By Mary A. Malgoire, MBA, CFP™
March, 2005
It never happened before in my entire business career. But since 2003, it’s happened three times. Three different clients, leading vastly different lives, but all very comfortable now, are on a train that's headed for a brick wall!
I once heard an advisor say, "I don't want to be around to watch when my client commits financial suicide". I thought, that's exactly it! That's what Mr. X is doing. Let me be clear, I am not referring to people who struggle financially all of their lives to have enough. I am talking about attorneys, doctors, company executives, inheritors, widows and others who live quite comfortably now.
What do I mean by "financial suicide"? Let me ask you, what is the worst possible financial outcome for your life? My answer — that you outlive your financial resources. You must turn to your children for financial support, you miss out on those activities you've been looking forward to, activities put off to raise a family or have a successful career, and you live alone in a shabby nursing home with sub par care. The "golden years" become the "tin can years". Hands down, this is the worst possible financial outcome. And many people, under the illusion that this could never happen to them, are on a trajectory for exactly this outcome.
How can this happen? It is not something that generally happens overnight, like losing everything in a stock market crash. But those occasional investment shocks, like the bursting of the stock market bubble in 2001, can hurl you further down the road toward this end. Typically a combination of perceived lifestyle needs and financial surprises gradually dissipates once wholly-sufficient financial resources to a point of no return. What starts at a million dollars, easily accommodating $30,000 of withdrawals per year, over time becomes $300,000, due to extra withdrawals, with an expected life of ten years or less. For example, a few large home repairs can swipe $25,000 from your investment account. Or, a series of family obligations like a big birthday celebration, a bar mitzvah or a wedding, can take out at least as much, or more. If the investments are in a pension account, the situation is worse because taxes are due on the distributions.
There are two types of people headed off the retirement cliff. In the first group are those who don't know and would like to know; the second are those who don't want to know. A good financial advisor can do a great deal for people in the first group. We can model current and future income, expenses, inflation effects, investment growth, savings, taxes, long-term health needs, home repair costs and even plan for some financial surprises. It's certainly not an exact picture of the future, but it's the only way to get an "early warning" signal and avert a possible catastrophe. Having a model like this can help illuminate the costs and benefits of behavior changes made today. Sure, there will be a wedding, but there is always the ability to compromise, and compromises are inevitable, either now or later. All costs are a choice. And most people find that the adjustments at this early point are not too drastic.
Such a model can (and should) be maintained and updated through time to keep on a steady course toward financial security. Picture winding up a toy car and letting it run until it stops. What you hope is that your money (the gas) doesn't run out before you do. Modeling helps us understand when your toy car is likely to run out of gas.
The second group of people, those who don't want to know, basically refuse to believe they could be committing financial suicide. They've always been powered by their own dogged determination to be successful or had someone there to bail them out. Many in this mind-set expect the investment markets to save them. Any financial advisor worth her salt will tell you this is a dubious expectation given today's economic challenges (aging population, huge deficits, and pressures on corporate profits). The reality is that people in this group simply don't have enough saved and are facing unacceptable lifestyle changes in order to shore up their financial situation.
To compound an intractable situation, as we age and experience declining health, these trade-offs become more difficult. People get angry when you tell them they can't afford a trip around the world. They are concerned that life is short. We are concerned that life could be very, very long.
For the group who are really in danger of running out of money, there is a "point of no return". It is the point when small, uncomfortable changes in lifestyle give way to large drastic cuts to rescue the situation to safer ground. Such large adjustments to spending can shake your self-concept, your sense of who you are, where you should live, the kinds of restaurants you can afford, the car you should drive, your largess with family and friends, and so forth. When the home is sold to turn equity into cash flow, the replacement home may be in a small town, far away from your "old life". At this point, the clearest danger is from further denial of the situation, leading to excessive credit card use or tapping the equity in your home.
Incidentally, by the time this point arrives, some people are not likely to have an advisor at all! In today's litigious society, the advisor knows that she or he will be on the short list of candidates to be on the receiving end of dismay or even rage. Figure that after several written warnings, the clients who “don’t want to know” most likely will have received a short letter of "graduation", well before the point of no return arrives.
Many consumers already sense the danger of being too smug about the adequacy of their current resources and are asking questions like "Can I safely retire?" "Do I have enough?" This is encouraging. The best time to check the situation is while you are still employed and can be flexible with choices and change habits.
If you have a financial advisor, does this mean you are safe from financial suicide? Not if your advisor only concerns themselves with managing your investments. Why would a money manager, who is mostly aware of withdrawals and knows little about your lifestyle or expected future income, know whether your assets will be depleted or not by, say, age 80? To keep the long view in mind, your advisor should conduct a financial planning review every year. I recommend that such an advisor be a member of The National Association of Personal Financial Advisors (NAPFA) because such advisors are comprehensive financial planners and because they are not compensated by product sales.
So, who are the folks who want to maintain a financial model and keep tabs on their financial future? They want a strong, independent retirement. They want financial security, but they are not only interested in accumulating wealth for security. They are active now in using their money for family needs (e.g. paying for a hearing aid for a grandchild with special needs), making a difference in their community and in the world (e.g. training parents in a rural town to be a support to their own children), or setting and achieving goals for their own life (e.g. to live in Scotland for three years). They are not afraid to hear "tighten the belt" once in a while. Their financial resources give them the freedom to be intentional with their money and make a difference. It is very exciting for a financial advisor to work with clients like these.
But such clients may not be typical. The huge wave of retiring baby boomers, who have had more of a laissez-faire attitude about their financial future than their post-Depression parents did, will experience their fair share of financial suicides. Perhaps this article will serve as a wake-up call and help some people realize that now is the time to make positive choices about their future.
Mary A. Malgoire, MBA, CFP is the president of The Family Firm, Inc. Located in Bethesda, Maryland, The Family Firm provides personal financial advisory services to high net worth individuals and families in the Washington DC Metropolitan Area. Ms. Malgoire can be reached at This e-mail address is being protected from spambots. You need JavaScript enabled to view it or via www.familyfirm.com.
