Run a Google search on “sudden wealth” and you find all kinds of advice on how to deal with the horribly traumatic effects of winning the lottery or inheriting oodles of money.
There is a Sudden Money Institute and even a Sudden Wealth Syndrome. Unfortunately, there is no sign that Sudden Money Syndrome is contagious, but there is another even more distressing condition that is projected to affect over two-thirds of our population. That would be the “Suddenly Poor Syndrome,” which manifests itself at retirement.
There are two ways to avoid this particular disease: take precautionary measures or die early. I estimate Suddenly Poor Syndrome is nearly 100 percent avoidable by anyone in any income bracket, so it’s a shame that so many have done so little about it.
How did we get in this mess? When Social Security became law in 1935, the average life expectancy was 61.7.
Of course, Uncle Sam expected to pay out much less in benefits than we’re currently on the hook for, but that’s another story. Before then, middle class and poor people worked until they physically could do so no more. It appears we may come full circle to those days. Here’s why:
• Our savings rate hit an all-time low of 1.5 percent in 2008. Fortunately, it’s up to 3.8 percent recently, but that still won’t be enough to supplement Social Security during a 30-year retirement because...
• Inflation will wipe out our savings, putting us back where we started, and...
• Our life expectancy has increased 27 years since 1935. While it’s great to live longer, it’s not very pleasant living in poverty. As we continue to live longer and healthier lives, statistics show retirees will be even more woefully unprepared because...
• Among families headed by 55- to 64-year-olds, the median value of all financial holdings — stocks, bonds, retirement accounts — was $73,000 in 2009 because...
• Our children get very little financial education in schools or from their parents. One of the best lessons you can teach your child is financial independence, as early as possible because...
• Many adult children are moving back home or they’ve never left (21.6 percent according to the Pew Research Center). It’s usually blamed on the recession, but in the old days it was called mooching. It depresses me when our middle-age clients sacrifice their retirement to support healthy adult children. This isn’t a favor — it’s being an enabler. And finally...
• There’s the matter of Social Security. I’m not one of the people who think the lock box will be empty one day soon, but it’s broken. Expect older full retirement ages, more taxes and lower benefits.
The solution, obviously, is to take matters into your own hands, and the sooner the better. My mantra is that I’ve never had a client walk into my office saying that he regretted saving so much. But I’ve heard many heart-wrenching tales of regret. So where do you start? Naturally, I recommend you schedule an appointment with a fee-only financial planner.
But if you’re not ready to take that step, check out some of the retirement projection calculators on the internet. The idea for this month’s story actually came from David Snowball at the Mutual Fund Observer. A few days ago, he asked me to assist them in reviewing free retirement calculators online. Here are a couple of simple free programs that will get you some useful information in 10 minutes or less:
• Vanguard — Vanguard uses sliders that make it very easy to adjust such things as retirement age, income needed at retirement and rate of return. This allows you to see what you will have at retirement under various market scenarios and savings amounts.
• CNN Money — Rather than entering a rate of return, CNN Money asks you to choose between various portfolios (from very conservative to very aggressive) and also includes projected income tax rates.
Both of these programs are pretty slick, but the many variables tell me that we really don’t know what we don’t know. So consider these sites as a great way to start thinking about “what ifs,” such as family gifting, health issues, life insurance and more. You can find the full MFO article by David and Junior in the June newsletter at www.mutualfundobserver.com.
For those of you who think you are too old to save enough, please take heart, it’s truly never too late to improve your fortunes.
Case in point: an Illinois client couple were totally unprepared for retirement until they reached the big 5-0. At that point, the light bulb came on and they decided to live (in the wife’s words) “very frugally” for the next 10 years. When they walked into my office at age 65, they were both retired, had a healthy balance sheet with almost no debt, and were living their dream of traveling the world. What a success story.
I wish I could take credit. I can’t, but I do hope this true story inspires you as they inspire me.
The best advice I can give you is to save as much as possible as early as possible and find a pro who specializes in money management and advice. And note that this is not the same as an investment adviser, although you might find someone who does both. The cost of good advice will be recouped many times over, I guarantee it.
Johanna Fox Turner, CPA, CFP, RLP, is CEO of Milestones Financial Planning, LLC in Mayfield. She is president of Johanna Fox, CPA and publishes a free monthly financial newsletter (email firstname.lastname@example.org to subscribe). Contact Turner at email@example.com, 270-247-0555, 800-991-2721, or at www.milestonesfp.com.