In this article, Paul Merriman describes two of our clients who are retired. One has done just about everything right, while the other has made so many mistakes that his life is more difficult than it needs to be. Paul paints a pair of vivid word pictures that show what works – and what doesn’t.

Most folks look forward to retirement, but it’s hardly an idyllic time of life.

Unfortunately, many retirees are forced to stare their finances in the face nearly every day as they worry about providing the basics of life. And for the majority of retirees, financial matters are a source of stress, hovering in the background as a potential threat to their hopes for living as they’d like and leaving a legacy as they wish to.

Most of us make choices that help determine whether our retirement years are golden or gloomy. Whether you’re planning for retirement, about to retire or have already retired, it will be well worth your while to think long and hard about what separates successful retirees from those who are doomed to struggle.

I could talk all day about the elements that make up a good retirement plan, but instead I’d like to describe two clients I have known for some time. Perhaps their stories will stick with you longer than any lecture from me.

One of these clients seems to have done just about everything right. The second has done so many things wrong that I sometimes cringe to think what his life must be like. (I’ve changed the names and a few details of these clients’ identities to protect their privacy and avoid embarrassing them. Except for that, what you’re about to read is true and accurate.)

DOING IT RIGHT: GEORGE

I wish you had an opportunity to meet the first of these clients, George Caldwell, a former Army officer and surgeon. George is one of the nicest people you could want to know. His wife, Ruth, is an accomplished musician with a charming personality.

After he left the service as a lieutenant colonel, George went into private practice for 14 years. Every year, the first claim on his income was a $90,000 (the maximum allowed) contribution to a tax-deferred retirement plan. “My wife and I decided to put the maximum in every year, and whatever we had left, that was what we could live on. We saved first,” he said.

His physician’s pay still left them with more than enough for the basics, but George and Ruth made a point to live below their means. “My friends were driving Jaguars and Mercedes and whatever else was really popular back then, but we didn’t,” George said. “We drove a used Honda, and I still drive a used Honda. We didn’t play being big shots; that wasn’t important to us. We lived in a house that was very modest compared to everybody we knew.

“We kept our expenses in line and we still do, even though we traveled a lot and we never felt deprived. We always shopped around for the best deal on everything.”

Ruth could afford to have any car she wants, but guess what: She’s content to drive an 11-year-old Ford Escort.

While he was working, George dabbled in investments and used several market timing systems from various advisors. At one time he had 25 to 30 mutual funds that he timed using three advisors’ systems. Once on an overseas trip, he realized he had left some of his paperwork at home and couldn’t keep up on his systems.

“I neglected to get out of a fund that was going down, down, down, and it cost me $6,000 or $8,000,” George said. “I can’t remember exactly how much it was, but I really remember that loss.”

George later consolidated his accounts, all of which are now governed by market timing at our company.

George and Ruth never fought about their investments. “She has left it up to me, although I run big decisions past her in advance because she has a lot of good sense,” George said. “When we disagree about something, we work it out until we are both satisfied.”

Their frugal lifestyle and relatively conservative investments have made it possible for George and Ruth to live the life they want. She pursues her music, he pursues travel and other interests. They are currently spending a year living in Atlanta so they can be close to two of their children and can spend a lot of time with a friend who’s battling cancer.

Later this year, George is planning a relatively expensive three-month trip to Antarctica. But he won’t raid his retirement fund to pay for it. Instead, he’ll stick with the fixed amount they withdraw each year for living expenses. “We’ll just cut back a bit on what we spend on other things for awhile,” he said.

George’s formula for retirement sounds easy: Make a bundle of money, and save a good chunk of it, then don’t spend much. But along the way he and Ruth have chosen carefully what is important to them (travel, visiting their children, being able to pursue their separate and shared interests) and have avoided spending much money on things that aren’t important to them like fancy homes, cars, clothes and other “show-off” items.

They’ve taken a long-term outlook, set realistic investment expectations and have managed to avoid the disagreements and power struggles that derail many couples’ financial plans.

We asked George what advice he would give to somebody about to retire.

Here’s what he said: “I’d say you have to do some figuring. Look at what you have and what you’ll need. Examine your lifestyle and what it will cost you. Be sure to account for inflation, and figure out what investment return you need and how you plan to do that.”

