The Boulevard to Financial Independence

So what happens when the economy hits a bump and some of the luster comes off the nation’s financial outlook?  Do people modify their behavior so that they can still save for retirement or do they just worry more because it’s something that they’re increasingly unable to do.

If what’s happening with retirement accounts is any bellwether, folks are pulling their savings out.  According to a recent MSNBC article:

“Some of the nation’s largest retirement plan administrators, such as Great-West Retirement Services and Fidelity Investments, are seeing double-digit spikes in hardship withdrawals and increases in loan requests, a sharp departure from levels that traditionally varied little.”

What’s interesting, is the article ties these 401(k) loans to credit card debt, which in turn is tied to living beyond your means, which will ultimately have a very real effect on US long-term economic stability.  And so we have a government offering up an economic stimulus package designed to reinforce an over-emphasis on consumerism.  Somehow it’s hard for me to follow the logic.

At some point, we’ll have to address the “direct hedonistic component,” which is what drives unwise consumer decisions.  That’s what gets us thinking, “Well, I could put this bonus towards my retirement (a distant unknown that could reduce future anxiety), but what I’d really like to have that new BMW instead (something that’s going to be enjoyable now- though the satisfaction will wear off over time).”

So it appears that the recession is going to take both a short-term and long-term toll if consumer continue to tap their retirement savings to cover poor spending decisions.  What would be interesting is if the economic stimulus package focused on making saving and retirement planning look patriotic, instead of a quick infusion of cash into the economy focused on spending, which is likely to do very little good over the long term and actually reinforces some of the bad habits that helped get us here in the first place (an economy overly reliant on consumer spending).

If you're new here, you may want to subscribe to our RSS feed
or get updates by email. Thanks for visiting!

I just spent the last week getting in touch with what life feels like at the end of retirement. The flu set in and I spent my days just hoping for the next to be a little less painful.

And it made me think that I don’t want to be spending my retirement isolated in some apartment where no one in my building knows me. At the same time, a certain amount of independence, like still being able to live in an apartment, is a real luxury. I’m really not keen on spending my days in a nursing care facility.

Who knows what kind of situations we’ll find ourselves in at the end of life? It’s partly this uncertainty that makes it difficult to motivate to plan for retirement. I should plan to live to 90, but what happens if I only make it to 80, or just 70? I can always keep working if it looks like my health is going to carry well into old age, right?

A study by McKinsey points to the fact that of those presently retired, 40% were forced into retirement. The two main causes of these premature retirements: disability and layoffs. An early retirement can put a serious crimp in quality of life later on. Fortunately, there are still some social and community services for older people to ensure that they can get the most basic care.

Retirement planning is tricky because we all want to hope for the best and it’s an event that is sufficiently far enough away that we can tell ourselves that there will be plenty of time to deal with this later. It’s also complex and not clear to most on where you should start your planning. The more money saved now, though, could be mean tens or hundreds of thousands of dollars extra in retirement. And that could have a major impact on how you live your life in your later years. Worse case scenario if you over-save, you’ll have money to leave behind so that others may benefit from you hard work. That’s not so bad.

As the housing market does a nose dive in certain areas of the country and analysts suggest that we’re not yet through the worst of it as adjustable rate mortgages continue to reset, many people nearing retirement are getting a bit more anxious.  Somewhere around 50% of Americans are counting on their home as a significant part of their retirement nest egg.

I had coffee last week with someone and he started talking about Boulevard R’s calculations.  He assumed that we were counting the equity in his house as an asset that could be counted toward his retirement.  Lots of Americans are counting on the recent gains in the housing market to fund their retirement.  Unfortunately, your home is not something that you want to bank on.

First of all, you have to live somewhere, unless you plan on selling your home and spending the rest of your life living on a tropical beach in a tent (doesn’t sound half-bad, though it might be hard to fit all your furniture inside).  Second, you’re not going to get nearly as much money out of your house as might think.

Randy laid out the math nicely in an earlier blog post.

There are a lot of expenses when it comes to tapping the equity in your home.  Naturally, banks and other lenders are particularly good at getting more of your assets into their pockets.  Up until recently, I believe that the market capitalization of financial services companies included in the S&P 500 accounted for over 20% of its total value.  It’s quite rare for any sector to be so dominant and it’s a position that financials have held for multiple years.

So soon, Boulevard R is going to be implementing a new feature to allow users to count the equity in their home (though we don’t recommend it and urge consumers to beware of reverse mortgages, at least until they become a more reputable financial transaction without so many hidden fees or with such poor conditions).  The stark reality is that for many Americans, they’ve saved so little they’re going to need to tap into all the assets they can.

One more reason to do all you can to get on track now, even if that means delaying retirement a bit.  Just don’t get stuck in the trap that you can just work forever.  According to McKinsey, 40% of current retirees were forced to stop working earlier than they had planned, primarily through either layoffs or becoming disabled on the job.

