My retired clients are some of the most vibrant and active people I know — and there’s no stopping them. Retirement also looks a lot different now than it did 50 years ago.. People are living longer and staying active, which means you have a lot of time to enjoy your post-work time. They’re also choosing to retire on their terms, not on the timeline of previous generations.
Most clients are surprised when they get to retirement and see that their taxes have changed. They go from having a normal W2 income, where their taxes are withheld — and sometimes they even withhold additional taxes to ensure they don’t owe at the end of the year. Then, they file their taxes, maybe get a refund, and it’s all fairly straightforward
When they retire, however, a couple of things happen.
In my work with my financial planning clients, I’ve found that there are a number of tax mistakes made every year — and some of them have nothing to do with how you file. That’s why I’m sharing these 5 mistakes, in the hopes that you can address these before you file for 2018, or so you can keep them in mind for 2019.
D Magazine, one of Dallas’s top publications, has been on a mission to provide a spotlight for the area since 1974. They share everything from local arts, culture, politics, fashion, food, and nightlife, but they’re particularly great at providing locals a list of the “best” in different categories.
I’ve been named one of D Magazine’s Top Financial Planners in Dallas for four years running.
I love my job. I think quite a few people say they love their jobs, but for me, it’s really true. Working with my clients is truly a privilege — they’re some of the most amazing and interesting people I’ve ever met. But aside from my great clients, I also love the work involved in being a Certified Financial Planner™. Why? Well, there are a few reasons...
When the markets fall, it can be intimidating for everyone — including your financial planner. As an individual, watching your account balances fall is stressful and, as a financial planner, we watch that happen to each of our clients. It’s hard to see our clients struggle.
Money and relationships can seem at odds sometimes. Especially when partners have different approaches and attachments to money, everyday discussions can become heated and difficult. If you’ve got some “money troubles” with your partner, know that you’re not alone.
Ready to reach your financial goals in 2019 and set yourself up long-term financial success? It doesn’t require an elaborate budget or downsizing in the majority of cases. In fact, it can be pretty simple: Review the big picture
Determine what you want in your elder years and start having those conversations with your family.
In our final post about student loans, we discuss the options available to families to avoid the trap of crippling debt.
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.
I recently visited a fifth grade classroom for a personal financial lesson. The ideas we talked about were simple, but the concepts hold true whether you are a grade school student or well into adult life.
Clients describe the meeting as shocking, even while admitting that they knew it was coming. It’s the financial planning meeting in which we look at their retirement projections to see if they are on track to meet their financial goals.
Some couples have figured it out. They know what they can spend; they live on a budget and have saved enough to be comfortable the rest of their lives. But for other couples, the meeting highlights adjustments they knew they needed to make.
And by adjustments, that can mean dramatic changes in their current lifestyle.
What to do when your lifestyle needs to change?
Get concrete numbers
When you come to terms with the fact that your lifestyle has to change, get concrete numbers. Talking in the abstract about needing to “cut back” is a lot different than knowing exactly how much money you need to be saving every year and what your ending budget number needs to be.
There are important numbers to consider when looking at spending cuts versus retirement dates or goals. If you were to work an extra year or five years, how does that change your financial picture? Often, those changes can have a dramatic effect on what you need to cut back.
Work with a financial planner
There are resources online, but I encourage you to find a financial planner you feel comfortable with and work with them through this process. Besides developing a relationship that aids financial recommendations, they can give you insights based on similar people’s experiences that they’ve worked with. A good financial planner will get to know you personally and offer advice tailored for you and your situation.
A knowledgeable financial planner will also help you identify the other areas in your finances to be aware of, expert advice that will help you should something unexpected happen. One gap in your insurance and an unfortunate incident can destroy your financial plan and everything you are working towards. Obviously, I’m biased, but I truly believe that the investment is worth it.
Identify your values
Knowing your values makes financial decisions so much simpler. It becomes easy to lose sight of what is really important to us, much of which doesn’t require a lot of money, and focus on the extras of life. Living life within your values creates the framework by which you begin to make intentional decisions.
In his New York Times column, David Brooks says it well: “Early in life you choose your identity by getting things. But later in an affluent life you discover or update your identity by throwing away what is no longer useful, true and beautiful.”
Consider Cutting Back Big
Big lifestyle changes are hard. Much of the popular advice you hear these days advocates cutting back on purchases like your everyday latte at Starbucks. While it’s true that small changes can make a difference, those results will be more subtle and long-term.
When you are faced with a lifestyle change, you must put all the options on the table. Some may be painful: downsizing your house, trading in your leased car, looking for another job, moving for a promotion, cutting your annual vacation. However, it’s necessary to consider every way in which you can make a significant change.
Begin Evaluating Every Option
Look at a list of all of your expenses and evaluate every line item. Begin by asking “why”. After evaluating what you money is being spent on specifically, ask why you are choosing to spend money on the items that you are. What are the alternatives? Even when alternative options seem far outside the realm of possibility, still include them. The purpose of this step is not to solve the problem, but to brainstorm every possible solution. Considering options that seem far from what you are willing to do (like trading your car for public transportation), give perspective and bring attention to the luxuries that you have in life.
Below are some examples of line item evaluations:
Car Payment: $650/month
Why am I spending money on this? Because I need transportation!
Why am I choosing my current option? Two cars are more convenient for our family and I’ve always wanted a BMW.
What are the alternatives? Sell it and have one car in the family, sell and buy a nicer car, sell and buy a less expensive car, sell and buy a used car, take public transportation.
How open am I to changing this (or do a scale of 1-10 on how important this is)?
If you were to change, what would be the monthly/yearly cost difference?
