CHAPTER 13

The Gift of Fulfillment

RETIREMENT PLANNING

Please grab a pen or pencil. I don’t want you to take the time to think about this, but instead, I want you to complete this sentence with the first thing that comes to mind.

Retirement is . . .________________________________________________

___________________________________________________________________

___________________________________________________________________

This is an exercise I’ve done in retirement seminars, but it’s also one that I use in my Fundamentals of Financial Planning class with college juniors and seniors. The range in answers is astounding, and I’ll share later in the chapter what I think a college student at the beginning of his or her financial journey has to teach an experienced adult contemplating retirement.

But first, what picture comes to mind when you read the word, retirement?

Those pictures, or some very close variant, are what we’re fed by the banks, brokerage firms, and insurance companies daily in the advertisements flooding the screens, pages, and airwaves. But it is not just the advertisements that promote the nonstop pursuit of seemingly unreachable financial goals. It is also the way that most financial plans are developed—especially by the majority of planners who work for one of “The Big 3” proprietary product producers. In those plans, the pinnacle moment of the presentation is when the retirement projections are revealed.

The retirement plan becomes the central point from which all other recommendations are made. Cash flow must be strictly monitored to ensure that you’re amply filling the retirement coffers that will serve you at some hopeful point in the future. Insurance is purchased so the retirement plan can be protected under any number of unexpected circumstances. Estate planning is ensuring your retirement plan continues on even if you don’t. Education planning is making sure you save enough for your children’s college so that you don’t have to impinge on your retirement savings.

What is the downside of retirement-centric financial planning? For most people, it creates a goal that feels out of reach for the majority of their lives, quite possibly forever. You stress to hide away all that you can in your early working years before you have kids. You stress to keep your savings objectives on track through the expensive years of child rearing. You stress to save anything at all during your peak expense years of having children in college. You stress to get caught up on your savings objectives after your kids have passed through college. And then, if you’re privileged enough to reach some seemingly arbitrary number that should produce enough income to live off of without working another day, you stress because—for the first time in your life—you no longer have any power over your income and you’re forced to subsist off of what your aggregate savings can spin off in growth and income. If it sounds like a lot of stress, it is.

For the last 6,000 or so years of humanity, retirement has been a relative nonissue. Even up through the so-called Depression Baby generation, those not born into wealth worked until they could not. Then they enjoyed a relatively short period of time when the company they worked for (all their life) continued their salary for five to 15 years in the form of a pension. But starting with their children—the Baby Boomer generation—financial institutions have been training our minds that life doesn’t really begin until we’re completely retired from all productive activity. They want us to stay focused on the pictures in the commercials, requiring millions saved for an early retirement. As long as we keep striving for the 365 vacation days per year, our money stays with the institutions, and commissions, expenses, fees, and interest continue to build.

The biggest problem with our current view of retirement planning is that it rarely brings a level of satisfaction and fulfillment into the present. It’s always about the future. It rarely helps serve the dreams and goals you have in life, but instead becomes the goal in life; the goal around which everything else revolves. It discourages independence and creativity and seeks to bring people to the conclusion that their financial goals in life should be dictated to them by an “expert,” as opposed to drawn from them by a professional. Is it possible that this modern day notion of retirement and retirement planning is prescribed more for the benefit of those who are writing the prescription than for the patient?

What would a financial plan look like if a higher priority was placed on fulfillment and satisfaction today? Is it possible to reduce the financial noise and confusion cluttering our present and still plan responsibly for the future? Would it be wrong to intentionally decrease your savings for retirement, take a lesser-paying job that is also less burdensome on your time and stress level, or reduce the combined hours that a husband and wife work during their children’s formative years to enjoy those years of rapid development with them?

If so, this could change everything about the way you’d approach your financial planning. Instead of just buying insurance, you would manage risk—sometimes with insurance, but many times with good contingency planning or self-insuring when possible. Instead of being “guilted” into it, estate planning could be a healthful discussion about who you would trust to nurture the character of your children in their formative years and what legacy you’d like to pass on to your heirs later in life.

