1. Plan for the future!
We cannot know what the future holds, but my goal is to help you preserve choices for your future. When you plan ahead you have time to change course. When you don’t, you get blindsided by emergencies that frequently make the choices for you. There are always ups and downs, but in the long-term, on average, the data proves that things are getting better.
2. Build up an “Emergency Fund”
Everyone is different, but put at least 3x (better still 6-9x) your monthly expenses in an account marked ‘Emergency Fund.’ For many, it takes up to 36 months to save this amount, but faster is better as long as other goals allow it. This is insurance against those surprise dentist bills, car repairs, etc. that make it hard to pay off your credit card. Annual expenses that you can count on like property taxes, Christmas, summer vacation, teeth cleanings, etc. are not emergencies and should be budgeted for monthly.
3. Pay your future self first, automatically
Everyone’s heard pay yourself first, but really it’s your future self that your savings are protecting, so, seriously, do this! Save at least 10%-20% of your after-tax income for retirement automatically each time you are paid. The automatic part is important because we tend to procrastinate and justifying why we didn’t save ‘this’ month, but then we wake up at 65 realizing we didn’t save enough.
4. Pay off revolving debt (aka credit cards)
Carrying revolving debt means you always pay more than you should. Once you have an emergency fund, you won’t need to use revolving credit to carry a balance. Pay it off monthly!
5. Protect yourself against massive losses
Insurance is an important piece of the puzzle. You may need term life or disability insurance if someone else relies on you for income, or you don’t want someone else to pay your funeral/estate expenses.
Follow these three basic rules of risk management:
- Don’t risk more than you can afford to lose.
- Consider the odds.
- Don’t risk a lot for a little.
Understand risk management
Let’s use riding a bike as an example of an activity that involves risk. You can manage the associated risk by a) never riding a bike (avoidance), b) wearing a helmet while riding (reduction), c) saving money for medical bills related to any injury (retention), or d) getting medical insurance to cover possible injuries while biking (transfer). Pick the right risk management technique for the right risks, or you can lose all that you’ve worked so hard to gain.
6. Invest your savings
After you have a sufficient Emergency Fund, are properly managing any debt, and have appropriate insurance, it’s time to start investing. The best time to invest is right now if you have a lump sum. Otherwise, invest monthly automatically to take advantage of DOLLAR COST AVERAGING. Investing in a diversified portfolio helps reduce the risk required for a given rate of return. CAUTION: investing in only 10-20 individual stocks is taking more risk than required for a proportionate return. I NEVER recommend investing in individual stocks.
Use an objective Risk Assessment Test
Most people think they are more comfortable with risk than the actually are. What we “think” about our risk tolerance does not match up with reality. If you stay up at night thinking about “losing” money in your investment account, then you are taking too much risk or you don’t adequately understand the risks you are taking.
Get a fee-only fiduciary advisor
They will help you pick the right investments with an appropriate asset allocation for your personal risk tolerance.
Low fees in investments are important. There are LOTS of hidden fees. A fiduciary MUST disclose all compensation clearly. Many advisors say things like ‘it won’t cost you anything.’ Let me tell you, you ALWAYS pay. It’s better to know exactly what you are paying.
Make sure there is not duplication among assets that you are unaware of. Having many accounts with different firms causes duplication and your portfolio becomes less efficient. It’s best to consolidate as much as you can.
CAUTION: Insurance products
Annuities, whole life, permanent life, variable life are risk management tools, and as such, they often make poor investment vehicles, because of their high fees and commensurate low returns.
A wise person once told me that “insurance is sold, not bought.” If you have any doubts about a product being presented, get a second opinion. Also, always make sure to ask how (and how much) someone is paid for a particular product they are selling. Remember, knowledge is your best tool!
7. The biggest risk to your retirement income is making the “Big Mistake”
There are several versions of the big mistake. Some of the most common and how to recognize them are:
- Market timing: “I’m waiting until the market improves/cools off to invest.”
- Under-diversification: “I’ve got most of my portfolio in X, I love that company” OR having only individual stocks in your portfolio.
- Euphoria: “This investment CAN’T lose” or “5 hot stocks to buy NOW!”
- Panic: “The sky is falling” and “this time it’s different.” HINT: It’s NEVER different (see market timing.)
- Sunk cost fallacy: “I’ve lost so much already, I can’t change now.”
- Confusing lifestyle assets with investment assets: “We can use our 401k to buy our dream house. They say your home is the biggest investment you’ll ever make.”
8. The 2nd biggest risk to your retirement income is loss of purchasing power
Inflation eats away purchasing power. Guaranteed investments typically don’t keep up with inflation. If your nest egg is going to last for a 30 year retirement, your investments must continue to grow in retirement while providing income. Most of us will not be able to accomplish this with the traditional advice of moving most of our portfolio into bonds in retirement.
9. In retirement, plan withdrawals conservatively
Withdraw a max of 4% of your portfolio per year. Adjust lower in market downturn years. This can be increased dramatically with advanced financial planning strategies. Enjoy your rewards, you are now in the 5% of people who took the time to plan to achieve their retirement goals.
10. Bonus: This is a reward for all the hard work you did in steps 1-9!
Plan for your legacy
What do you want your wealth to do when you are gone? Do what you want – it’s your money! Do you want to fund a favorite cause? Provide for the future of a loved one? Blow it on an amazing funeral? Decide, then hire an attorney and add it to your will!
Still have questions about your financial future?
Our fee-only fiduciary financial advisors can help! Contact us today.