George would recommend some reading on retirement and investments, and mentioned a book he gave his children when they were in their 30s: “The Armchair Millionaire” by Lewis Schiff, Douglas Gerlach and Kate Hanley. (The book outlines basic, common-sense investment principals that will be familiar to regular readers of FundAdvice.com.)

DOING IT WRONG: ROGER

We have another long-time client who constantly struggles with his money, his investments and his emotions. His name is Roger Bell, and he has been an on-again, off-again client several times. His pattern goes something like this: He opens an account, gets frustrated, loses his patience, then fires us.

Sometime later, almost like clockwork, Roger calls us back, saying he needs our help once again because he can’t stand what happens when he manages his own money. We express our reluctance to take him as a client again, but he convinces us that he has learned his lesson and this time will be different. And the cycle repeats.

Like George, Roger retired with what would seem to be plenty of money to live a good life. But following his own investment ideas, he has suffered a series of significant losses. The losses are mostly the result of repeatedly shifting from one investment “plan” to another, never giving any strategy enough time to work properly.

Contrary to our advice, Roger has been addicted to chasing recent hot performance, trying to find a spectacularly successful investment that will let him recover his large past losses. As these losses accumulate, that is a tougher and tougher assignment.

When he has been our client, we’ve put his money in carefully chosen strategies that we are confident will meet his needs over the long run. But Roger has a terrible time accepting short-term setbacks, and he has never been patient enough to let those strategies work.

Ironically, Roger’s fear of not making enough money has led him to make investments in which he lost a lot of money. Intellectually, he understands all this perfectly. But he can’t seem to get the emotional part right the way that George has.

As you might imagine, Roger is a difficult client for us. But dealing with clients is our job, not our life. Roger isn’t so fortunate, because he has to live with himself and his out-of-control emotions.

So does Roger’s wife, Joyce. She has her own account with us, managed completely separately, without any input from him. She is a much more successful investor, and an easier client to deal with, because she has patience and a long-term attitude that always seems to elude her husband.

To Roger, buy and hold is a strategy that dictates sticking with an investment as long as it pleases him. (He is certainly not the only investor with this philosophy!)

Likewise, Roger has his own view of market timing. In his mind, when timing results in a profit, it’s a strategy that brilliantly reflects his own judgment about the market. But when it results in a loss, timing is a misguided strategy that’s out of touch with reality.

When we’re managing Roger’s money, he’s constantly on the lookout for anything he perceives as a mistake. When he’s managing his own money, he’s either wildly overconfident, for example when he has bought something that has risen, or he’s quite depressed, for example when he has bought something that has gone down.

Roger does not have a long-range plan. He has not figured out his risk tolerance. And over the past 12 years, from what I know, he has lost more money than he has gained.

Roger drives a very nice car, lives in a nice home and has a fabulous boat. But in the 12 years I have known him, I’d estimate he’s been content with his finances for less than a total of a few months.

When we talk to Roger, we don’t hear many stories of how he and Joyce are living a satisfying life. I think Roger’s emotional struggles consume a good part of his energy. Even with his losses, he has enough to live comfortably, but he doesn’t act as if that’s the case. In short, his money is a problem for him instead of a tool to let him live the way he wants to live.

It would be interesting to ask Roger what advice he would give to someone who’s just retiring. I didn’t do that, and I can only guess what he would say. I hope his advice would not be to follow his example!

MY ADVICE

I suspect most readers of this newsletter fall somewhere in between the two opposites of George and Roger. A few years ago I wrote an article for Alaska Airlines Magazine describing some things that smart people do to plan wisely for retirement.

It’s interesting to think back on this list in relation to Roger and George. I think George does every one of the things I listed, and Roger seems to struggle with many of them.

I’d like to share some of what was in that article. The full text, titled “Rewarding Lifestyles” is in the Retirement section of the article library on our website.

No matter how much or how little money you have, if you keep these relatively simple principals in mind, you can make choices that will make your retirement years more like those of George and less like those of Roger.

 

 

 

Discover how professional money management can help you.  Get a Free Consultation from a Merriman financial advisor.