Instead of submitting to a pie chart of investments “scientifically” designed to work if you can only hold on for the long term, you could find a strategy designed for each year of your life instead of only the last 15 or 20. Instead of stockpiling all of your investing dollars into accounts or investment products with locks and chains (in the form of penalties and taxes), you could concentrate more on short-term investments that provide you with emergency liquidity and mid-term investments to be used for unexpected opportunities that may arise before your retirement party. Instead of existing solely of directives, charts, and graphs, financial planning could be an exploration of your Personal Principles and Goals and a living, breathing plan to help achieve them.

Retirement Past

A convenient metaphor that has been used for many years in the financial planning community to describe planning for retirement is the three-legged stool. This analogy is used to describe the sources from which retirement income will flow. The three legs are (1) Social Security, (2) pension, and (3) personal savings. Social Security is the federal program initiated in the 1930s to help provide a base level of income for retirees to help them avoid complete financial deprivation. Pension is a word that actually encompasses much more than is intended in this illustration, but the corporate pension is an annuity stream of income that is provided to an employee by the company for which the employee worked. Personal savings is the remainder that pre-retirees can muster in cash, certificates of deposit, money market funds, stocks, bonds, mutual funds, and in more recent generations, retirement savings plans like 401ks and IRAs. My, how times have changed.

For the Greatest Generation, Social Security and pension made up the bulk of their retirement income. Any savings was typically in cash and CDs because most of the retirement savings vehicles weren’t yet in existence, mutual funds weren’t yet common, and this generation’s connection to the Great Depression made them very skeptical of stock investing.

Retirement Present

As Boomers sought greater freedom and flexibility in the workplace, employers became less willing and able to provide their workers an income in retirement. As things stand today, most companies have halted, clipped, or dumped their pension offerings, and of those that still exist, most of them are underfunded (they have less in the central pension fund than they are obligated to pay out). Workers have made better use of savings vehicles—like 401ks and IRAs—but largely not to the degree that it will make up for the pensions lost. The three-legged stool is now a two-legged stool—or stilts, if you will. Without that third leg, and after a decade of losses in retirement savings plans, the Boomers are grasping for a new financial identity in retirement.

Retirement Future

What does the future retirement look like? A pogo stick, as we’re down to only one leg! Pensions are history, and there is much talk about the projected insolvency of Social Security as well.

Now, let’s clear something up once and for all regarding Social Security. It is in trouble, but it’s not going to vanish into thin air, because the entity writing the checks also has the ability to print the money, and more importantly, raise taxes. Yes, Social Security is projected to struggle, and yes, Social Security will likely be worth less to future generations; but the United States is not likely to default entirely on this massive obligation to its citizens.

This doesn’t mean that the financial problems of the United States aren’t going to affect current and future retirees. The financial mishandling of our country’s finances is likely to be made most evident in the form of future tax increases. And don’t think it can’t happen; it was only in 1980 when the top marginal income tax rate was 70 percent! In addition to the increasing costs of health care, likely tax increases will make all of the legs of the retirement stool less effective.

Employer-Sponsored Retirement Plans

The personal savings leg of our stool is broken down into several different components. Even though we’ve discussed them in the tax chapter, we’re going to reiterate some of that information and go into further depth. The most common employer-sponsored retirement plans for working Americans are 401k plans. They allow contributions on the part of the employee—in 2011, the employee contribution limit is $16,500, with an additional $5,500 catch-up contribution allowed for employees age 50 or older—as well as matching contributions and/or profit-sharing contributions on the part of the employer. Contributions to a 401k plan are pre-tax—taken out of an employee’s paycheck prior to any federal or state income tax being paid—and grow tax deferred until distributions are taken.

Although their number was reduced throughout the 2008–2009 recession, many employers do offer a matching contribution to their employees’ 401k plans. A common matching contribution is “100 percent up to three percent” or “50 percent up to six percent.” This means, in the first example, if the employee contributes three percent of his or her compensation to the plan, the employer would match the employee’s contribution 100 percent up to three percent. For any employee contribution over three percent, the employer would match nothing. Or, in the second example, if the employee contributes six percent of his or her income to the 401k plan, the employer would contribute 50 percent of that, up to six percent—effectively, three percent of the employee’s compensation.

In addition to the match, or on its own entirely, a company may also make a profit-sharing contribution to the employee’s 401k plan. The total annual addition limit per plan participant is $49,000 in 2011. That means between an employee’s contribution, an employer match, and an employer profit-sharing contribution, the maximum allowable contribution in any one year is $49,000 for any single employee.