Eating Out: $400/month
Why am I spending money on this? Because we need to eat.
Why am I choosing my current option? We enjoy eating at restaurants and it’s convenient.
What are the alternatives? Eating out less, purchasing ready-made meals, personal chef, cooking all meals at home.
How open am I to changing this (or scale of 1-10)?
If I did make a change, what would be the monthly/yearly cost difference?
Begin to make decisions
After you have worked through your line item evaluations and identified what’s important to you, start making decisions.
As with so much in life, these decisions are not easy or clear cut. Every decision is a trade-off. What is right for one family is not going to be right for the next.
Remember to reflect back on why you are making these changes. It takes courage to make big decisions when your lifestyle has to change, but knowing why you are changing can make all the difference in the world.
If you find yourself unsure of your future and aren’t even sure if you need to cut back, I encourage you to consult with a financial advisor and begin the journey to achieving your financial goals.
“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.
In my freshman year of college I had to take the Clifton StrengthsFinder assessment. Two of my top five strengths were “Competition” and “Achiever.” Over the years I’ve had to come to terms with the blessings and curses of being a competitive overachiever.
“No matter how hard you tried, no matter how worthy your intentions, if you reached your goal but did not outperform your peers, the achievement feels hollow,” reads the description of the StrengthsFinder Competition Theme.
I have no doubt that my competitive nature helped me all throughout school. It served as a motivator when subjects seemed far from interesting and kept me focused on my education. But after I finished school and completed all my professional certifications, I was left with an emptiness. Without courses, I no longer had a yardstick to measure my success. There weren’t assignments and projects to overachieve on, there were no more “A”s to show or professors to tell me what a great job I had done.
I had to find a new way to compete and achieve. The obvious way to do this was to compare myself with those around me, my peers and friends, but I quickly realized how pointless that was.
Our Financial Perspectives
One of the incredible privileges I have in my career is getting an intimate look at other people’s finances, learning what is truly important to them and observing how they choose to live their lives.
I’ll never forget the conversation I had with one client couple. Their net worth was in the eight figures, and they lived well within their means. At the end of the meeting, they looked at me and said “We know we don’t have that much, but do you think we’ll be okay?”
At that moment I realized that, no matter how wealthy you are, there will always be someone who has more. Someone who has more money, a nicer house, a better education, a better career. Even people with lots of money feel this way.
I’ve worked with families who have far more money than I was raised with and people who have incredibly successful careers. I quickly realized that the happiest people were the ones who weren’t in a financial race. Yes, they had financial goals, but the goal wasn’t to simply make more money, the goal was rooted in a deeper value.
The happiest clients were the ones who knew what was important in their lives and pursued those values rather than simply valuing the accumulation of more money. They knew, accepted and weren’t bothered by the fact that there will always be someone out there with more money.
I’ve also seen people who were miserable in their careers despite making incredible salaries. Some would say they were winning at the comparison game, but losing at life.
Dangers in Financial Competition/Comparison
The very nature of competition is being aware of other people. But there is danger in judging your life by comparing it to other people’s.
It defines what you chase
It becomes far too easy to chase financial goals because you are trying to keep up with those around you, or worse, just because you want to beat someone. Jealousy, competition and keeping step with your social circles become the motivators instead of your core values.
It says where you're at isn’t good enough
Competition runs on the same premise as the advertising industry: that you need more. You need to be more successful and have more money and move faster through your career. Competition can easily sit at odds with contentment.
It defines happiness
Far too often, happiness is found in knowing that we are better off than others. A shallow sense of satisfaction is derived from knowing that when people visit our house, they will be impressed because it is nicer/bigger/better than theirs.
It breeds discontentment
The same is true when you don’t “win.” Comparison can breed discontent when you realize that your home will never compare with others, or that your career path with never result in a salary like your brother-in-law’s. Comparison shifts our focus from our lives to others.
Looking at Comparison in a Different Way
The best example I have of re-framing comparison is my mom. My mom has three daughters-in-law who are incredibly talented and amazing women. She has acknowledged that it would be easy for her to compare herself to them, to always try to play catch up with their beautifully decorated houses and various accomplishments.
One day, while talking with my mom, she said “I decided that instead of feeling insecure about my house not being as nicely decorated as theirs, I was going to be their biggest cheerleaders. I want to be the one leading the way in telling them how incredible they are and showing them off to the people I know.”
What a great perspective.
She continued by telling me how freeing it was when she made the decision to be their greatest supporter instead of subtly comparing herself with them.
How to Avoid the Hazards of Comparing
The first step in redefining the comparison game is to know what you value and the goals that you want to pursue. Know what is important to you.
The second step is to think differently about other’s successes. When you find yourself observing other people’s situations, instead of getting the emotional high or low, stop and think about what values the other person is holding to make those decisions. Are their lives or decisions ones that would fulfill your values? Are your motivations for living the life you have in line with your values?
The third step is to cheer others on. It doesn’t come natural at first, but when you see someone else's successes, be the one to applaud for them. Changing your mindset this way can be liberating and allows you to experience contentment and joy in seeing other’s successes.
I’ll leave you with a practical example of this. Several personal friends have been taking incredible vacations around the world. My husband and I were talking about this recently in light of our values. While we would certainly love to travel overseas, with limited vacation time and managing our budget, we realized that this couldn’t be and wasn’t our priority in life. We decided that instead of taking exotic trips overseas, we’ll be making more trips to South Dakota to visit family. Our values guide us to prioritizing our relationship and our future children’s relationship with their grandparents and extended family.
Yes, we would love to go on elaborate vacations, and we very well might do that someday, but letting our values dictate out choices has fostered contentment. We’re happy with the lives that we have chosen.