Thinking honestly about savings
Better to cut back now than come up short later
It’s time for an uncomfortable conversation about the facts of life.
Some financial advisers are forcing their clients — even those with portfolios worth millions — to look at what remains in their nest eggs and ask themselves if they have enough to keep spending what they are used to spending.
After losing money in both stocks and bonds, “many are getting into fetal mode,” said William Bengen, an El Cajon, Calif., financial planner.
They are immobilized by regret and fear, he said. And while some people are holding their cash tighter than usual, many have no idea if they are saving enough.
Advisers are worried that people aren’t thinking clearly. They fear investors’ approach to saving is haphazard rather than focused on specific needs for getting through emergencies or making nest eggs last through retirement.
Instead of cutting out an expense here and there, advisers suggest people review a few months of their checkbooks and credit card statements, add it up and compare it with what they earn each month. This gives a clear picture of what people are doing.
Included in the monthly log of spending should be occasional spending such as buying a new car or taking a vacation, and homeowners should put away $150 a month for home repairs. In addition, workers need to be channeling at least 10 percent of pay to savings.
If people are saving too little, they will pay for it later in retirement. If they are already retired or living off of a nest egg or inheritance, they will deplete savings too quickly if they have no idea how their spending is draining the money away. Try a budgeting tool on the Internet. There are dozens.
Although advisers say that people will feel calmer about the future if they budget, some say this
environment calls for extraordinary measures.
“Everyone needs to be saving more,” said Deerfield, Ill., financial planner Sue Stevens, who has put together a list of 101 ways to find savings.
Stevens’ list is on the Morningstar Inc. Web site, at Morningstar.com. Search for “Sue Stevens 101.”
Most of all, advisers say they can’t allow people to hope the stock market eventually will fix everything.
Barbara Finder, a Smith Barney financial adviser in Chicago, said when she awoke earlier this year to news about the potential for nationalizing banks, she decided conditions were too extraordinary to let people continue to spend money as usual. Though many of the wealthy people she deals with are scared about the future of their businesses and investments, she said few had started to ask themselves what to do so they don’t run short on cash or deplete their savings too early.
She called each client and gave them homework: Go through everything you buy each month, and items like trips or cars you might want to buy in the future. It’s the first step in starting to calculate whether people can let their stocks sit for years without having to touch them for spending money.
If the calculations show people could be starved for cash in a long bear market, she said she will ask them to cut back spending or even sell some stocks to build up a longer-lasting pool of cash for those dipping into savings.
“It will be a really hard conversation,” she said. “It’s their identity. Some would rather be less in the market than to socialize differently than they are used to.”
Typically, planners try to get people to invest so they can weather long bear markets without selling stock. But the ferocity of this bear market took aggressive investors by surprise, and even
conservative investors with about 30 percent of their portfolio in the stock market have lost more than 10 percent.
For retirees or near retirees, the threats are greatest.
Financial planners have long held that if a person follows a disciplined approach to withdrawing money from savings during retirement, they will not have to worry about running out of money, even if they live into their 90s. Under the rule of thumb, developed on research done by Bengen, a person can withdraw 4 percent of their savings during the first year of retirement, and each year afterward take out a little more to match the rate of inflation.
But most people don’t do this. They withdraw what they think they need for spending money.
“People always spend more than they think they are spending,” said Bruce Weininger, a Chicago financial adviser with Kovitz Investment Group.
It’s a backward approach that can cause people to run out of money too early.
And the haphazard approach is especially dangerous now, Bengen said. In fact, Bengen said he is questioning whether this financial crisis might be so prolonged that even taking 4 percent from retirement savings will be too aggressive.
He is worried about retirees being hit by two factors: continued losses in investments now, and
inflation later. If sharp inflation results from the enormous economic rescue maneuvers by the
government, people will need more savings than usual to buy basics at sharply higher prices.
If inflation rises at 3 percent a year, a person retiring now will need about $112,000 in 15 years to buy what $70,000 would buy now.
It’s too early to tell whether 4 percent withdrawals will hold up over time, Bengen said. So to be on the safe side, he has asked retirees to cut 5 percent from their usual spending. And for people still working, he advocates saving at least 10 percent of their income.
In addition, a few months ago he had retirees sell their stock investments and invested them almost entirely in money market funds, mutual funds in investing in Treasuries and other bonds backed by the U.S. government. A small portion — roughly 3 percent — is invested in gold exchange-traded funds.
Gail MarksJarvis is a personal finance columnist for the Chicago. Contact her at email@example.com.