4 Secrets to Managing Your Money in the Years Before Retirement

The years before retirement are especially important for making decisions about our spending habits, investments and other financial issues. Where do we begin? Join us in discussion with financial advisor Allan Roth, who will give us some pointers on being wise when creating our retirement plan. Enjoy the show!

Margaret Manning:

My guest today is Allan Roth who is the founder of Wealth Logic. He has been working in the investment world and in corporate finance for over 25 years. He is an expert in organizing investments and taking care of your money. He’s been quoted in Money Magazine, Next Avenue, The Wall Street Journal, and he’s been on television and radio. He is a true expert in money business. Welcome, Allan.

Allan Roth:

Thank you for having me. I appreciate it, Margaret.

Margaret:

Thank you for being here. We have got a community of about 450 thousand women all around the world, and regardless of the country we live in, we all have money issues.

Allan:

I bet you do.

Margaret:

As women, we have a unique set of issues, and it would be wonderful to receive help to understand what goes on during that transition period to retirement. The first thing we would like to know is how to make good decisions.

Allan:

In going up to retirement, there is no shortcut. The only way to get there is a bit like dieting: You have to make some money. You have to live below your means. Then you have to invest it well. There’s no shortcut to that.

Margaret:

How many years before retirement do you think someone should start thinking about it? Five years? Ten years? What would your recommendation be?

Allan:

It’s never too late, but the earlier the better. The power of compounding on savings and investing globally really gets you to retirement much quicker, but you’ve got to invest your money well. You’ve got to avoid those emotional mistakes. You’ve got to avoid making the financial services industry rich.

Margaret:

The first thing you mentioned has to do with spending your money wisely. You said you should live beneath your means, instead of living with what you’ve got. Can you tell us, from your own experience, why that’s important?

Allan:

Depending on how much your take home pay is, you’re going to use part of that to live on. However, money is stored energy, so you’ve got to take a piece of that money and defer that immediate gratification from it, and invest it well. The goal of investing well is that it earns greater than inflation. Therefore, that amount of stored energy in your portfolio grows. It’s just that simple.

Margaret:

It does sound really simple, but people, especially in the United States, have become complete victims of commercialization and materialism. As a habit, people spend right up to their maximum and beyond. Do you think people should put aside a certain percentage of their salary immediately after receiving it, thus negating this bad habit of spending all?

Allan:

It varies based upon how much you spend. You make a good point, though. In the United States, there’s the misconception that “You are what you drive.” This makes people spend a lot on fancy cars, which is the single biggest issue with saving. Buying an inexpensive car and holding it for ten years would make a huge impact towards getting you to retirement.

I wrote a piece once called The Millionaire’s Car. In that article I compared two couples that lived across the street from each other. One got the new Lexus every other year, while the other bought the inexpensive Ford, Toyota or whatever and kept it for ten years. 30 years later, the difference that the one couple had versus the other was almost two million dollars.

The Starbucks factor of not buying the Latte every day is also important, but it pales in comparison to buying fancy cars every two years.

Margaret:

I lived in the States for many years, and I always felt a competition among people to show their worth via the material things that they owned. Now that we are in our 60’s, we ask people in our community, “What would you have done differently?” The usual response is, “Save more money.” When you are at the age of 65, it’s very hard to get another million dollars in the bank.

Allan:

Looking back on our past, it’s easy to say, “I wish I had.” When we have a health condition, we say, “I wish I had exercised more. I wish I had eaten better, etc.”

Margaret:

So, living beneath your means is the number one thing we should consider doing while still working. This is an important distinction to make—not just living in your means, but living below your means. It’s also important to deliberately put aside an x amount every month. Did you say what percentage you think was reasonable, Allan?

Allan:

It varies depending on how much you need to live on. Your monthly needs, rather than how much you earn, have a far bigger impact on the amount you need to save. That is because you only earn up to retirement, but your spending habits go for the rest of your life.

Margaret:

That’s true.

Allan:

Controlling your spending habits is the second important thing you should keep in mind when working toward retirement. The biggest ‘Aha!’ I had in my practice concerns two groups of people in their early 60s. The first one consists of people who came to me really optimistic about retirement. The second group were really pessimistic, saying, “I’ll never be able to retire.”

What’s interesting is that the optimists were those who hardly saved a penny. The pessimists, on the other hand, saved millions. They lived below their means and deferred that immediate gratification toward saving instead of spending.

