New Rules for Emergency Funds

Ray’s Take The old rule of thumb for an emergency savings account was three to six months of living expenses. It was created at a time when the workforce experience was more monolithic and predictable. This was when there more likely was a single breadwinner who worked at the same company their entire life and retired with a gold watch and a big send-off party. 

Those days are behind us now. Changes in the workforce and economy have led to a much more fluid society. Years ago, changing jobs multiple times was considered “job hopping,” and it was a big red flag on an employment application. Nowadays, it’s the norm. So when creating an emergency fund, the new rules should include time and resources for career changes. 

Bear markets come and go. Real financial distress tends to occur when people didn’t properly prepare for reasonably predictable financial challenges. The time to fix the roof is when the sun is shining! Build those reserves while you have cash flow coming in. Give yourself the freedom of finding the career that’s best for you by creating a fund large enough to support yourself and your family for a longer period of time – whether that timeframe is by choice or thrust upon you. 

You need to have a money plan in place before making a career change, not just a career plan. You need a financial plan to protect you from the downside risks you take on in making such a dramatic life transition. And a bigger emergency fund is a vital part of that plan.

The era of lifetime employment is over for more and more, and we need to plan for multiple careers throughout our working lives. An expanded emergency fund will allow us to make better long-term decisions without worrying about losing the house or eating, but it’s hard not to tap into those resources when tempted!

Dana’s Take Employment gaps and transitions do require a greater savings cushion. To minimize those gaps and get ahead of the competition, Gov. Bill Haslam is offering free tuition and fees at Tennessee Colleges of Applied Technology (TCATs). His Drive to 55 and Reconnect programs (tnreconnect.gov) aim to retrain adults for higher-tech – and higher-paying – jobs.

Before turning up your nose at technical or vocational training, look into the salaries for some of these skilled tracks. A surgical technician, the person who hands the surgeon sterilized tools, requires three semesters of training at community college and salaries start at $40,000 to $45,000 plus full benefits. Try matching that with a history degree. 

Peruse the fields of study offered at TCATs to find specialties tailored to current job openings. I know it’s hard to teach an old dog new tricks, but gaining cutting-edge skills may make you feel like a much younger dog. 

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Uncertain Times

Ray’s Take We live in uncertain times. There are no guarantees; there is only planning and adapting. A sound financial plan is a great hedge against uncertain times, and the inability to predict future tax rates or the direction of the stock market should not be a deterrent to having a good financial plan.

A generation ago, not many people really cared what “the market” was doing. We worked, retired, and lived on a pension. Trained investment professionals worried about asset allocations, interest rates and longevity risk. Now it’s up to us.

With the demise of pensions, uncertainty in home prices, generation low interest rates and a volatile stock market, in addition to ongoing changes to Social Security, Medicare and employer-sponsored retirement plans, setting financial goals and sticking to them is more important than ever before.

The fact is, we are living in a new normal and 21st-century retirees have a slew of things to plan for, so it’s important to devote some time to thinking about the areas of your financial plan that you can control. And the sooner the better.

Start with the amount you put into retirement accounts and how those accounts are managed. Next up, review the tools in place to manage unexpected future expenses like a long-term health care plan, a power of attorney and a will. Additionally, have an emergency cash fund to cover short-term expenses.

Short-term volatility is no reason to change your long-term financial plan. But media stories of an alarming nature can give rise to doubts and concerns. An annual review is an important part of making sure you’re still on track. Financial planning in uncertain times requires thoughtful decision-making and a decision to do nothing is as important a decision as is to do something.

A qualified financial planner who is on top of the changing face of the world of planning and investments can help you navigate the murky waters.

Dana’s Take The baby boomer generation is creating a new retirement lifestyle. But what will our kids’ retirement look like? Will there be a new new normal by the time they reach retirement age? And what will retirement look like for them?

With all the changes taking place in the financial world in everything from how we handle paying bills to how we save for the future, it’s very hard to imagine what tools we need to give our kids in order for them to achieve the type of retirement we’ve dreamed of for ourselves.

But will they even want the same type of retirement that we envision for ourselves? It’s important to teach our children money skills based on the world as it is today, but make sure they adapt those skills to match changing trends as they mature into their own retirement dreams.

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Financial Spring Cleaning

Ray’s Take: This time of year our thoughts turn to spring – and cleaning. Sprucing up our yard. Clearing out closets and other clutter. But how about our finances? Spring is a great time to take a look at debt, savings, budgets and retirement plans with an eye to getting them all in shape.

Take a look at any holiday debt you incurred and make plans to pay it off. According to Consumer Reports, approximately 7 percent of shoppers go into the new holiday season still paying off debt from the previous one. If there’s any interest being incurred, that’s the place to start. Taking steps to pay it now will leave money to save before the next holiday season rolls around.

Take a look at your credit reports to make sure there’s nothing on them that’s incorrect, and if there is, take steps to get it corrected. You can get a free report every 12 months to help ensure there is no false information reported about you. Line up all debt in order of interest rate and start knocking them down.

How about your budget? If you don’t have one, do it now. If you do, how have you been doing with it? Over it? Under it? Now is a good time to review your budget and make any adjustments to get back on track if you’ve swerved off it, or to tweak it to make it work even better for you.

