Flight Plan for Retirement

It is well known, almost a cliche in fact, that our lives eventually become the result of our previous choices.  By the time one reaches the age of us "boomers" one has made many, many choices that have steered their lives to the point where we find ourselves today.  I often remember that day years ago when I decided to take the physical exam required to qualify for the US Air Force flight training program, even though I needed glasses and had been told I had no chance of passing it.  Yet, due to a series of highly unusual chance events, I passed the exam.  I now find myself rapidly approaching the end of a 30 plus year career of flying airplanes, the culmination of choices I made long ago.  Other choices, many made in haste without really considering their import, have also impacted my life in profound ways.  Desperate for a date to a fraternity party years ago, I tapped the shoulder of a pretty young thing in line in front of me at a cafeteria and asked her for a date.  This was the wisest snap decision I ever made as we have had a fantastic 30 plus years together, and she remains the light of my life to this day.  And many other, less readily recognizable decisions have shaped my life.  A decision not to go there, or a decision to do that, have all worked together to see that I have arrived here.

Many folks, often without realizing it, face momentous decisions each day; decisions that will keep them within the law or decisions that ultimately lead them to further bad decisions that eventually will lead to their downfall.  Many otherwise "good" people have made "bad" decisions because they simply do not take the time to ask themselves if this decision is in keeping with their moral code. Perhaps some make the decision that is just the easiest way to go at the time; maybe they choose not to "rock the boat" at work; perhaps they decide that they will "go along" with a decision they know is wrong just this one time.  Maybe they just do not realize the impact that the decision will ultimately have on their lives.  But nearly every day we face decisions that will affect us long after the decision is made for either better of worse.  Often we cannot know simply because we cannot see the future, but we still we must choose.

I recently had a talk with a young friend of mine struggling with some decisions that will ultimately determine the path that his life will take.  As a youngster, all he ever wanted to do was to fly airplanes.  He is a bright and energetic young man, and through considerable hard work and determination, he found himself hired at a regional airline at the tender age of 21.  In a few short years, oil prices went to $140 a barrel, the financial and credit markets melted down, and a raging recession gripped the land.  Thus he found himself furloughed from his job flying airplanes with his wife expecting their first child; all this before the age of 25.

My young friend is at that age where doors begin closing behind you as you make decisions.  Not all, but some decisions you make at his age will mean that certain opportunities you may now have may never appear again.  Thus it is that he finds himself with his current dilemma.  I mentioned that he is a bright and energetic young man, and that being the case, he did not spend too much time crying about his situation when he lost his flying job, but set about beginning a new career in the financial services industry.  He has been making steady progress and no doubt could eventually be quite successful in this field.  Suddenly he finds he has another opportunity to fly for a living, but if he opts to return to flying he may have to turn his back on his budding career in financial services.  By choosing to fly again, he is facing the fact that he will be away from home a great deal, missing numerous events that his child will be participating in over the years, as well as facing all of the upheavals and tumult that a career in aviation almost guarantees.  So he is facing a very tough decision, one he already knows will likely determine the trajectory of his life.  I shared with him some of my thoughts as I looked back over my flying career and wished him well as he makes his decision.

We also face financial decisions along the way that greatly affect our future.  Do we save this dollar or spend it?  Due to the time value of money and the fact that a dollar saved eventually becomes greater that the original dollar, a dollar saved today eventually becomes more than a dollar.  Of course to save it, we forego the pleasure of spending it today, and the priceless memories we often get from spending a dollar with family or friends.  Do we save for our future, our retirement, our children's education, or do we spend (or borrow) to enjoy life today?  There are often no hard and fast "right" answers.  But there can be a balance.  To arrive at that balance, we have to be brutally honest with ourselves occasionally.  We have to ask ourselves the hard questions and project our spending and our financial lives into the future to see how our spending today will affect those future lives.  We can also observe those around us.  We can note how those who have trod these roads before have managed.  We don't necessarily have to relearn all of the lessons if others have learned them before us.  Experience is often a harsh teacher.  Often it is best to skip the "school of hard knocks" if we possibly can!  But all to often, since the future is unknowable, we simply have to pray for wisdom when facing financial decisions and make the best decision we can with the information at hand.