In addition to corporate 401k plans, 403b plans function very similarly for not-for-profit companies. Nonprofit retirement plans are also often referred to as TSAs (Tax Sheltered Annuities) and federal employees’ contributory retirement plan is called the thrift savings plan, or TSP. Deferred compensation plans, known as 457 plans, exist for some government employees. Appropriate for smaller employers are simple IRAs and simple 401ks, and for the self-employed, Simplified Employee Pension (SEP) IRAs. Like 401ks, these plans allow employees and employers to receive a tax deduction for contributions and tax deferral on the growth until distribution. These plans typically have much lower cost associated with the establishment and administration of the plans (than 401ks), an important feature for small business owners.

Distributions from 401k plans are taxed as ordinary income, but if taken before certain ages, early distributions may also be penalized at a rate of 10 percent. The common age at which distributions can be taken from most retirement vehicles is 59½, but for 401ks, as long as the participant has parted service, distributions can be taken free of penalty at age 55. Then, the IRS requires 401k owners to take mandatory required distributions (MRDs) at age 70½.

In the case of financial hardship, 401k plans also offer participants the opportunity to take loans from their plans. While this feature can help in a pinch, you should be very wary to take a loan from your 401k, because if you leave that job for any reason in the midst of the payback period, you’ll either be responsible to pay the loan back in full at that time or the outstanding loan balance will be taxed and penalized immediately.

401k Rollovers

To roll or not to roll—that is the question. When you leave a company, you have the following three options facing you:

The financial services world has long relied on old 401ks (most of which an advisor cannot manage or receive fees or commissions from) rolling into IRAs (they can manage) as a steady stream of new business as prospects and clients move from one job to another. While a direct rollover may be the best move for most people, there are a few reasons why someone may want to consider options one or two.

First, while an IRA requires that an owner reach the age of 59½ prior to taking distributions without a penalty, the owner of a 401k who has reached the age of 55 and has parted service from the company may take withdrawals with no penalty. So, if you’re leaving your company between age 55 and 59½ and would like to retire, it may be in your best interest to keep your 401k where it is.

Second, 401ks are thought to offer a higher level of protection from creditors than do IRAs. IRAs are protected on a state-by-state basis, but 401ks offer a federal level of creditor protection, so an individual in a particularly visible position professionally or in the community may find that additional protection comforting.

Finally, you may take a loan from a 401k, while you may not from an IRA. As mentioned, taking a loan from your 401k is not ordinarily advisable, but for those in a unique situation, it could be necessary; however, you can’t take a loan from a 401k without working for the company sponsoring the plan, so you’ll need to transfer the old 401k balance into your new 401k to be able to take a loan.

These contingencies will not apply to the majority of workers who will benefit from the strengths offered in completing a direct rollover to an IRA. First, it is a benefit to be able to consolidate old 401k and other corporate retirement plans in one place. Oftentimes, workers leave a trail of old 401ks following their professional path. These older plans have a tendency to be forgotten and mismanaged.

In addition, 401ks have a limited number of investment options; it could be argued that to keep plan fiduciaries out of legal hot water, 401k plans are designed for mediocrity. While your 401k may have five to 50 (occasionally more) different options, the virtual investment universe is open to you in your IRA. This is the primary reason an old 401k is typically best rolled into an IRA. Many plans even allow workers over the age of 59½ to conduct in-service direct rollovers. While most must wait to conduct a direct rollover until they part service with a company, the IRS—and many company plans—allow a worker to periodically roll out their balance in their existing company 401k once they pass the age of 59½.

Traditional IRAs

The Individual Retirement Account (IRA) came into existence in 1974. The plan was and is to give American workers an incentive to save for retirement with tax privilege. The IRA allows an individual with earned income to take a tax deduction for dollars contributed (if income falls below a certain threshold), and the growth in the account is tax deferred. In order to take the deduction in 2011, an employee who is covered by an employer-sponsored retirement plan (a 401k or equivalent plan) must make less than $56,000 to $66,000 as an individual or $90,000 to $110,000 as a married couple. The ranges given represent a middle ground where savers are phased out of the ability to contribute. Above those upper limits, a saver is still able to contribute to an IRA, but no deduction is allowed.