Multiple 401(k) accounts should be consolidated if possible. Look at your options and choose the plan with the lowest fees. Make sure your asset allocation is consistent with your plan. If you have changed jobs a few times, you may have left your 401(k) to continue being handled by your previous employer. Combining multiple 401(k)’s makes it easier to manage these accounts and to avoid paying fees to multiple managers.

Taking steps to keep your financial house in order will pay dividends all year long. Once you’ve done that, you can relax in the knowledge that you’ve checked that off your to-do list.

Dana’s Take: While you have your mind on spring-cleaning, take a look in your purse or wallet. Did you find any partially used or unused gift cards languishing in there? If you don’t plan to use them, investigate websites that will pay you cash to take them off your hands.

How about your closet? Do you constantly feel like you have nothing to wear, but the closet is bursting at the seams? Winnow that wardrobe down and sell the rest. Your closet will thank you.

Go through your loyalty cards and frequent flyer points. Tally everything up and use points that are on the verge of expiration.

Doing simple spring-cleaning chores like these can result in more cash in your life. What’s not to love?

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Financial Freedom

Ray’s Take We have been trying to move away from using the word “retirement” and instead focus on achieving “financial freedom.” But have you ever asked yourself what financial freedom is? 

It may have a different meaning to you than to your friends or your spouse. There are bound to be many opinions and some disagreement, even with a spouse or other family member.

In other words, there are many routes to financial freedom and many pictures of what financial freedom looks like.

The first step to financial freedom for a couple is to have a discussion with your spouse and family about what financial freedom means to each of you. It’s difficult to create a plan to get to your destination if you aren’t working toward the same point.

Does financial freedom mean no required work with no debt at all? Or is some debt OK? And if so, what debt? Mortgage? This knowledge can free you. It may include supporting your favorite causes with time, money or both. With a plan, you won’t be wondering if what you’re doing is “right” or “wrong.” In most cases, there is no right or wrong answer – it will depend on your situation.

People often view financial freedom as an enormous task that requires years of saving and investing while concentrating on that distant goal of retirement. It’s important to plan for that day, but it’s also important to enjoy life as you work toward that goal. Financial freedom doesn’t need to wait until retirement; it’s much more beneficial to focus on each victory along the way. That balance can be financial freedom right now.

Have that discussion and put your feet on the road to your destination. It’s up to you to define financial freedom for yourself – and then to create a plan that will help you methodically reach that goal. A financial planner can help you set up the plan to take you there. 

Dana’s Take I might define post-retirement financial freedom as having no worries about money, living in pleasant surroundings with reliable transportation and being able to pay my health care expenses. Plus having the liquidity to travel often and eat out a few times a week. But, is that doable?

In my mind, the key to achieving that freedom is keeping overhead manageable, post-retirement. Hitting that mark does not necessarily require a huge nest egg. Finding a super-affordable rental or sharing a home could drop expenses a lot. I’m surprised that more senior adults don’t share a home. Even if installing a second kitchen were required, the savings might justify the remodel. 

Think about your definition of financial freedom and brainstorm creative ways to get there.

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The Optimal Retirement Age

Ray’s Take Most of us say we want to do it – retire, that is. Given that, how do we find that perfect time to do it? Retirement at the optimal age isn’t something to be left to chance; it is something that needs to be a rational decision that takes into consideration a variety of variables. Financial variables include how much income you’ll be receiving from all sources and factoring in life expectancy and health issues. Emotional variables include considering that your spouse may have taken you for better or worse, but not for lunch.

Choosing the right retirement age is a trade-off between time and money. The traditional retirement age of 65 was chosen when most people didn’t live much past 70, so clearly the math has changed.

Many people would like to retire early but are unsure if they can afford to. Numerous retirement-planning events are triggered at specific ages, such as when you can begin drawing on Social Security or when you are required to take IRA distributions. These need to be factored into your decision along with health insurance options. Consider if retiring early leaves a gap in health insurance coverage.

A harsh reality of the globally competitive world in which we live is that the notion of lifetime employment is increasingly unlikely. Employment, like retirement, will be considered in phases. An “all or none” approach to either one won’t be an option for more and more people. Most people will need to consider working longer to accumulate additional funds for the extended life expectancies we are enjoying.

Finding the right balance is hard. Careers and skill sets will need to evolve. Retirement plans will be like the flight plan for Apollo 13 – scrapped and rewritten as conditions change. Meeting with a financial planner to discuss your options is a good step in the right direction, then buckle up!

Dana’s Take Assuming steady employment with your current employer until the age you choose may be wishful thinking. Ray and I have a college-educated friend who was laid off from his job at age 50. Was that his financial plan? Not even close. 

Saving more into an emergency fund and maxing out retirement savings while fully employed might pay off big if blindsided by an employment gap. 

One area where most of us could cut costs is in extravagant spending on our kids and teens. If your teen’s not working, particularly in the summer, your emergency fund needs that money more than your teen needs to work on his tan. (When did travel “experiences” replace cutting yards in the summer?) 

Include contingencies for employment gaps in your retirement plan. Then, if all goes well, retire early and splurge a little. 

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