Why Do We Cut the End Off the Ham?
You probably remember the old story. A child asks his mom why they always trim the end of a ham before putting it in the oven to bake. She replies that she’s not sure and suggests they call grandma from whom she got the recipe. Grandma’s answer: “The only baking pan I had was too small to fit a whole ham without trimming.”
How many of us keep doing the same things over and over just because those old habits seem familiar? As we begin a new year, it might be a good time to review some financial habits.
Jalene and I think of people as either living in retirement or working toward it. If you’re still working and contemplating retirement, we suggest that you ‘practice’ retirement. Figure out what your income is likely to be and then move toward living on that amount. For most people, this will require spending less.
It’s been our experience that everyone can spend less. While working, that means you can save more. In retirement, it means that you can make your nest egg last longer. Some suggestions for cutting expenses? The Center for Disease Control tells us that 36% of Americans eat fast food on any given day. In Columbus there are long lines at most of the drive thru windows, most of the day. It’s easy to convince yourself that buying coffee or eating out is as cheap as cooking at home, but I assure you it isn’t. Making the effort to eat more meals at home has brought more than one budget into balance but there are other easy steps you can consider. Do you have the least expensive phone plan that meets your needs? Are all the cable channels you pay for really necessary? Would you be as comfortable turning down your thermostat and wearing a sweater? Could you make fewer car trips by grouping your errands? All of your expenses should be reviewed as you develop your spending plan. A new year might be an opportune time to make some adjustments.
Whether in or working towards retirement, is your investment strategy appropriate? If you’re far from retirement age, should you consider an approach that pays higher rates than a CD? Or, if you are in or near retirement, should you consider replacing a small-cap growth fund with something less volatile? There’s a world of information as close as your computer but that range of diverse opinions can be more harm than help. As you do your research, remember that your investment strategy should reflect your personal situation and goals and no one else’s.
What about protecting the assets that you’ve accumulated? Insurance strategy is a critical component of any financial plan. In fact, I believe our primary role as planners is helping manage risks for our clients. Our approach is simple: which risks should our clients assume themselves and which should they lay off to an insurance company?
What would happen to your retirement plan if you or a partner were at fault in an accident? Would your assets be protected? What would happen if you slipped and fell? Could you afford both the medical and ancillary costs associated with reduced physical capacity? How about fire or a significant theft? Do you have appropriate coverage? How recently have you reviewed it?
Virtually everyone needs homeowner’s (or renter’s) insurance as well as some type of vehicle coverage. One place we often make a ‘self-insure or share’ decision is comprehensive coverage on an older vehicle. If you’re driving a newer car, you probably want it repaired in case of a wreck. But if it has a lot of miles on it, you might prefer to keep just the liability coverage, so your nest egg is protected but skip the comprehensive and self-insure the vehicle.
What are some other risks that affect a financial plan? How about an untimely death? That’s the role life insurance is meant to play. We sometimes find that our older clients don’t need as much in force as they did when there were kids to educate and mortgages to pay off. However, we often find them to be underinsured in other areas. What about collectibles, jewelry or fine art? Most homeowner’s policies have caps on the amount of coverage within the basic policy, but all companies will insure specific items for you for an additional premium.
Let me pause here to mention an investment idea we don’t endorse: playing the lottery. If you buy tickets for fun, I guess it could be considered an inexpensive hobby. But, according to the investment-related website Stash, 59% of millennials polled said that winning the lottery was a reasonable plan for funding retirement.
Since people tend to be worth more as they age, we wouldn’t want a client’s nest egg to resemble ‘winning the lottery’ to someone with few assets. To protect against that eventuality, we suggest umbrella coverage. This is a separate policy that floats above other coverages, raising the overall limits of liability protection. I think one million dollars is the minimum a middle-class person should have. I recently recommended increasing coverage to five million for a client who’s a practicing physician.
Since the end of the Second World War, health insurance has generally been available in the US through employment, not on an individual basis. This can be a significant challenge to those who find themselves unemployed or decide to retire early. Health care costs are often reduced in retirement as Medicare subsidizes basic health insurance for all seniors. At this point, the Marketplace remains an option, although often an expensive one, for early retirees. Regardless of age, managing health risks remains a key component of every financial plan.
Attempting a new year’s review of the financial planning process is beyond the scope of a single article, so I’ll be back next week with some additional topics for your consideration.