5 key retirement factors your financial plan may not address
If you love cat pictures, today is your lucky day. Because I'm back!
As longtime readers will recall, I contributed to Get Rich Slowly from 2009 to 2013. I often wrote about more “technical” (i.e., boring) topics, such as taxes and IRAs. In order to provide a reprieve from the technical-ness, J.D. occasionally sprinkled in cat pictures. I tried not to take it personally.
But for the record, I think other creatures would have been more appropriate. Such as the blob fish.
For those who remember me, it's great to see you again. For those who don't, here's my Cliff's Notes tale of priesthood, eating pre-chewed food, reproduction, and why I know a thing or few about money.
I hung up my GRS writing boots last year because I had overloaded my life with new ventures, which included more actual financial planning for folks. But things have settled down, which allows me once again to be a part of this self- and other-bettering community. But here's the thing about financial plans: They're really financial projections, using just your current numbers — the size of your IRAs and 401(k)s, how much you add to those accounts, your current Social Security benefit estimate, and so on. A financial adviser — or you, using a retirement calculator — inputs a bunch of figures and out comes the verdict: You're guilty of not saving enough, or you're innocent of all financial wrongdoing.
I wholeheartedly believe that everyone should do just such an analysis annually to estimate whether they have a reasonable shot at retirement, or other financial goal, and to determine what they can do if things aren't looking so hot. However, these analyses also have their limitations because they only care about what can be quantified.
So more and more over the years, I've found myself using financial-judging software as the basis for starting a discussion, and then wading into more fluid factors that are also crucial indicators of future financial freedom. Here are five of those factors, oh-so-briefly explained. I could devote an entire article to each. (Yay, more cats! Or blob fish! Or a sitcom about them getting married but their parents not understanding!) But what follows will give you an idea.
Your non-portfolio assets. We all have a lot of stuff. In fact, that's why we have a house, according to the late, great comedian George Carlin, who said, “Your house is nothing more than a place to keep your stuff while you go out and get more stuff.” For some, a house is not enough. According to the Self Storage Association, 9 percent of American households were renting a unit as of 2012. Chances are, you have stuff you either don't need or that could be replaced with a less-expensive option. It starts with your stuff-container (your house) but can involve a wide and diverse range of property: other real estate, collectibles, electronics, appliances, household items, vehicles (including bikes and boats), and the many gifts of Christmases past. You can fall back on hawking these wares in a pinch, but it is even better to turn depreciating dust-collectors into growing assets now by selling them and investing the proceeds. An investment in the Vanguard 500 index fund would have grown to almost 19 times its value over the past three decades. And unless you're a 95-year-old javelin catcher who smokes, you should think of your investment time horizon in terms of decades.
Your human capital. Regardless of what advertisers or Wall Street might say, your biggest asset isn't what you buy or own. Your biggest asset is you — what you can do, what you know, what you've accomplished, and who you know. In financial terms, this can be considered your human capital — your ability to earn an income (including the variety of ways, the amount you would earn, and how easy it is to move in and out of the workforce), the things you can do that you would otherwise have to pay someone else to do, and your social and professional network. A sub-category is your financial literacy, i.e., how smart you are with your money.
Your health. A recent study from gerontologist Ken Dychtwald and Merrill Lynch found that good health is the No. 1 ingredient of a happy retirement. It is hard to enjoy your golden years if your creaky bones have you in tears. But there is also a financial component: Healthier people spend less money on health care. They keep the money that would otherwise go to hospitals, pharmacies, and the medical equipment industrial complex. Of course we are all very fortunate and grateful such things exist, but they don't come cheap. Plus, healthier folks feel better, can do more, and can work later in life if they want to — as opposed to the approximately 25 percent of retirees who left the workforce at least partially for health reasons.
Your habits. Financial success is determined largely by financial behavior. As “The Millionaire Next Door” — the study of real-life wealth by Thomas Stanley and William Danko — and Stanley's follow-up “Stop Acting Rich” taught us, monetary security doesn't just happen. The majority of Americans who earned their millionaire-hood did so by having a plan for where their money would go, maintaining a system for making sure they are on track, living on 80 percent or less of their income, and not buying homes in high-priced neighborhoods. Only 30 percent of the variability of wealth among households is explained by income, so the truly well-off are doing something right besides bringing home a bunch of bacon.
Your family's assets. When it comes to stuff, you may have heard that you can't take it with you (even though many people think shopping is a divine experience). You might be in line for an eventual inheritance. But for many families, the biggest “asset” is the support they give one another, such as child care, elder care, professional expertise, hard-earned wisdom, and a safety net. However, to keep wealth of all kinds in the family as seamlessly and cheaply as possible, you and your relatives should have frequent and open discussions as well as the properly executed financial documents.