In a recent column in the San Diego Union Tribune, a financial planner was enlisted to offer a reader a financial make-over. The goal was to retire at 55, after a divorce, after a recent home purchase, and after racking up a five figure debt with credit cards.
The planner suggested:
"Use emergency savings to pay off debt.
"Decrease monthly retirement contributions from $500 to $300; use the extra $200 to rebuild emergency fund.
"To retire at 55, work part time for 10 years (with a minimum salary of $20,000) and consider selling home and buying a smaller property outright to eliminate a mortgage during retirement.
"Establish a budget to manage current spending habits.
"Revise W-4 form with employer to account for mortgage and property tax deductions; doing so will increase income by $400.
"Take on more risk and diversify asset allocations to maximize returns for the next few years before retirement.
"Look into the purchase of a $1 million umbrella policy as well as disability insurance.
"Have a coordinated will and trust drawn up along with applicable medical directives and powers of attorney."
And because the article allowed for comments, I added the following: "Sounds like her planner needs to suggest the harsh realities. Let's start with her inability to come up with or budget for those property taxes. With a current liability (mortgage payment, which seems to me was adjusted at some point) and a $5,000 a year property tax bill (something that is guaranteed never to decline), Ms. Ventura will not even come close to enough to live on with her pension. If she were to retire right now, with the assets she has, she would have about $300 a week for all of her other incidentals.
"Her planner," I wrote, "wants her to decrease her retirement contribution by 30%, add more insurance, not really retire (work part-time for earning least $20,000 a year - doing what?) and rearrange her asset allocation to get 10.68% a year return (even without the use of index funds, no short term or intermediate bond investment coupled with large-cap and international exposure could hope to get those kinds of returns which so far over the last ten-years hasn't and projecting even optimistically out over the next ten years will).
"And after all of that, he wants her to sell her home.
Why not just keep working until she is 65, put away the credit cards (while continuing to pay them down - which if she took her current personal savings to do would allow her to redirect that $450 to rebuilding that account - which would still have, according to the numbers listed above, well over $13,000 in checking and savings) and budget in another $300 towards the mortgage payments bringing the overall life of the loan down to around fifteen years. This will leave her living tight - like the rest of us - but will also increase the chance that she will have her home when she retires (meaning when she stops working) and might be able to pay for the taxes on the property.
I see no mention of health insurance in Mr. Phelps plan short of a disability policy or an employer sponsored long-term care arrangement. That 403(b) and 457 plan will begin to cover that but if a recent estimate by Fidelity suggests, her savings for insurance in a post-work life will fall short by $850,000.
True, Ms. Ventura is doing better than most but she is going to need to rethink those post-divorce goals. And this is true for many of us.
When we calculate how much we will need, we tend to gloss over numerous factors in an attempt to tailor our dreams to fit. Her financial make-over would have cost her $1,200 and she would not really be any closer to the truth about her future than had she just faced the facts.
One: Divorce changes the whole retirement picture. Ms. Ventura is no exception, she will have to recover much more financially than had she remained married.
Two: The cost of retirement is rising every day, just like everything else. Plan on a 15% increase in those costs, year-over-year. Can she handle that and still retire at 55? Not likely.
Three: There are no guarantees. That employer sponsored pension may falter. Those investments may weaken. That house may be worth less as the taxes on it rise.
The best base calculation she can make: Can she live on half of what she is making now? Because that, for an increasing number of us, is the reality of retirement.
Showing posts with label divorce. Show all posts
Showing posts with label divorce. Show all posts
Monday, June 23, 2008
Tuesday, November 27, 2007
Retirement Planning and Divorce
“After a divorce”, writes E. Mavis Hetherington, author of “For Better or Worse: Divorce Reconsidered” at the beginning of chapter two, “people often imagine that if only they could go back and make a tiny adjustment here of there in the past – not answering a particular phone call, say, or displaying an ounce more resolve in a weak moment – life would have turned out differently for them.”
The reason Ms. Hetherington gets a mention in the book is because of the way she categorizes people into six groups.
The enhancers are who we would all like to be: upbeat, learning from each mistake and turning it to our benefit. In a divorce this would be someone who feels release without regret. In retirement planning, this is someone who understands that things may not be exactly how they envision it but they are nonetheless excited about the prospects of entering a new and mysterious time. This person or couple would gladly downsize and do so without so much as a re-consideration. Free from the confines of work, this person(s) will explore art and gardening with a new or renewed passion. They will volunteer and become vibrant and active members of their community.
And yes, they will have managed this because they saved as much as possible, stuck to a plan and practiced retirement often while they were working. They did not live large even when they had the cash to do so. They did not take unnecessary financial or health risks and pretty much had that single goal in mind for quite a long time.
An enhancer could also be a competent loner. This person was never meant to be confined by marriage and probably will not allow retirement to hold them as well. They forge on without the help or encouragement of others. As the name implies, they do this with some skill.
The good enoughs are like most of us. We take a beating and step right back in, often making the same mistakes as we did previously. In a retirement plan, you will be the one who will be haunted by the missed or mishandled opportunities that may have come your way.