Non-deductible IRA contributions can make for a record-keeping nightmare because it is the taxpayer who is responsible to keep track of the contributions and growth in the account (that may also have deductible contributions in it). If one of two spouses is covered by an employer-sponsored plan, the income limits for the household are increased to $169,000 to $179,000, and if no one in a household is covered by a plan, there is no income limitation in order to deduct contributions to a Traditional IRA.

When distributions are taken from an IRA, they are taxed as ordinary income. If one chooses not to take distributions from an IRA after reaching age 59½, the IRS will force distributions to be taken at age 70½. These are known as required minimum distributions (RMDs) or sometimes minimum required distributions (MRDs)— no, I don’t know who comes up with all the goofy names or half numbers—and are taken based on the presumable retiree’s life expectancy. Each year, a higher percentage of the IRA is mandated to satisfy the RMD; those who forget are charged a 50 percent excise tax on the amount that was to be withdrawn! By the way, if you’re gifted to be retiring prior to age 59½, but it really grates on your nerves that you can’t touch your IRAs without penalty until you’re 59½, I have a deal for you. The IRS allows an individual of any age to take distributions without penalty prior to age 59 ½ if you can prove you’re gainfully retired, as evidenced by your taking “substantially equal periodic payments” as outlined in IRS Code Section 72(t). (That’s not supposed to make sense; it just is.)

Roth IRAs

If you don’t like paying taxes on your investments or having to remember the age 70½, consider using a Roth IRA as an investment vehicle. Named after a senator from Delaware, a state recognized for its favorable tax treatment of individuals and corporations, the Roth IRA was established by the Taxpayer Relief Act of 1997 as an account into which after-tax dollars are invested. While the Roth gives no tax deduction on the front end, the growth—and eventual distribution—is tax free.

While the tax-free growth and distribution is my favorite reason to like the Roth, a close second is the liquidity factor. The Roth IRA allows you to take out 100 percent of your contributions at any time for any reason with no taxes or penalties. It is only the growth on which you must wait until age 59½ to draw penalty free.

As mentioned, once you make a contribution to a 401k or Traditional IRA, your money should be seen as being held ransom until you reach age 59½. For many people, this is a welcome disincentive, helping them maintain discipline in the area of saving. But, unless you have three to twelve months of living expenses in cash or a liquid investment account—which many people don’t—you’re bound to be faced with some sort of financial emergency requiring you to find available cash. In that case, you’ll either have to pay taxes and a penalty or support the primary enemy of wealth accumulation by grabbing your credit card to cover the expense.

This access to unencumbered withdrawals of Roth IRA principal contributions allows someone who has not yet met their emergency savings goal to take advantage of the most potentially tax-privileged investment vehicle, knowing they can get the money contributed if they absolutely need it. As of 2011, if you make less than $107,000 for a single individual or $169,000 for a married couple, you can contribute $5,000 per person ($6,000 for individuals age 50 or older). Between $107,000 and $122,000 for an individual or $169,000 and $179,000 for a married couple, your allowable Roth contribution is phased out, and if you make over those top thresholds, you’re not able to contribute a dime to a Roth IRA.

If you are unable to contribute to a Roth IRA because you are blessed with a high income, check with your human resources department or retirement plan administrator at work to see if your employer-sponsored plan offers a Roth 401k (or Roth 403b) option. This is a relatively new vehicle allowed by the IRS enabling an employee to contribute to his or her 401k with after-tax dollars and receive the tax-free growth and distribution of a Roth IRA with no maximum income cap. If your plan has a Roth 401k option, you can contribute any portion of your allowable $16,500 annual contribution to your Roth tranche. You may also parcel out your contribution so that 50 percent of it, for example, could go into the Traditional 401k and 50 percent into your Roth 401k. For anyone who has been making a substantial contribution to their 401k each year, it is recommended that you phase in the use of an available Roth 401k so you can weigh the impact it will have on your taxes. Remember, the pre-tax contribution to a Traditional 401k is the equivalent of a tax deduction; this won’t happen in the case of a Roth 401k contribution.

