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Today's Commentary: 10.03.06
Fuzzy Finance
Some of you may have, if only in passing, heard that Pluto has been downgraded to a dwarf planet. My fascination with science extends well beyond this debate over what is and what isn¹t a permanent member of the solar system.
My fascination with finance also extends well beyond what is and isn¹t a financial plan. Equally as nebulous and just as hard to comprehend, your retirement seems as distant as the objects whirling around our sun a billion plus miles away in the Kuiper Belt.
In the case of Pluto, the assumption we all made as youngsters when the planet was named as an official member of the solar system was that this ninth planet, a little odd with its 17% axis and its ice-rock composition, was the last piece in a cosmic puzzle. Granted, astronomers were looking at the heavens with more powerful optics than were previously available and the fact the planet was not similar to the four rocks and the four gaseous giants already orbiting the sun seemed to matter little.
It was there and it seemed to fit. But it didn¹t and despite numerous cries from planet lovers, the fact remains, it is not exactly a planet.
Retirement, like the debate over what a constitutes a planet is largely beyond the limited grasp of the average worker. We hear the word so often, we naturally assume that we will gravitate towards it much as we did with our first job. Problem with that sort of haphazard planning, we will not have as many choices to make once we reach a certain age about how that after-work plan will unfold.
For those with pensions, the rude awakening that your guaranteed, defined benefit will change soon is a startling revelation. For those without a pension, struggling under the day-to-day pressure of not only working but guestimating how much you will need in a future that holds no clues, the outer reaches of our lifetimes seem remote and undiscovered.
But there are ways to adjust that thinking and bring the hazy future into a more precise perspective.
Witness the birth of fuzzy finance. What this new method of understanding seeks to achieve is a more precise way to measure how you think your money should be spent once you reach an age when the income stream is wholly dependent on what you have saved.
Fuzzy finance relies on two principles: honesty and your level of satisfaction. Although we cannot not see the future, we rely on faith that it will come much the way we relied on science to tells us that the world we live in is inhabited by objects beyond our eyesight and in many cases, our perception.
It may seem odd to have the conversation, but everyone needs to ask themselves, out loud: ³what is it about money that I value?² In the here and now, the answer may be relatively simple. Your money provides you with food and shelter, clothing and some measure of pleasure. In the here and now, your money provides you with freedom to do things you might like to do and the security of knowing that everything you have gathered in the way of possessions in protected.
So many of us want the same things in retirement. But retirement is fraught with uncertainty and because of that, we rarely allow ourselves to think about it terms of value.
For most folks, asking themselves what freedom is may garner an answer like: ³I want to travel, play golf, do volunteer work² or something similar. But the cost involved in such activities is often not calculated in terms of how long they will be able to travel on the income you saved, how well their health will hold out, or whether their ambitions will change with time.
While this sounds like so much dreaming, the fact of the matter is we rarely vocalize what we are trying to achieve in retirement. Our parents did not have the need to set such goals but hindsight might suggest to all of us, had they asked the serious questions while they were working, they may not have been searching out the best deals on the cheapest cup of coffee as their retirement years wore on.
The reality of the situation is this: we will have bills as long as we live; we will have health issues as we age; we will have desires that will diminish as we get older. Taking to the road might seem nice in the early days of your job-free afterlife, but committing yourself to caravanning around the country is just not feasible for many of us in the long-term.
There are a good deal of us that will continue to have mortgage payments well into those retirement years and the specter of taxes will not go away just because we have decided not to work.
Once the question of freedom and what you plan on doing with that newly found time is answered, the question is what will make us happy. This sort of soul searching is difficult for the retired person who has found satisfaction in their work and their interaction with colleagues. Once retirement comes into question, happiness becomes the single most important topic following the question of freedom.
In many cases, happiness is freedom and security. Problem is, retirement may not give you the security or the freedom you desire. But happiness can come from community involvement, the rekindling of your relationship with your spouse, or perhaps a more spiritual journey is what you seek.
The easiest way do this is to list those thoughts on paper and then try to define some sort of order of importance. This will allow you and your spouse to align yourselves early on and come to some sort of compromise on what retirement will be like.
This value-based approach is not new yet the conversation about it is. Often the discussion comes on the cusp of leaving the workforce and is often discussed as you lay in bed in at night, alone with your own thoughts.
The benefits are three fold. First, you begin to adjust your sights to a common goal. Secondly, you can prioritize those goals based on how much they cost. And lastly, you can realign your portfolio to achieve those goals.
For instance, suppose you and your spouse share similar values about the environment. Directing your portfolio to socially responsible savings vehicles will provide you with peace of mind now and even allow you to make guilt free increases in your contributions to those funds and their goals.
Perhaps you find that you care little about the overall management of your money but want it to grow more conservative as you age. Picking a lifestyle fund will accomplish this and give you some measure of protection as you age.
Looking at your retirement as a lump sum might not make sense either. Separating what you see as important- in other words, creating a future budget for your retirement costs will help you get a better handle on how your retirement will look. If you will have a house payment well into your retirement, budget for it while allowing for realistic savings for home improvement and upkeep and most importantly, taxes. Be sure to factor in inflation using a higher rate than the current one. It might sound excessive, but using a 6% rate is not unrealistic.
This sort of fuzzy finance, where you wrap yourself around what you believe in and then finance it while you are still working is far better than eliminating hopes and dreams once you retire.
Keeping Pluto as a planet may seem a mote point in our day-to-day activities, but eliminating the things that are truly important and highly valued when we retire is not.
The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.
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