SpendingCLIENT PROFILE: Frugal Living
Background: I was visited by a client who had average to below-average pay, money saved and money to invest. The client’s goal in life is to live frugally, be socially sustainable and enjoy the environment we live in. In my 13 years helping clients, I had never encountered a lifestyle with as minimal spending as this client achieved. Some of the techniques the client used include: Renting, with all utilities included, even cable and internet (Note that home ownership can also be an affordable option); living close enough to work that walking is convenient; taking advantage of community gardening; enjoying nature both as a passion and a way to avoid costlier hobbies and entertainment sources. None of the techniques listed above are unusual in themselves, but this client has strung a number of frugal living habits together. As a result, this client was able to save 40% of the money this client earned.
The Take Away: If you think you cannot cut spending, you can. However, significant reductions in spending may only be achieved with significant changes in attitude, beliefs and lifestyle. For this person it is a way of life, for most of us, major spending cuts are painful. I think it is important for us to ask ourselves how unthinkable it really is. We are a consuming nation – can we continue to be?
CLIENT PROFILE: Younger Couple
Background: A younger couple had recently received a significant increase in salary. This couple wanted to know what they should do differently, especially to prepare for their retirement years. My spending analysis showed that they needed to save more to achieve their goals. Though the monthly savings target was higher than they were comfortable with, it was achievable.
The Take Away: It was great this couple called before they started to spend the salary increase. Often when I recommend saving more for retirement, spending must be reduced. In this couple’s case, they did not have to make any spending cuts.
CLIENT PROFILE: Spending all we Have
Background: Joe and Sally had three small children and where concerned about their finances. They had both short-term goals (buy a house, repay credit card debt and save) and long-term goals (college and retirement). Joe and Sally had been spending more than they were earning (aren’t credit cards wonderful!) and were concerned about their future.
The Take Away: In cases like this, it is important to keep the following in mind: How much you are spending could be an issue if you are to achieve your goals. Rarely, does it make sense to spend more than you earn. If you have credit card debt that is increasing each year, you are spending too much. Reducing credit card debt should be a priority. It is of the utmost importance that you do not incur additional credit card debt. I spoke with this client about a year later and they thanked me for getting them back on track and changing their lives.
RetirementCLIENT PROFILE: Retiring Soon
Background: Clients who call for an appointment often have two concerns; whether they have enough money (retirement planning and spending projections) and whether their portfolio is invested properly. Though each client and each meeting are different, similar issues are often addressed. Jack called and discussed his plans to retire in the next couple of years. He wanted to know if his portfolio was sufficient to support his lifestyle in retirement. There are many variables and assumptions that are used in developing a retirement projection, but the most important client variable is the annual spending. It is difficult to know what level of spending will be required in retirement. I have had retired clients tell me they spend more now that they are retired then they did before retirement. In Jack’s case, the retirement projections indicated a spending level that was significantly less than Jack had hoped.
The Take Away: There are many options when spending cannot be supported, including, but not limited to: working longer, working part-time, spending less, downsizing the house, taking out a reverse mortgage or some combination of strategies. A planner often deals with aligning a client’s retirement expectations with the financial reality. Since Jack was two years away from retiring, there was still some time to “align” his retirement thinking with the reality of the financial projections. However, I know Jack left the meeting disappointed and discouraged. I was confident that Jack will be fine in the long run, but had he called 5 or 10 years earlier, his current dreams and goals may have been much closer to reality.
CLIENT PROFILE: “Can I do it?”
Background: Jim was 55, divorced and living in an apartment. He was concerned about having enough for retirement. Jim signed up for my Basic Review service. The projections indicated a couple of things to Jim. First, he could actually increase his current annual spending and still be set for retirement. Second, he dreamed of owning a home again, but was doubtful he could afford one. The analysis showed him that he could, in fact, own a home and still have a comfortable retirement.
The Take Away: If Jim had not had his finances reviewed, he may not have been able to achieve his goals even though he actually had the money to do so. It is important to understand your finances and the limits associated with them – particularly as you look ahead towards retirement and continuing to reach your life goals. More often than you think, clients have a stronger financial position than they realize.
Aligning the portfolio
Background: Susan and Greg scheduled a first first-time meeting; they wanted assurance they were doing the right things as they approached retirement in 5 years. They had saved well and had various, savings, investment and retirement accounts to support themselves during retirement. The retirement spending analysis did indeed indicate they were doing the right things and could retire in 5 years if they changed they changed their portfolio allocation. Their investments were very conservative.
The Take Away: Like many things in life and certainly most aspects retirement planning, there are decisions to be made. The discussion with Susan and Greg centered around either their desire to retire in 5 years, or to keep their conservative investment strategy. Though there is no guarantee in investing (don’t we all wish!), increasing their stock allocation (and thus their risk) allowed them to focus on retiring in 5 years.
We provided them with recommendations to align their level of risk with their goals with so they could be better prepared for retirement. In the end, Susan and Greg decided to become On-Going clients and we continue to guide them to their retirement date (now one year away) and we manage their portfolio, ensuring they have the proper allocation, diversification and cash.CLIENT PROFILE: College
Background: John, a long term client, wanted to do something for his grandchild’s education. John came to me to ask what I thought was the best investment option.
The Take Away: There are many ways to save for a grandchild’s education. In this case, I recommended the 529 plan. A 529 plan is an educational savings plan. Its main advantage is that though John gets no tax advantages when he adds money to the plan, once the money is deposited it grows tax free. Any interest, dividends or capital gains are not taxed provided the money is used for qualified education expenses stated in the guidelines. There may be additional benefits to the 529 depending on the state that is hosting the plan and the state you live in.
CLIENT PROFILE: Chasing returns
Background: Jeb and Melissa came to the office for their Annual Review. Both are hard working, successful people. They were there to have their portfolio reviewed. After their visit the previous year, their portfolio was well allocated. They had large, medium and small cap exposure. They had international exposure and a reasonable balance between value and growth. What I discovered was that since their last visit, they had been chasing returns. It seems that every time they received an investment statement, they would move money to the best performing funds. The result; a 12-month return greater than 80%! However, the portfolio was now heavily growth oriented, and it was over 60% in the technology sector. This all before the technology crash in 2000.
The Take Away: There was no doubt that the changes the clients had made during the year were responsible for the 80% plus return. Had they left the portfolio well-diversified, their return, though good, would have been much less. So, what was my advice? One suggestion was to reduce their growth concentration and trim their technology exposure. I believe it is very important to maintain a well-diversified portfolio, especially in volatile markets.
DivorceCLIENT PROFILE: Financial planning for divorce
Background: Mary came in for a planning meeting and found it helpful to project her financial stability after her divorce. Based on various settlement alternatives, I was able to help Mary decide what option best worked for her. More importantly, Mary was able to focus on her future and together we determined a target spending level.
The Take Away: Working with clients like Mary before the divorce is settled is a much better situation than working with clients who call for advice after the divorce is final. Often, the expectations the client has for the settlement are unrealistic – even with a generous and fair settlement. I still vividly remember a client meeting where the purpose was to discuss how to manage her divorce settlement. It quickly became clear that the client’s expectations of her settlement were in stark contrast to what she had planned on doing. Often one of the jobs of a financial planner provides is to manage expectations.