Traditional versus Roth

So now the stage is set for the epic battle Traditional IRA versus Roth IRA! This contrast is argued by many sides for various reasons. Most have focused on the difference between the two regarding taxation. It is suggested for folks who would anticipate a higher rate of tax in the future, the Roth is the best option. For those, however, currently in their peak income earning years and expecting a lower tax rate in retirement, the Traditional IRA is best. Both of these arguments rely heavily on a static income tax code. Most indications would point toward higher taxes in the future, for the reasons outlined in the tax chapter. Advantage Roth.

But there is another reason I recommend to those young and old, in almost any tax bracket, that they contribute to a Roth IRA—income tax levelization in the future. (Yes, I’m fully aware that levelization is not a word recognized in any dictionary, but you’ll know what I mean in a moment.) Most of the income generated by those in retirement is taxable. Even though at its inception Social Security income was promised not to be taxed, now up to 85 percent of one’s Social Security retirement benefit is taxed. Pension income is taxed, although some states do not tax recipients of some pension income to draw retirees to their state. Every single cent of your tax-deductible contributions to 401ks and IRAs is going to be taxed in the year in which you take a distribution. Everyone would be better off in retirement with a healthy bucket of tax-free cash. With that bucket, you have the control to levelize your tax bracket by drawing from your Roth IRA after you’ve reached a certain level of income. Advantage Roth.

There is, however, reason to fear the tax utopia of the Roth IRA will not go on forever. Especially in an environment in which our government is spending more and taking in less, the Roth IRA looks more and more attractive to us, as investors, and less and less attractive to politicians who need us to pay their bills. The majority opinion is that if the Roth IRA train is halted, the ability of retirement savers to make new contributions would cease, but the existing contributions and future growth of existing contributions would be grandfathered to provide the tax treatment originally promised. If the risk of the Roth IRA becoming extinct is high, the response on most of our parts should be to take full advantage of it while we can. Advantage Roth.

The more skeptical view is that the situation could get bad enough that politicians hunting for tax revenue may even go back on their promise, making all future distributions from Roth IRAs taxable—just like Traditional IRAs and 401ks. However unlikely, that is a contingency that deserves a hearing. A Traditional IRA is “a bird in the hand,” and the Roth IRA is “two in the bush.” Advantage Traditional.

(In case you weren’t keeping track, that’s Roth—3; Traditional—1.)

Roth IRA Conversions

In a Roth conversion, a retirement saver takes what is currently in a Traditional IRA or 401k and transforms (or, in IRS vernacular, converts) it into a Roth IRA. That sounds like a great deal—take money that will currently be taxed when it’s taken out and turn it into money that will never be taxed! But did you really think that the IRS was going to let us get away with that? No, a converter will be asked to pay tax on every Traditional IRA dollar that is turned into a Roth IRA dollar. So, if you convert a $50,000 IRA into a Roth IRA, in the year the conversion is performed you’ll pay tax on an additional $50,000 of income.

Is a Roth conversion right for you? Possibly. Until 2010, there was an income cap of $100,000 (for both individuals and married couples), under which one could not convert. Today there is no income cap, so especially for those with high enough income that they’re not allowed to contribute to a Roth, a conversion gives them an opportunity to begin filling that tax-free bucket. For those who have lost a great deal of the value in their investments in recent years, it would seem to make sense to convert depressed IRA dollars into Roth IRA dollars that will hopefully benefit from a tax-free market upturn, but there are a couple of other criteria you should meet before considering making a Roth conversion.

First, you cannot make a Roth conversion work unless you pay the taxes with cash outside of the Traditional IRA. If you used the funds in the IRA, you’d end up paying taxes on the dollars raised to pay taxes (sounds confusing, I know) and make it very hard for this conversion to benefit you numerically. You must also be very careful if you have both deductible and nondeductible IRA accounts you’re hoping to convert. No matter how many individual IRA accounts you hold, the IRS only sees you as having one, so any conversions will deal with the deductible and nondeductible contributions on a pro-rata basis.1

Second, you must have a long time horizon. It will take around a decade for you to pass the break-even on this maneuver, so if you may possibly need the money prior to then, it’s not a good idea.

Finally, the Roth conversion really works best for those who would like to leave their children an inheritance and have the money to do so. There is no better gift to inherit than a tax-free Roth IRA. Unlike you, your heirs will be forced to take distributions from the inherited Roth on an annual basis (based on their life expectancy), but they will still pay no tax. Like Cousin Eddie said in Christmas Vacation when Clark learned he received a subscription to the “Jelly of the Month Club” instead of his typical Christmas bonus, “Clark, that’s the gift that keeps on giving the whole year.” The Roth is a gift that keeps on giving their whole life!