There are a lot of downers when it comes to retirement.  There’s hope though- if you understand where you stand, become better informed and start to make incremental changes now, you’ll be able to navigate to a secure retirement.

In the months and months we’ve been working away, we’ve had the opportunity to check out a lot of different online tools aimed at helping consumers come up with a plan, or at least a calculation, for retirement.

Boulevard R is continually refining our calculations so that they’re increasingly accurate and customized. We’re using a cost of living index by zip codes now and are fine tuning the impact of buying a home (like any independent financial advisor worth their salt would tell you, you shouldn’t count on the equity in your home as part of your nest egg because you have to live somewhere)).

In the process of coming up with our own algorithm and testing lots of other tools to see how they approach retirement planning calculations, I think the different types of planning calcs can be roughly grouped into the following categories:

1. Hi, meet our sales rep
2. Hi, we’re here to help (meet our sales rep)
3. Hi, we’re here to help (and they really are)
4. Get out the your tax returns from the last 3 years
5. You like multimedia? Have I got a site for you!
6. You like meaningless calculations? Step right up!

Let’s start at the top and explore #1 a bit more. Fidelity’s myPlan tool is a classic example of this. It gives you a quick and easy calculation, coupled with voice over and sliders. The user interface is very friendly and engaging, but the problem is that it generally comes up with an unrealistic number, because so many of the big impact assumptions are hard wired into the tool itself (like the replacement rate for income). Since you realize that this point that saving $1.2 million is a daunting proposition, talking to a Fidelity rep might be an increasingly attractive proposition. Many of the tools made by financial services companies fall into this group, principally because they’re more aligned with their own interests than those of their customers.

#2 is a more subtle variation on the first approach. It tries to help, sometimes valiantly, but in the end the goal is to provide an array of options, one of which (guess which one) is more attractive than the others. Nationwide does a nice job with this on their Retireability Check. They have a lot of good information about how to choose a financial advisor. But guess what- Nationwide is not in the business of generating leads for non-associated financial advisors.

Financial Engines is a good example of #3. Tools built by a Nobel Prize winning economist. They really set out to create tools to help consumers make good investment decisions. The problem is that most people don’t what to use them. They’re not particularly engaging and you’re totally isolated from anyone else who uses the tool. No collective wisdom, no tips or advice, just modeling with a pretty bland interface. When it comes to picking good mutual funds, they make it pretty easy, though it’d be interested to see how the top mutual funds perform against index funds.

Of all the different kinds of gifts, the one that Boulevard R aspires to give to everyone who uses our application is the gift of financial knowledge.

We live in a society where most Americans have received very little in the way of education on personal finances. Research by Annamaria Lusardi and Olivia S. Mitchell (Financial Literacy and Planning: Implications for Retirement Wellbeing. University of Michigan Retirement Research Center, 2005) discovered the following about American’s financial literacy:

1. One out of three Americans could not answer this question correctly: Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?
2. One out of two could not answer this question correctly: “Buying a single company stock usually provides a safer return than a stock mutual fund.”

Regardless of one’s financial literacy, the nonprofit Employee Benefit Research Institute found that just doing a retirement needs calculation is enough to motivate more than half of those who do one to start saving more. Realizing that there is a considerable anxiety among consumers when it comes to retirement and that many people (particularly parents) are concerned about how those who are close to them are saving for retirement, we created a new feature to help give the gift of financial education.

http://www.boulevardr.com/br/gift/landing.jsf

Boulevard R wants to help facilitate a discussion around one of the most sensitive issues there is: saving for retirement. To help get retirement planing on the radar for those close to you, we help you kickstart someone else’s plan (just fill in basic information like age, gender, marital status and profession) and then offer a gift (optional) if they complete a retirement calculation. You can give money towards an IRA, iTunes songs or create your own gift.

In the long run, a little reward now can pay huge dividends later for those close to you if they start to save a bit more for a secure retirement. And it also makes us feel like we’re doing our job.

We got some nice press today from the good folks over at FiLife.com.

Kristen, who covers the retirement planning and investing beat, wrote up a thoughtful piece on what we’re up to. She did a great job of accurately depicting our approach to planning, as well as a laying out what’s coming down the pipe.

The angle she took by including the mental health aspect of what Boulevard R is about was an interesting emphasis. The reality is that a lot of Americans are pretty stressed out about retirement. Even if they’re doing a good job, they’re constantly hearing that it’s never good enough. Boulevard R tries to go beyond what existing retirement calculators offer, by customizing your calculation (using Bureau of Labor Statistics, Census and IRS data), so the amount you need to save on an ongoing basis is reflective of what your life situation is, as well as your expectations for retirement.

We can all do more to prepare, but how about just making sure that we have our basics covered and then go from there? In an age where the safety nets are fraying and we have to depend on ourselves (and our own judgment on saving and investing, while providing for those who depend on us), if Boulevard R can remove some of the stresses inherent in personal finance, while motivating people to do the best that they can to prepare for life after work, then we’ll have done something special.