My wife and I have made many, many spending or saving decisions over the years.  The results of these decisions are even now still evolving.  Some things, such as how much we spent or saved, we could control.  Others, like the general economy, what politicians did to affect it, and general market conditions, we could not.  Thus it is left to us to educate ourselves as best we can, control what we can, and trust the Good Lord with the rest.  At least, that is how we have always faced that aspect of our lives.

I am now facing some fairly big decisions that I know will affect the rest of my life as I contemplate my retirement from flying.  Thus I am reading everything I can find about that stage of life.  I am trying to learn from the experiences of others.  I am just about ready to hang up my flying suit, but I am not ready to check out and play golf five days a week.  Now mind you there is nothing wrong with playing golf and taking it easy in retirement, it is just not the way I envision my retirement. Oh I want to play plenty of golf, but I also want to feel as if I am still making a contribution; that I am still doing something worthwhile for others.  I guess I just want to still feel needed somewhere, somehow.  So, that is why I am doing as much as I can to prepare for this next stage of my life. Whether I eventually become a teacher of some sort, a writer, a financial advisor, or a greeter at Wal-Mart, I am determined to become something else worthwhile.  I guess you can say I am still working on becoming who I am to be.

So, whether we intend it or not, we are all still becoming who we are.  Each day we make decisions that determine that outcome.  Even as I work this out in my life, I wish you well as you become who you are; I hope it is who you want to be!

Fly/Drive Safely

10 November 2009

Viewed from a distance, personal financial planning may appear complicated and overwhelming.  It may appear so unwieldy that folks delay tackling this issue because they do not know exactly where to start or how to go about it. The fact is that someone, or something, is going to do our financial planning; the choice we have is to choose who or what.  We can choose to do it ourselves, seek professional help, or allow the vagaries of daily life to do it for us.  Though it appears that most choose the latter and don't really know where they are going until they get there, I propose that the first two options are much better.  So, I want to take a look at how personal financial planning is logically approached.

First we need to understand that a viable financial plan is never set in stone.  Much about life cannot really be planned, especially our financial lives that often depend not only on the general economy, but also on the whimsical turns that fate occasionally throws our way.  Thus plans have to be flexible and allow for the unexpected, both the good and not so good. So, when we speak of a financial plan, we are really talking about a map that depicts a road we hope to take but also realize that there may be some detours from time to time.  So, with that proviso, let's take a look at the various areas that a good financial plan will cover.

A personal, or family financial plan will cover six basic areas:

1) Budgeting

2) Insurance

3) Taxes

4) Investments

5) Retirement Planning

6) Estate Planning

Budgeting comes first because until a family has an understanding of where their money is going, and how much can reasonably be expected to be left after their fixed expenses each month, they don't really know what they can, or cannot do with their money.  So, they must first determine how much money comes in each month, what their fixed expenses are, and then determine where their discretionary money is going.  This will give them a pretty good idea of what their cash flow looks like and, in the process, reveal what kind of options they may have for the rest of their financial plan. Until this step is taken, the rest of the financial planning process is on hold.

As I mentioned in a previous article, every good financial plan begins with a discussion about insurance.  Just some of the topics to be covered here will include home, auto, life, disability, loss of license (for us pilots), and long term care.  If you are a small business owner you know that many other areas from liability to key man insurance may also come into play.  Insurance may also be a factor in planning how a family business may transfer from one generation to the next.  Insurance products can be complex, but they can also be flexible and fill many needs.  A good insurance agent is worth his commission.