Fulfillment Planning

You see, it’s very difficult to talk about retirement as a concept or stage of life without getting stuck in the minutia and legalese. The minutia will be much easier to tackle if you’ve put the entire notion of retirement in perspective. You may recall from the second chapter we discussed putting the cart before the horse. Retirement is one of those goals that is thrown out for some random date in the future without respect to the personal principles at stake—your Personal Principles.

I encourage you to take the word retirement off of the table.

What are the things in life that fulfill you? It’s likely that a financially comfortable future for you and your family is one of them. That is going to require long-term planning and a concerted and consistent effort now that we’re down to a single leg on the retirement stool, but your fulfillment plan isn’t complete if you’re only focusing on the long term. The short and mid-term must also be a part of your fulfillment plan.

A good friend and associate of mine has a unique posture toward retirement planning in the short, mid-, and long term. Marcus Harris is a Certified Financial Planner™ practitioner and a board member of the Cystic Fibrosis Foundation’s Maryland chapter. At the age of 37, he is a husband, father, financial planner, and one who suffers from Cystic Fibrosis, a life-threatening genetic disease that at this time has no cure. I asked Marcus how the knowledge of this disease has altered his view of retirement.

He told me his personal financial planning philosophy took a serious turn about a decade ago. Up to that point, Marcus assumed his life would be dramatically shortened—today, the life expectancy of someone with CF is 37.4 years, but when Marcus first learned he had the disease, it was only 12 (he was 10 at the time)—and, therefore, he had little need for saving for the long or even the mid-term. He was a spender.

But in his mid-twenties, Marcus made a conscious decision that he wasn’t going to live life in the shadow of his disease; he was going to continue to enjoy life, but he was going to approach it as though the cure was imminent. And God willing, it is. This realization opened the door to Marcus entering into serious relationships, and in 2003, he was married. Now, he and his wife have six-year-old twins, and Marcus is a saver.

His is a situation offering us all a profound lesson in financial planning. Especially because of Marcus’s condition, he is very motivated to plan for his family’s future so that it is secure even if Marcus is unable to enjoy it with them. At the same time, Marcus is reminded daily, with a host of medications following him, that he has a disease that could have already taken his life. You might not know Marcus personally, but you know someone like him, or you personally may have experienced something similar that screams out that we are all living on borrowed time.

Are you familiar with the term antinomy? An antinomy occurs when two agreed-upon truths seem to conflict. It’s absolutely true you should plan and prepare for tomorrow, and it’s entirely true that you must live for today. What most of us forget to do is to plan for today. How do you do that in your personal finances? The first step is to scrap whatever retirement plan you currently have. Don’t throw anything away; just scrap it in your mind for the moment. Now take a look through your Personal Principles again. How many of those Principles appear to have long-term implications? Mid-term? Short-term?

The majority of financial planning recommendations pertain to the long-term category, but most of the stuff we do in life exists in the short and mid-term. And recognizing money plays a role in each of the goals that are likely to spring from your Personal Principles, how would you know how to prioritize? The chances are good that you err on one side or the other. We mentioned the gentler terms of spender and saver, but there are two extremes on each end of that continuum: the spendthrift and the hoarder. On the continuum, where would you put yourself?

You noticed there’s not a “perfect” in the middle, didn’t you? That’s because most of us are pretty recognizable. I’ve looked at hundreds of personal financial statements, and there is no perfect equilibrium. My financial planning colleagues and I are no exception.

If you have a good chunk of money saved in your 401k but very little margin in your checking and savings accounts and a couple of retail store credit cards with balances and you always pick up the tab, you’re a Spender. If you aren’t even contributing enough to your 401k to get all the matching contribution from your employer, you’ve changed banks several times to maximize the first time forgiveness on overdraft fees, your tax return is already spent for next year, and you put your vacations on your credit card, you’re a Spendthrift.

If you max out your 401k, contribute to an IRA, and have adequate emergency reserves, but you also give your spouse a lecture once a month when you review the household budget, you’re a Saver. If you have been certified by every online calculator that you are on track to be able to retire—twice—but have the personality of Ebenezer Scrooge (preconversion) and set your thermostat on 59 degrees in the dead of winter, scoffing at anyone who shows a hint of imprudence, you’re a Hoarder.

