When considering a Donor Advised Fund, there should be a balance between aggressively funding your giving goals to save money on taxes and assuring that your other financial goals are being met as well.
This is the second part of my interview with my client, Evelyn, a 73-year-old divorcee and retired high school teacher, who is going through a new transition. In my last post, we touched on Evelyn’s decision to move to a retirement community. In this post, I want to share more of Evelyn’s thoughts on what helped her make this decision. One of the resources that has helped Evelyn is a book called The Gift of Years: Growing Older Gracefully by Joan Chittister. In the chapter titled Adjustment, Chittister says, “A burden of these years is that we must consciously decide how we will live, what kind of person we will become now…how alive we intend to be.” Evelyn echoed this: “This has been an extremely interesting part of my life. It has been a real growth process. I’ve learned more about myself.”
She notes that the transition to retirement was modeled by the women in her life. “I started early. My mother had moved into a retirement center when my father died. She had flourished there. It was really good for her. My model before that even was my grandmother, who had moved into a retirement community and she flourished. She had regular meals and got dressed up every day. There were people that she had known all her life and they were there. There were classes she took – she was very creative. That was my model of what you did when you retire.”
These examples served Evelyn when several things happened that led her to think about her own transition.
“It was critically important for me to maintain my house. I knew I didn’t want to live here if I couldn’t maintain it. My house is nearly 60 years old, there’s stuff that is going to happen and so it was like, it’s never going to be in any better shape than it was.”
Besides realizing it was the right time to sell her home, another factor was Evelyn’s health. “After I was really sick this fall, I realized that I wanted to be somewhere that if I wanted to go to the doctor, I didn’t have to depend on a friend to take me there.” Having convenient access to medical care became an important consideration to Evelyn.
And so Evelyn began to look at her options. She had always assumed she would rely on her children at this stage of life and considered moving to Memphis to be near them. After looking at living arrangements there, she realized that it would be much more expensive and nothing would be familiar. At that point, Evelyn realized that she didn’t need or want to rely on her kids. “I had to realize that I don’t want them to do this. I had to be really grounded in reality and know that I wanted to take care of myself for the rest of my life. And when I was unable to care for myself, the money [would be there] for the assisted living. That was part of my legacy to them.
“The good part of looking and slowly coming to terms with this was that I began to [consider] what was important to me. I can remember saying to my daughter, I can give up space. As long as I have a place to go outside, I can have just a few pots to put my geraniums in and my pansies in the winter.” Evelyn’s other criteria was that it be light with outside views.
Upon visiting a local retirement community, Evelyn knew it was the right place. “When I saw this [retirement community] and it was a price I could afford…and still have the medical care that I need...it was like, that’s it.” After having looked at many other places, “it just felt like home.”
When Evelyn put her house up for sale, she enlisted help to organize her belongings and stage her home. “That part has been helpful.” It was time to decide what to let go of. Evelyn had things taken to her attic and had “one side for sale and [one side for] what I’m going to take. I thought my books would be hard [to give up], but I don’t need that anymore.” As Chittister says in her book, “a burden of these years is the temptation to cling to the times and things behind us rather than move to the liberating moments ahead. A blessing of these years is the invitation to go lightfooted into the here and now.”
Although Evelyn is confident in her decision, she has at times felt conflicted. “There have been some sad times. There was one day last week and it was like, oh my gosh, I’ve lived here for 43 years. Both of my children grew up here, they walked to elementary school, they went to high school. All their friends were here. I’m going away and leaving that, but… I’m ready. Occasionally the sadness hits, but it doesn’t really ever stay very long. It’s more like, alright, this is so good!
“I’ve realized such freedom. It was so clear, but it took some meandering to do it. I know what I want to do and this is it."
“I have no idea how we did it back then,” a client couple commented on a copy of their budget from fifteen years prior. They laughed as they remembered their early struggles. They knew that their life had altered over the years, but hadn’t realized how much it had transformed financially.
The changes that take place over many years can be hard to identify as you go through daily life, but looking back over time, the changes can be shocking.
Most people see their incomes rise over the course of their working years, and as it does, that extra money is added to what they spend. With more money to spend, lifestyle spending creeps up.
Lifestyle creep happens over years. When you were younger, you might not have imagined eating fine dining on a regular basis, or having the ability to shop at Whole Foods or to take vacations. Your own children have grown accustomed to having the gifts and luxuries you never had growing up.
We don’t notice the innocuous changes and grow comfortable with the gradual adjustments. Because it’s not a sudden change, we don’t make conscious decisions about spending. It just happens.
Lifestyle creep is normal and expected in life, but looking at it from a financial perspective, there can be negative consequences if you don’t plan well for it.