Tax planning has become more and more important as our tax code has become more complex.  The complexity of the US tax code should be an embarrassment to every elected federal official.  We live under a tax code with which neither the Secretary of the Treasury nor the Chairman of the House Ways and Means Committee that writes the tax laws were able to legally comply.  But until our Congress comes to it senses and moves to simplify our tax code, we have to live with it as it is.  Due in part to its complexity, it offers those who do a bit of planning the opportunity to minimize their tax bills.  This touches every other aspect of our financial plan.  How we invest our money, buy insurance, and prepare for our retirement impact our tax bills.  How we are paid at work and withdraw money from our retirement accounts affect our tax bills.  And ultimately, how we prepare to pass on our estates affects our tax bills.  Being aware of the impact of taxes and planning to minimize them where appropriate, can have a very significant impact on one's net worth if done over a lifetime.  So you see, tax planning is a very important part of any financial plan, and with the complexity of today's tax code, the help of a qualified tax specialist is usually needed.

Personal investing and retirement planning actually go hand in hand because the primary reason many of us struggle with investing is the aim to prepare for our eventual retirement.  Thus, once we have a reasonable emergency fund (six months expenses) in place in a stable account such as a bank savings account or money market fund with a large reputable mutual fund company, we can begin our investment/retirement savings plan in earnest.  If our cash flow permits only contributing to a 401k at work, then the simple answer is that is what we should do.  If we have extra funds after fully funding our 401k up to the point where we capture any matching funds from our employer, we can then look to diversify our investments in other accounts, a Roth IRA first and foremost, followed by traditional IRAs.  If funds are then still available, we can invest in taxable accounts such as CDs, individual stocks, or well diversified equity mutual funds.  As our investable funds grow, we should look to diversify further with investments in commodities, real estate, international equities, and bonds.  Again, a great many mutual funds and exchange traded funds are suitable vehicles for these types of investments.  We should always look for funds with the lowest expenses for expenses will figure prominently in our investment success over the course of an investing lifetime. Thus, non-managed, low fee index funds are suggested by many reputable investment gurus.  We also need to be aware of and carefully plan how our investments are allocated between equities, cash, and bonds.  Generally speaking the younger a person is, the greater will be his allocation to equities.  An individual in his 20s or 30s will probably have up to 80% of his portfolio in domestic or foreign equities.  As one nears retirement age, his allocation should become more conservative and favor more cash and bonds.  At retirement I believe that one's portfolio should hold no more than 50% equities.  This is a complex issue, and is being debated in many financial circles.  Much relies on the individual investor's risk tolerance, and there is no "right" answer for everyone.  Again, a good financial counsellor can help the individual find his "right" answer.

Finally, we come to estate planning, perhaps the most complicated financial planning issue and the one with which the average investor has the least experience.  The estate tax is currently being debated in Congress and is doubtless going to change over the course of the next few years.  I believe that the estate tax will be increasing as Congress looks to finance our huge and growing federal deficit, and this is a tax that primarily affects those families with more assets and who can ostensibly better afford it.  Nevertheless, many families will still be able to minimize this tax bite with a bit of prior planning with the help of an estate attorney.  There are a number of trusts and other vehicles that a family can use, if, and a big IF, they plan ahead.  These steps must be taken will before the death of the estate holder.  The mistake that many have made is to wait too long to make estate plans (note famous Nashvillian Steve McNair.)  Regardless of their financial picture, everyone should have a will for a variety of good reasons.  Likewise, every young family should have plans in place to insure that their children are cared for as they would choose if something were to happen to the parents.  No estate is as precious as children; thus their future should not be left to chance.

If one is truly wealthy like Warren Buffet or Bill Gates, they can afford accountants and lawyers on full-time retainer to see to their financial planning.  For the rest of us peons, we need to take the time to educate ourselves a bit and/or seek the help of others.  A good, fee-only financial planner, one with whom you feel comfortable, is well worth their fee.  They will ask questions and encourage you to consider issues that you may not even recognize you need to consider.  They can also suggest ways to deal with these various issues.  But however you approach the topic, just remember that someone or something is going to do financial planning for you.  You get to choose who or what.  Make it a good decision.

Fly/Drive Safely

11 October, 2009