Recently there was a special on TV about the various meteors that NASA has tracked. You may be relieved to know that all the major asteroids have been identified and we should not expect a large collision in the next few decades. The question was then posed, “If there was a large Armageddon-like asteroid heading toward Earth, what could we do about it?” In the movie Armageddon, the solution was to blow the asteroid in half with an atomic bomb so that each half would go on either side of the earth. The real solution would not make a blockbuster movie. What we would do is to try to catch it early on and send a relatively small rocket booster to it and change the trajectory. If you caught it early enough it would take a very small push to make it safely avoid Earth. However, if you waited too long, not even an atomic bomb may be able to avoid catastrophe. The key point being: small nudge, early on = big impact down the road.
This is an analogy with financial planning. I feel that much of my job is meeting asteroids at various distances from the earth. If I meet someone early on, just a slight nudge can get them on the right path and it doesn’t take a lot of effort. If someone is 22 and not saving up money, simply nudging them to save a few hundred per month can create a very healthy retirement. If someone is eligible for senior discounts and hasn’t saved a dime, even an atomic bomb of effort couldn’t help them.
Most of the time, people are somewhere in the middle. But more importantly they don’t know what path they are heading down. We’ve all heard different figures for how much we need to have saved up, but the truth is that everyone is unique. Rules of thumb for how much someone needs saved up for retirement or what people should be invested in are almost never right. We’ve heard that people need $1,000,000 to retire. Statistically we know that not everyone has this, so this rule of thumb must have holes in it. We’ve also heard that people should switch their money to fixed income when they retire, but if they aren’t drawing fixed income from their retirement, this may not make sense.
Going back to the asteroid analogy, when I think of the clients that have come to me when it was too late or when they didn’t heed my advice of changing their course (i.e. apply some boosters to change the path early on), it was usually in trite situations. What I mean is that when I first told them to do something, the sun was shining in their lives so to speak.
Early on in my career I had a client who was 87 years old and in assisted living. I had taken over her account from a previous broker. Right away, I ran the numbers on her account and it was obvious that within about 18 months she was going to have spent down all of her assets. The first time I met with her I brought this up. She was incredibly charming and said she knew it and understood, but in good humor she thought she’d be dead before it’d run out. I asked her about her family and found out she had a daughter in town who helped her. I set a second appointment with her daughter and showed her mother’s “path” and how they needed to make some decisions now unless the daughter was prepared to start supporting her mother’s expensive assisted living (she wasn’t). They did nothing and every two months or so I would nag them about this and tell them what I thought they should do. Sure enough, 18 months after I met them, the day came and she ran out of money. But, she had a credit card. She kept up her good spirits as she stacked about $5,000 per month on her card. All the while she’d joke, “I’m going to go to my grave owing the credit card.” Six months later she hit her $30,000 limit and two months later she was forced to leave the assisted living facility where she had been in for five years and where all her friends were. No early nudge = (for her) financial Armageddon.
Another client came to me with a large check that was a lump sum from his pension. I told him not to take a lump sum because it was like getting a $250,000 paycheck and it would all be taxable. He didn’t, it was taxed at around 28% leaving him $180,000 which we invested. About a month went by and he tells me he’s going to start a business hauling dirt away from building sites – like when they dig out a basement for a new home. He had no experience in this business, had never even been inside of one of these trucks, didn’t know anyone in the business and it was going to cost him $75,000 to get into. You’re welcome to decide which of these was the biggest red flag. I again, urged him not to do this and without belaboring the issue, it didn’t go well. He didn’t know the business and at a rate of $5,000-10,000 per month he was asking me to send him checks to keep him afloat and after about two years he had depleted his nest egg and all he had to account for it was a $60,000 hauling truck worth next to nothing because nobody was building new homes by this time.
And lastly, a long term care case. When I meet with someone for financial planning, my biggest concern is making sure clients don’t run out of money. A big risk to this is the expense of going into long term care. Some people have enough money to self-insure. They should be able to afford it on their own dime. On the other hand, some people hardly have any money; certainly not enough to pay for being in long term care and probably not enough to be able to afford a hefty annual long term care insurance premium payment. The default plan with this group is Medicare. However, most people are somewhere in between. A few years back I had a client that was in this middle group: she didn’t have enough to pay for long term care, but she could afford a premium payment. I ran her a long term care quote and advised her to get it because she was very healthy and relatively young (late 60s – the longer you wait to get it the more expensive it gets). I urged her, but she told me that she decided not to get it because she didn’t want to spend the money on insurance premiums and she was healthy and knew so because she was a nurse. Six months later, she called me up crying because she just found out that she had a cancerous tumor on her spine. Treatment was hopeful in that she probably wouldn’t die from it, but there was a very high risk that she’d end up paralyzed and perhaps end up in long term care. She asked me a question that broke my heart, “Chad, is it too late to still get that long term care insurance?” I think you know the answer.
These three stories of actual clients of mine are all completely true and all haunt me to this day and very much drive how I advise people. The common denominator is that for all three is: it was easy to project a path and to say this is where you’re heading and this is what you need to do and do now. A small nudge early on, like an asteroid heading toward earth, could have potentially prevented each of these catastrophes.
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