Simple enough? You need emergency savings. Make it happen. Enough said.
As for retirement, the first question is, how much do I need to save per year? This is a question a lot of people ask themselves. Searching the phrase “How much do I need to save per year” in Google gives about 433 million results (we checked), so there are a lot of opinions out there. MSN Money has a great calculator to give you an idea of how much you need to save per month given your current income level, how much you already have saved, when you want to retire, and how long you expect to need your savings to last during retirement.
We recommend looking at a few of these various guides/calculators to get an idea of where you stand. The easiest way to put your savings plan into action is to actually have, somewhere, a separate bank account, for example, to sock away your current nest egg and to move funds every month. There is something rewarding about being able to see your retirement savings growing month after month. The best way to fund it is by having money automatically put into it every month, withdrawing from perhaps your day-to-day checking account. However you choose to do it, make it a consistent habit.
Sometimes, despite the most carefully crafted plans for the future, life can throw a curveball and you find yourself someplace you never expected to be, dealing with problems you never would have imagined. Bob, whom you met in Chapter 1, asked Lenore to meet with his daughter as she was dealing with a painful situation, one to which Lenore could unfortunately relate.
Sophia – Rebuilding a life and a plan for the future
Lenore met with Bob's daughter for dinner a few days after she had run into him, literally, at the UPS store. After commiserating about their failed marriages, Lenore tried to get a smile out of Sophia. “My marriage was also all about compromise. My ex got his way and I learned to live with it! After an argument with him, the only way I could keep my spirits up was to come up with a really great comeback. Unfortunately, one usually didn't dawn on me until a few days later!”
Sophia was in such a glum mood that the best she could do was a short laugh that was more of a hiccup. She mused, “Nothing has turned out the way I expected it to.”
Lenore told her, “I know what you mean. Seems that they rarely ever do, but sometimes what I get ends up being better than my own plan… Not what you want to hear now, though, is it? I hate it when people give you the, ‘This will be such a growth opportunity’ speech when all I really want to do is feel awful. Relationships seem to me to be a lot like algebra. I look at my X and wonder Y.”
Understandably, Sophia groaned and rolled her eyes. Frankly we can't blame her.
Lenore laughed and told her, “Sorry, bad puns are a familial genetic defect. Now that you and your ex-husband have split, you can explore a life full of unexpected stories, some of which you hopefully won't be able to share,” trying to coax a smile out of her. One of the great things about having something blow up so spectacularly is that you can cash in all that sadness for a ticket to do something you never thought you'd have the courage to do. If you were ever going to really shoot for something beyond your wildest dreams, why not go for it now?” she continued encouragingly, “Let's just make sure that before you go cavorting around the Tuscan hills writing the next great novel or becoming the next Picasso, your finances are in order.”
After Lenore painted that picture, an awkward silence ensued while Sophia's eyes remained glued to the tabletop.
Lenore silently chewed her cheek, thinking of how to best navigate the minefield she'd apparently stepped onto. She asked, “Did your husband handle most of the finances for you two? It's pretty standard for one person in a marriage to handle it all.”
Sophia let out a big breath, but continued to avoid eye contact while fidgeting with the wine list. Lenore stared awkwardly into her water glass, trying to think of some way to help Sophia feel less vulnerable. There is nothing like a painful divorce and the realization that you're not sure how the hell you're going to manage your life going forward to make a mess of one's sense of self-worth.
Being human is just not easy at times. There are days that we both wish we had our respective dogs' lives, being told daily how wonderful we are, plenty of head rubs and getting to feel exquisite joy from something as simple as the sound of a leash being picked up or the tail-tingling sight of a tennis ball.
Lenore stopped chewing on her cheek and asked, “Sophia, how about this? If you would like, you could come over to my office next week and we can go through your finances and figure out how to get everything in order so you know where you stand. I'm guessing that you are feeling totally overwhelmed and don't know where to start. My partner Chris and I can help. Let me know if you feel up to it. Most importantly, which bottle of wine shall we order? I think we need something special to toast the start of your next chapter in life. If you are up for it, it could become a real page-turner… So what do you think of the salads here? I'm trying to get back into bikini shape, but so far the only member of my household with a personal trainer is the dog.”
Sophia, one again, rolled her eyes. You are probably going to want to do the same occasionally during this book, as we just can't help ourselves sometimes.
Second Step: Investing
After some cajoling, we managed to get Sophia to join us for lunch to talk about how she could get back in charge of her finances.
We determined that Sophia had about five months' worth of emergency cash in a savings account, a reasonable-sized nest-egg for her retirement, and we came up with a plan for how much she needed to put away every month to augment her retirement savings. Next, we needed to help her decide how she wanted to manage her retirement savings.
We told her that there are a few things to think about when you decide how you want to invest. The first is how much time you can devote to your investments and the other is how comfortable you are with making decisions about what to invest in and when to buy and sell.
Sophia revealed that her ex-husband had handled most of their investments, so she didn't have a lot of experience, but was really not comfortable handing it all over to someone who she felt was just going to charge her a bunch of fees to do what she thought she could do herself, particularly since she wasn't sure she'd know how to even monitor what they would be doing for her. She'd heard horror stories about how so-called “advisors” had destroyed someone's life savings.
We hear those stories, too, and believe investors are wise to be cautious. There are basically three options with differing levels of commitment:
1. Self-directed
2. Partially self-directed
3. Advisor-directed
If you choose to be self-directed, you are deciding to make all your investment decisions on your own. This is probably the right choice if you have less than $300,000 (that's Lenore's rule of thumb) and/or you feel comfortable choosing your own investments and are willing to devote the time necessary to monitor them. (We'll go over in later chapters just how to do this in a way that is as time-efficient as possible.)
You can also choose to be partially self-directed, which entails either using a broker who will give you advice and guidance on potential investments and your portfolio as a whole or using a service. There are a plethora of services and newsletters out there than can give you guidance on stocks, mutual funds, ETFs, bonds, and so on. These services run the gamut from giving you a complete portfolio, which you actively manage by responding to email alerts, to services that just suggest various stocks, bonds, or funds that an investor may want to consider for their portfolio without giving guidance on timing or how much of your portfolio ought to be invested in any particular security.
Finally, you can choose to work with an investment advisor who works either at a registered investment advisory firm (RIA) or at one of the bigger investment companies such as JP Morgan, Goldman Sachs, Merrill Lynch, and others. This also includes those who take advantage of the family office approach. A family office is a private company that