twice a year to remind them that they’re in great shape, but I’m still not sure they believe me yet.
Client #2 was incredibly confident in his plan to retire at 60, and it took several meetings to convince him that this was a bad idea. He couldn’t fathom that his $2 million dollars wasn’t going to be enough and he was certain that something was wrong with my math. But after seeing the numbers in black and white, it finally started to sink in. Realistically, their options are either for him to work longer than he’d planned, or make some significant changes to their lifestyle. Or maybe a combination of the two. They haven’t exactly decided which of those unpleasant options they’ll choose, but at least they now know what’s realistic and what’s not.
Here’s the bottom line. Don’t make assumptions about your financial health, one way or the other, until you have a clear understanding of what metrics are important.
Unless you have two donkeys. In that case, all is well.