Friday, May 14, 2010

Off Topic - Budget Crisis

When we bought our place a year ago, I put together a monthly budget to make sure we could afford it on one salary, should one of us be out of work for an extended period of time. At the time it seemed doable. Now, I am extremely unhappy at work, and have been looking at our family budget from a new angle: "Can I afford to quit?"


So inspired by today's post on the Juggle Blog, and the State's finances.....I am seeking some budget advice. Before I start in, let me preface this by saying, we have really tried to find a financial advisor, but have not had any luck. Advisers tend to fall into several camps, they only deal with folks with high net worth (focus on fewer clients), they work on commission only (we don't have investments outside our 401ks/IRAs), or they don't follow up with you.


Ideally I would like to get answers to questions like, "Are we saving enough for retirement?", "Do we have a big enough cash cushion?, " "How much life insurance is really necessary?"etc.


Looking on the web, I find lots of advise, but none of it seems that realistic. Do people really have that big of a cash cushion, or that much life insurance? (given that the personal savings rate in this country is so very low).

I have attempted to go it alone, and created a large spreadsheet for retirement projections, factoring in inflation, SS earnings, contributions, and withdrawals. It all seems reasonable, however because retirement is so far off for Mr. BT and I, the projections are especially sensitive to the assumptions due to all the compounding, so the exercise becomes almost meaningless.


If I were to quit, we would no longer be able to save for retirement, and we wouldn't have much extra cash to start saving for our kids college education. On the other hand, we do have a substantial nest egg by national standards (we have been putting away the max contribution in our 401ks for several years now). Mr. BT and I used a combination of loans, work study, and scholarships to pay for our educations.

So any words of wisdom or advice? I'm really not satisfied with any of my options at this point.

Or perhaps a financial advisor to suggest. The irony in all this, to get a financial advisor, you have to have a lot of investable assets. But how do you get a lot of investable assets if you don't have a financial advisor?

10 comments:

smf said...

I always ask people this simple question:

Why are you expecting to pay for your kids' college education? When did that become the standard?

I'm around 40, and for those friends and family that I know most paid for their education themselves, with some parental help.

Perhaps one answer to the rise in costs is the relatively new expectation that parents are supposed to pay for it.

Personally, if we can we'll help out, but never to sacrifice our own personal finances.

sacramentia said...

TGIF! Sounds like you could use a weekend with your feet up and a nice glass of wine.

Buying Time said...

TGIF indeed Tia - I have tried that tactic for many weeks now...and unfortunately the effects seem to be short lived.

I've found that when I am very frustrated, writing forces me to organize my thoughts. 90% of the stuff I write never makes it onto the blog.

I think the grass is always greener, so just knowing I could have that grass, has helped my soothe my mindset a bit.

Giacomo said...

You might consider a fee-for-service financial advisor. I hear www.napfa.org is a good place to look.

We wasted a good bit of money when we were younger going to "financial advisors" who were really salesmen employed by mutual fund companies (like Merrill Lynch, etc.) who are paid on commission and are inclined to push higher-risk funds, especially when you are young. In past years, they even had the nerve to charge consultation fees in advance of selling you their products!

It's hard to know how much is "enough," but you can expect commissioned people to suggest HUGE numbers to you. Naturally they could care less about your quality-of-life in the near term, they just want as much of your money in their system as possible.

RV6Flyer said...

Giacomo, I agree with you on the fee based advisor front. Unfortunately, there is so little money in fee based advising many don't do it. Accountants can be a very good resource if they have a Certified Financial Planner (CFP) designation. Be wary of anyone connected to an insurance company. The income generated on annuities, life insurance, and mutual funds is staggering. That is why they offer "free" advice if you invest your assets with them.

The discount brokerage houses, Schwab, Fidelity, ect, supposedly offer advice and some of the advisor may even be CFP designated, but they often have their hands tied in what advice they can dole out. They often just us a program from S&P or Moddy's Financial to run montecarlo scenarios based on a list of inputs you provide. These are often free services to get you in the door, and can be a good starting point. They will, however, be extremely conservative and not very creative in distribution of assets. Basically, four or five mutual funds and that is it.