Margaret:

That’s a really interesting distinction. We talk all the time about being optimistic. We encourage people that everything is going to be okay. The American psyche, especially, always demands us to be confident and optimistic. And here you’re saying that maybe we should be a little pessimistic.

Allan:

It’s healthy to be a little pessimistic about living under a bridge. If you think the world is going to end, you are not going to defer and save.

Margaret:

In our community, we have quite a few women in their 50’s. They’re still in the working force, but once they retire, earning money will become difficult. You mentioned investing as an opportunity for income. Tell us more about how to approach investing.

Allan:

If you are investing right, it should be very boring. To illustrate this, I created my website daretobedull.com. With market speculation, you have to figure out which industries are going to do better under President Trump or in Europe, etc. It feels good, and it’s really exciting; unfortunately, it doesn’t work.

The smart thing to do is buying, for instance, a fund that owns every US stock or a fund that owns every international stock, at the lowest cost. This way you avoid all the media hype and speculation about what’s going to do better when markets tank. Sticking to that asset allocation and going against the herd, then you have to buy more stocks, etc. It’s very boring, but it works.

Margaret:

Nowadays, many people hire an investment advisor to help them with their finances. You have been in this business for many years, and you do help people with valuable advice. What do you say are the personal qualities that people should look for in an advisor?

Allan:

When you want honest help from an advisor, you have to look for humility. They have to be willing to talk about the total costs that you would be paying. For example, I think that maybe stocks might beat inflation by 4% in the long run and bonds by 0% in the long run. Therefore, a 50/50 portfolio might have a real return of 2%; how much of that are you giving away to the industry?

The advisor has got to be willing to talk about their mistakes. You would want to make sure that they are not coming across as someone who thinks they are smarter than the market. This thing called Alpha—how much they are beating the market by—is hogwash.

Margaret:

So, if an advisor tells us, “Come work with me because I’m the best,” or “I’ve been able to do this and this,” we should take that with a grain of salt.

Allan:

Yes. It’s like you really can’t find what the past performance of your advisor has been, which is kind of the same.

Margaret:

Your website is a great place to start. Are there other resources you would recommend for how to approach the before retirement planning period?

Allan:

My website is more of a brochure; I don’t necessarily keep it up to date. Although, there is a link to some of my more recent articles that I write for Wall Street Journal or AARP, which is the United States Retirement Program.

Another place to check out is the obliviousinvestor.com. This is Mike Piper’s website where you can find a ton of resources. He also has books specific to the United States, like Social Security Made Simple, Can I Retire, etc. Those are really wonderful, easy to read books, and his website and blog are brilliant.

Morning Star is a wealth of resources when it comes to investing. They are absolutely one of the good guys. Those are just a couple that come to mind.

Margaret:

These are wonderful, thank you. In your opinion, what is the biggest mindset shift that people have to make in this pre-retirement period?

Allan:

I think you’ve got to understand what money is. First of all, it’s stored energy, which gives people choices in life. It gives freedom to pursue what they want. If they need a lot of that stored energy, if they have very expensive habits, that’s going to push back their retirement.

Also, you’ve got to make a conscious decision to save up. If you buy that new fancy car, that’s going to set your retirement back by 2-3 years. You’ve got to make those sorts of tradeoffs.

Margaret:

That’s really good advice. I think that there’s a whole other group of issues that people have to deal with in their 50’s because this is a time of changes: children leave home; friends move away to other parts of the world. It’s a time when you can either get scared of change and just keep on doing the things you’ve always done, or think of it as an opportunity.

Allan:

That’s true. Also, I’m just a financial advisor; I’m no life advisor. I’m still working on my own life. My son just went away to college.

Margaret:

So you are in the middle of that, too. What you’ve shared so far is really helpful, Allan. I look forward to seeing what the community feedback is. I know there will be a push back in the sense that people would think, “Why should I cut back on my pleasures in my 50’s and early 60’s?”

I think it’s important to take a long term view on things, and realistically consider if you are going to continue the way you are, or you’ve got to make some necessary changes. There is no money after retirement, after all.

Allan:

If you are happy to work the rest of your life, you don’t need to defer any immediate gratifications.

Margaret:

Thanks for your advice on this, Allan. I think it’s really reasonable.

Have you thought about your retirement plan yet? What steps have you considered or have already taken? Would you be willing to hire a financial advisor? Please join the conversation!