How Lifestyle Creep Effects Your Financial Plan
You become inured to spending money
The danger here is that you may not even realize it. An increase in income means an increase in spending. What use to be unimaginable, becomes the norm.
Your perception of money changes
Spending $20 outside your budget may once have thrown your finances for a loop. Now, you don’t even blink at $20 spent here and there, and may spend even more than that without a second thought.
Your lifestyle changes
While you were once able to live comfortably on a certain amount, several years later, that amount has increased. You value the experiences and luxuries of the life you enjoy now. You didn’t know what you were missing before!
Not only has your lifestyle changed, your friends and social circles have changed. Social expectations may include dining at restaurants that would have never fit your budget before. You may feel (consciously or unconsciously) that in order to maintain those relationships, you have to maintain the spending.
Your retirement numbers change
This is the most important way that lifestyle creep affects people. For most, the goal of retirement is to maintain how you are currently living your life, or even increase the amount you live on; meaning that your income level will stay the same or higher.
As your lifestyle spending slowly rises, the amount you need in retirement will also rise. A small lifestyle change now has a dramatic effect on how much you’ll need in the future. As a basic example, for every $1,000 increase in your yearly spending, or $83 per month, you will need to have an additional $25,000 saved for your retirement years to sustain that lifestyle.
People feel compelled to save more money as they near retirement. Saving money is very important, but the biggest impact a couple can make on their retirement is to decrease their expenses.
Proactively Planning for Lifestyle Creep
Track spending and income
If you had a financial plan done in the past, be aware that your income and expenses are likely to have changed over the years. To keep current with the amount you need to be saving, track spending and income and revisit that financial plan often.
The most important element of a financial plan is the dollar amount that goes out every month. When that number changes, it is critical to let your financial planner know. Together you can determine an appropriate savings plan.
Many people intend to save their raises or bonuses. They plan on increasing their 401(k) contributions or putting extra money away for the children’s college fund or another financial goal. However, it’s far too easy to have good intentions and still miss implementing them.
Your expenses will always rise to your income unless you have a plan in place. A plan requires intentionality, energy and time. Frequently it’s on the to-do list, but can feel so enormous that it never gets done. Don’t let this happen!
Your first step is to realize how important this task is. These simple decisions to save or invest windfalls can be the defining point in your financial plan's success. Next, make the commitment to plan and take the time to put systems in place to make it easier to allocate that money. Set up an automatic investing plan or arrange to make extra payments on debt. Check into budgeting apps that help you save without thinking about it. Implementing these seemingly small steps throughout your life will yield big results.
Don’t let lifestyle creep wreck your retirement goals. Being conscious of your spending and having a plan in place will not only pay off financially, it will bring peace of mind as well.
Hannah was asked to guest post on I Am That Lady. The following is the article that recently appeared.
It’s that time of year again.
Time for the onslaught of perfect holiday decorations, perfect family portraits and perfectly wrapped gifts under the tree. And we can’t forget those Christmas newsletters – is it even possible for people’s lives to be that perfect?!
And you’re stuck with your failed Pinterest projects and tight budget; the knot in your stomach growing as Christmas nears.
It’s holiday shame: the feeling of inadequacy that haunts us in the midst of the season’s celebrations.
Yet, we try to do it all anyway. Despite financial strains, we host our traditional holiday party for the neighborhood, buy extravagant gifts we can’t afford for the kids, and splurge on decorations in hopes of looking as festive as the best of those carefully staged homes on Instagram.
Famed researcher on shame, Brene Brown defines shame as “the intensely painful feeling that we are unworthy of love and belonging.”
Holidays are all about family, love and belonging, yet we try to appear to be what we think others want us to be to attain that love and belonging. We try to meet all those unspoken expectations of everyone around us, hiding the reality of our situations from those we want to impress, and even those we love.
We end up filled with holiday shame and find ourselves telling stories that make our situation seem acceptable to those we love, putting presents on credit cards because our kids shouldn’t be punished for our shortcomings and avoiding connecting with people, sometimes even in our own home. We hide our pain and struggles and tell ourselves it doesn’t hurt.
Why do we do this? Why all the smoke and mirrors?
Exposing our situation and ourselves is risky business. There is fear of rejection, fear that we will forever be labeled as that person. We’re afraid to be a disappointment to our friends and family and the last thing we want is their pity.
But with every risk, there’s the possibility of reward. What could possibly be worth that risk?
There is nothing greater at times like this than the joy and freedom of being loved exactly as you are. Honesty about our situations allows us to give what we can give. It lifts the weight of perfectionism and replaces it with freedom, a freedom that allows us to love ourselves, love others, and live life to the fullest. This in turn strengthens relationships and builds community.