Regret is a mighty potent weight especially as you approach retirement age. Yet, while there is time, and it could take as little as ten years, any retirement plan can be turned around. To become an enhancer, you will need to embrace a sort of lifestyle change.
How little can you live on and not be completely miserable? Not an easy question to ask but look around the dinner table one night and picture yourself asking those kids of yours for a small loan to get by. You may love them but can you rely on them to do well enough to fund their own lives while helping you out as well?
The other direction for the good enoughs is less appealing. Perhaps you would become a seeker. This person stumbles along for most of their working lives and finds that when they no longer want to work, they can not stop. They may have gathered a small pension or tapped their Social Security benefit, but they are finding that life after work may be too expensive. These unprepared souls quickly become depressed.
The libertines actually make a brief appearance in the book as the couple that sold everything for the RV life only to be waylaid by a medical condition that forced them to return to their hometown. Without house and lacking the right kind of coverage (insurance) for the wife’s problem, they were forced to live a wholly different existence than they did when they were working.
In fact, looking back, the libertine might even find work a more desirable place to be. In Ms. Hetherington’s book – and I failed to give credit to her co-author John Kelly and do so here – the libertine rejoices at the idea of finally being free of the confines of a marriage only to find that the experience is fleeting.
And finally, the defeated. These are the hapless workers who labored at the bottom of the wrung and can expect a life of hardship for the foreseeable future. These are not just the hardscrabble people you might expect who end up among the ranks, but those who have had a simple turn of luck, a misfortune, and an I-didn’t-see-that-coming moment.
Can we learn something from divorce? Absolutely. It, all by its lonesome can derail a perfectly good retirement plan. For the woman, statistics prove that you will take the longest time to financially recover. For the man, the cost of recovering can be just as difficult on your health as your wallet. Avoiding a divorce would be the best method of retirement survival.
But the separation events described above apply nicely to the state of retirement. Will you blossom or wither? Will you become regretful or will your ability to survive be enhanced by your newfound lifestyle? You are making the choice right now.
The reason Ms. Hetherington gets a mention in the book is because of the way she categorizes people into six groups.
The enhancers are who we would all like to be: upbeat, learning from each mistake and turning it to our benefit. In a divorce this would be someone who feels release without regret. In retirement planning, this is someone who understands that things may not be exactly how they envision it but they are nonetheless excited about the prospects of entering a new and mysterious time. This person or couple would gladly downsize and do so without so much as a re-consideration. Free from the confines of work, this person(s) will explore art and gardening with a new or renewed passion. They will volunteer and become vibrant and active members of their community.
And yes, they will have managed this because they saved as much as possible, stuck to a plan and practiced retirement often while they were working. They did not live large even when they had the cash to do so. They did not take unnecessary financial or health risks and pretty much had that single goal in mind for quite a long time.
An enhancer could also be a competent loner. This person was never meant to be confined by marriage and probably will not allow retirement to hold them as well. They forge on without the help or encouragement of others. As the name implies, they do this with some skill.
The good enoughs are like most of us. We take a beating and step right back in, often making the same mistakes as we did previously. In a retirement plan, you will be the one who will be haunted by the missed or mishandled opportunities that may have come your way.
Regret is a mighty potent weight especially as you approach retirement age. Yet, while there is time, and it could take as little as ten years, any retirement plan can be turned around. To become an enhancer, you will need to embrace a sort of lifestyle change.
How little can you live on and not be completely miserable? Not an easy question to ask but look around the dinner table one night and picture yourself asking those kids of yours for a small loan to get by. You may love them but can you rely on them to do well enough to fund their own lives while helping you out as well?
The other direction for the good enoughs is less appealing. Perhaps you would become a seeker. This person stumbles along for most of their working lives and finds that when they no longer want to work, they can not stop. They may have gathered a small pension or tapped their Social Security benefit, but they are finding that life after work may be too expensive. These unprepared souls quickly become depressed.
The libertines actually make a brief appearance in the book as the couple that sold everything for the RV life only to be waylaid by a medical condition that forced them to return to their hometown. Without house and lacking the right kind of coverage (insurance) for the wife’s problem, they were forced to live a wholly different existence than they did when they were working.
In fact, looking back, the libertine might even find work a more desirable place to be. In Ms. Hetherington’s book – and I failed to give credit to her co-author John Kelly and do so here – the libertine rejoices at the idea of finally being free of the confines of a marriage only to find that the experience is fleeting.
And finally, the defeated. These are the hapless workers who labored at the bottom of the wrung and can expect a life of hardship for the foreseeable future. These are not just the hardscrabble people you might expect who end up among the ranks, but those who have had a simple turn of luck, a misfortune, and an I-didn’t-see-that-coming moment.
Can we learn something from divorce? Absolutely. It, all by its lonesome can derail a perfectly good retirement plan. For the woman, statistics prove that you will take the longest time to financially recover. For the man, the cost of recovering can be just as difficult on your health as your wallet. Avoiding a divorce would be the best method of retirement survival.
But the separation events described above apply nicely to the state of retirement. Will you blossom or wither? Will you become regretful or will your ability to survive be enhanced by your newfound lifestyle? You are making the choice right now.
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