Just save as much as you can and diversify and you should be fine. If you have been maxing out your 401k each year, you will do just fine. Assume with employer match you and your husband are putting away $28,000 per year. With a $100,000 starting balance, 8% return, 3.1% inflation, and 20 more years of saving...you will have $1.9MM in today's dollars. Invest this in a 5% treasury, for example, and you will be receiving $95,000 in retirement income. This does not include post tax savings and investments. I assume your house will be paid off and kids out of college, so the big ticket expenses will be gone and more money can be directed to hanging out in the south of france.

husmanen said...

I hear what you are saying. When I was younger I reviewed a few ‘financial analysts’ and chose a couple to interview and explain my situation, very similar to yours. Nearly all the analysts came back with the same response.

Put everything you have into a retirement fun… and oh, btw, I can help you make that decision. I did not get the feeling they were much more knowledgeable or well informed than I could be if I spent some time analyzing my options myself.

Right now I am using the RV6Flyer method described above.

One other thought that haunts me is the college fund savings as so many parents put it as a high priority.

My parents didn’t have the options of creating one for each of us and we knew that. We took loans, worked as much when we can, at meals at relatives etc. Having worked and borrowed the money myself taught me a lot.

Many of my friends that grew up on El Dorado Hills and Cameron Park had ‘free’ tickets to just about anywhere they could qualify. They knew it and most of them didn’t do much about their grades, floundered in college, many didn’t graduate and those that did I can only count a handful that seem to like what they do. Some still return to the parent tit even today, sad!

One of my best friends had the foresight to go to the JC by Berkeley and then priority transfer as a Junior. He saved thousands of dollars. Berkeley would have never let him in as a Freshman, too much competition and his grades were not 4.0s. This is a scenario I would like to encourage my children to choose.

Buying Time said...

We have defintely been following the RV6Flyer philosphy so far (save and diverify). And was glad to see his example (thanks)...since it also puts my assumptions into perspective as well (I had assumed lower returns and lower inflation).

Husmanen - I witnessed many of the same things.....those who had school paid for didn't appreciate it, and slacked off. So I am very sympathetic to your argument. But at the same time, I feel I missed out on a lot. I had to keep my grades up to keep my scholarships, and didn't have much free time, cause of all the work study. Hoping Mr. BT and I can find a happy medium when it comes to our kids education.

RV6Flyer said...

"I had to keep my grades up to keep my scholarships, and didn't have much free time"

I did it the hard way through both undergrad and grad school. I often wonder how much life would have been different with a little financial help from my family. I was out of the real work force 4 extra years due to taking a lesser load to pay the bills, and I went to much less costly but lowered tiered schools.
I feel by going cheap I didn't get as much depth out of my education as my peers at better schools and I didn't make the contacts with bright motivated future leaders either. It also took me a decade of grunt work in the trenches to get where my friends started at when graduating from Haas, Booth, and Columbia.
My wife and I have talked about this subject for years. If we had kids, we would definitely help them with undergrad at the very least.

Helio said...

BT,
I hear you and understand your predicament very well. I'm closer to retirement age than you and Mr.BT, but the insecurity towards the unknown future is the same regardless of the length of that future or the financial cushion one has in the present.
I suggest you check this forum out:
http://www.early-retirement.org/forums/
It really gave me a lot of relevant information (no BS, just down to earth advices and information sources), and made me feel part of a group of people with similar desires and doubts in life.
There is also an interesting book "work less live more" by one of the members of the forum which I found informative and inspiring, despite its corny title. I was surprised to find out that many people ER (retire early) as a result of a well thought and conscious decision rather than just by accident (lay-off, inheritance, etc).
Firecalc is an interesting calculator to check out how you would survive with your investments should the last 100 years of financial marlet repeated itself.
At any rate, one needs guts to allocate her investments heavily in stocks nowadays.
Good luck and best regards,
Helio

rejunkie said...

I highly recommend the folks at
Symphony Financial Planning (www.symphonyfinancialplanning.com). They are fee-only planners (very reasonable -- about $200/hr the last time I was there). Be sure to have a list of questions you want answered and have everything organized (it sounds like you are already very organized!) to make optimum use of your time. They can help guide you to the options that are best for your comfort level, but they are not going to give you absolute answers. If you find someone who claims to be able to give you absolute answers, run like hell in the opposite direction. Good luck!