In order overcome shame and allow ourselves to be loved, no matter what financial situation we’re in, it helps to be proactive. Here are some practical steps to help ease holiday shame.
Oftentimes, what we are able to do this year is different than what we were able to do last year. Communicating directly with your family or children about what you are and are not able to do takes away the awkwardness of unexpected surprises during holiday celebrations.
Practically, this could be sending an email to your family saying that this year, instead of a traditional store-bought gift for the family exchange, you are giving homemade gifts. Or it could mean telling your children that instead of buying things, you will be sharing an experience.
This allows you to create boundaries from the onset, creating an environment that allows you to not spend through guilt or shame.
Share Your Story
Shame flourishes in secrecy and silence. As you begin to tell your story, shame begins to lose its potency. Your story is powerful and your story matters!
Regardless of how much money my clients have, the most common sentiment I hear is “am I normal?” So many people go through life thinking no one could ever understand their lives. You are not alone. Give people you are close to the opportunity to hear your story and give them the gift of listening to their stories. It truly is one of the greatest gifts you can give someone.
Telling your story does not mean full disclosure to absolutely everyone. Use discretion and have healthy boundaries with who you are willing to share what with. However, I encourage you to push the boundaries with those you know who love you. I think you’ll find it’s worth it.
Have a Touchstone
A touchstone is something you have that reminds you why you are doing what you are doing. It’s a physical manifestation of something that’s important to you.
One of my touchstones is an envelope opener that sits on my desk. I was given this letter opener by a woman who believed that money and possessions are not the purpose of life. She exuded those values, and every time I use it, I think of her and who I aspire to be.
There will be times when giving in to the expectations of others would be so much easier than taking the hard route. Having something to physically touch will center you and remind you that you are trying to live intentionally, bringing you back to the purpose of it all.
Be Kind to Yourself
Lastly, be kind to yourself. We’re often our harshest critics. If we are to allow ourselves the freedom to be loved, we have to first be kind and love ourselves first.
Think of your closest friend. If they were to share a struggle or something that was close to their heart, how would you respond? Let that be the response you give yourself.
Letting yourself be seen and fully accepted by others is the greatest gift you can give yourself this Christmas. It is my deepest hope that you accept that gift this year.
Not every financial planner is going to offer you what you need. Working with a financial planner requires making sure that you have a good fit. We've already gone over how to decide whether you need a financial planner and making sure you're on the same page with your spouse. Now you need to make sure that the financial planner sitting in front of you is the right person to work with.
The first meeting is an interview
If you're going to pay a person to do a job for you, you need to make sure they can do that job successfully. Use the following questions to get a sense of the services this financial planner offers, compared to what you're looking for.
Learn about their business
- How do you charge your clients for services?
- What is your investment philosophy?
- What do your financial plans usually look like?
- What will my experience be as you create a financial plan for me?
- What is your ideal client?
Learn about their qualifications
- Are you a fiduciary?
A fiduciary is a person morally and legally bound to make financial decisions solely based on the interest of the client. A fiduciary will therefore make different decisions based on different clients and will not make decisions based on how much money he is going to get out of the deal.
- What certifications do you have?
I have heard of "financial advisors" recommending investments to high net worth clients without understanding how it will affect their year-end taxes. Others have given basic retirement advice that is simply wrong. Avoiding these situations is easy if you ask for credentials.
CFP® is a designation meaning Certified Financial Planner™. CFP® professionals must pass a certification examination, which requires an understanding of the areas that affect your financial plan, and agree to abide by the board's code of ethics in regards to their clients. A CFP® gives clients the confidence that their financial planner is held to a certain standard.
CPA® is a Certified Public Accountant. In order to receive this designation, accounting practitioners are required not only to pass a test, but to demonstrate extensive experience in their field. CPAs provide insight into complex tax issues, such as stock options and how to reduce one’s overall tax liability.
CFA®designates Chartered Financial Analysts. Like the other designations above, it requires testing and extensive work in order to receive the designation of CFA®. People who hold this designation are going to be trained in how to extensively evaluate individual stocks and investments.
There are many designations that have not been listed here. Unfortunately, many of those can be obtained via a quick test of knowledge or even a short seminar. While there are definitely capable advisors who do not have a CFP®, a CPA®, or a CFA®, these designations provide the best initial understanding of a financial planner's knowledge and background. Practitioners with these designations are knowledgeable on all aspects of your finances and how they will affect your life.
Give yourself time before your first meeting to prepare your questions. Is there anything specific you'd like to remember to ask? Review your questions after the meeting. How did you feel about the answers this financial planner gave in response?
Preparing for your meeting gives you the confidence to choose the best possible advisor for your financial planning needs.