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Money November 2017

Financial Fortitude

Buckets of Money

By Karen Telleen-Lawton

The latest figure shows Americans save about 4% of their income on average. At that rate, it could take 25 years to save one year’s worth of income. A one or two-year retirement doesn’t jive well with our longer life spans and expectations of an enjoyable and stress-free retirement.

Did you know that over 6% of student loan borrowers are over age 60? Most of these seniors are paying off loans taken for children or grandchildren’s degrees. However generous, holding debt as a senior makes retirement more difficult. Judicious spending and saving are a necessary part of life at every age, but particularly essential for over-50s.

Wouldn’t it reduce your present stress considerably to know you were on track to retire – or stay retired – with buckets of money? The buckets image can represent money destinations, such as fixed expenses, variable expenses, savings, and taxes. Fixed expenses are those over which you don’t have much control in the short term (one year), such as rent or mortgage, property taxes, and education loans. Variable ones are everything else: the ones you could trim if needed in an emergency or to improve your bottom line.

These buckets have very different sizes. The variable expense bucket is like a water glass that you drink and refill frequently. It’s a relatively small container because you’re refreshing it every payday.

The fixed expenses bucket needs to be larger. You contribute to it every paycheck just like the beverage glass, but the expenses typically are larger and sometimes infrequent. They’re often stored up for months at a time until a big bill – insurance, property tax, etc. –  comes due. Since the expenses are fixed, you can determine how much of each paycheck needs to go in this bucket by totaling your annual fixed expenses and dividing by 12.

The savings bucket may be the hardest to picture, and thus to contribute to. If your variable expenses fill a drinking glass and your fixed expenses fit a cooking pot, then your savings bucket might be a large recycling bin. It might seem futile even to attempt to contribute to this one, since your drinking glass and even cooking pot are so much easier to fill. But fill it you must.

The latest figure shows Americans save about 4% of their income on average. At that rate, it could take 25 years to save one year’s worth of income. A one or two-year retirement doesn’t jive well with our longer life spans and expectations of an enjoyable and stress-free retirement.

In contrast, a 20% savings rate will grow to about 25 times your annual income in about 40 years. At that point you could likely draw 4% per year forever. Social Security can reduce that requirement somewhat, and any pension to which you’re entitled reduces the required savings percentage further.

For maximum retirement flexibility, you can build up several funds from which you’ll draw your income. Tax-deferred accounts like IRAs and 401(k)s allow you to hold and grow your income pre-tax until you withdraw it. Roth IRAs hold already-taxed deposits, so there’s no further tax to pay. Individual accounts (such as a personal savings or brokerage account) are not tax advantaged. They are the most flexible, which also increases the risk that you’ll withdraw funds before retirement. With funds in each of these instruments, you can alter your withdrawal schedule depending on your tax situation in a particular year.

An underrated benefit of sticking to a high savings rate is getting used to a simpler standard of living. The obvious benefit is that it is fiscally conservative, helping you prepare for whatever surprises await you. An unexpected illness or accident is a lot more likely than an unexpected windfall. Having a family member who recently received a serious health diagnoses, I recognize what havoc health costs could wreak if we were living too close to the financial edge.

I would argue that a simpler lifestyle is also better for the psyche and better for the environment. The best things in life may not always be free, but there’s freedom in not needing expensive toys and experiences to enjoy life.

Finally, living more simply improves your ability and frame of mind for sharing your wealth with whatever causes most touch your heart. This may be elevating the world’s poor or contributing to medical breakthroughs. It could include – after you’ve taken care of your own retirement – funding your children’s and grandchildren’s educations.

As a financial planner, I desperately want to guarantee a low-stress environment for my clients. I can’t promise that. But organizing your financial life will ease your whole life, even if your financial picture is worse than you imagined. It is true that the truth will set you free – free to live and free to give buckets of money.

 

Karen Telleen-Lawton serves seniors and pre-seniors as the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). You can reach her with your financial planning questions at This email address is being protected from spambots. You need JavaScript enabled to view it. .


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