Once you’ve determined where you are on this continuum, you’ll know how to craft your short-, mid-, and long-term fulfillment plan because you’ll be able to identify your strengths and weaknesses. You may be naturally gifted in the area of saving for a rainy day far in the future, but you need help opening up the coffers to enjoy a more extravagant family vacation. Or, you might show a natural inclination to take care of yourself and those in your circle today and next year, but it will take discipline to see meaningful amounts of your paycheck going into an account you can’t spend. You’re to be commended for your strengths, but we all need help on our weaknesses.

One of the most practical tools to be used in planning for the short and mid-term is the liquid investment account we’ve mentioned in other chapters. Many, many people—oftentimes, even savers and hoarders—have a cash reserve (large or small doesn’t matter) and then every other dime is tied up in some sort of investment vehicle designed for long-term planning (IRAs, 401ks, 529s, and the like). But there’s nothing in between. All they have is cash earning next to nothing (very short term in design) and money with financial handcuffs solely designed for the long term, penalizing you for early distributions.

If all you have are short- and long-term savings, you have already ruled out some of the more interesting and exciting options in life that might come your way. A fundamental career change? Can’t afford it. A yearlong home-schooling adventure around the world? No chance. The purchase of a rental real estate property or second home? You see where I’m going with this. The regular old liquid investment account is the ideal mid-term investment mechanism. This account should be more aggressively invested than your emergency cash and more conservatively than your inherently long-term accounts.

Look back over that list in the last paragraph for a moment. I see all of those interesting mid-term savings items as representing genuine wealth, but be wary that many financial planners will see these as being outside-of-the-box. Worse yet, they probably have an economic bias to dissuade you from any of those courses of action. But this is your plan, not theirs. You should be saving for the mid-term even if you can’t imagine how you’d use it. If you never do find a valuable use for this money, you simply add it as a complement to your longer-term retirement savings.

Retirement Makeover

But what if there isn’t enough cash flow to go around to fund your short- and mid-term fulfillment plan in addition to your long-term objectives? It is a virtual guarantee that you will have to make compromises in your pursuit of your fulfillment plan. Your financial advisor might tell you you’re obligated to plan for your future retirement first. There is an argument to be made for full recognition of your long-term goals, because it is those that will require a lifetime of diligent saving to achieve. But before you sign away 100 percent of your monthly discretionary income to get locked away in an account where you can’t touch it, I suggest you go back to your Personal Principles and see how you’ve chosen to prioritize your life. Do you remember the example I used in Chapter 2? Working more to get to your long-term goal of reaching “the number” in your long-term savings may conflict with your Personal Principle of being accessible to your family.

The other key to finding peace with your short-, mid-, and long-term fulfillment plan is considered by many to be a four-letter word—work. One of the more difficult tasks for anyone to pull off emotionally or financially is going from full-time work to full-time retirement. Interestingly, both medical doctors and independent-thinking financial planners acknowledge these pictures of retirement may not actually be medically or financially advisable. In a BusinessWeek article by Anne Tergesen, “Live Long and Prosper. Seriously,” she describes the results of studies done at the University of Michigan, National Taiwan University, and Johns Hopkins University in which doctors concluded retirees who kept working showed signs of better health than those who stopped working completely.

What if you’re at a dead end? What if you’ve already reached the point where your health has made it impossible to increase your income through work, and the income you’re receiving from Social Security, pension, and investments simply isn’t enough? What then? The single most impactful thing that you can do to improve your financial standing in retirement is move. You see, your financial standing in retirement is relative, based on your geography. If you live in Boston, the median home price there is $425,300, according to a great online tool, www.bestplaces.net. It also tells me the cost of living in Beantown “is 61.60 percent higher than the U.S. average.”

If I wanted to move to Knoxville, Tennessee, however, I’d find that the median home price is $125,930 and that the cost of living is 15 percent below the U.S. average. Gee, if I took my net worth from Boston to Knoxville, I’d get a lot more bang for my buck! But what if I moved to Chevy Chase Village, a Washington, DC suburb, where the median home costs over a million dollars and the cost of living is 112 percent higher than the U.S. average?

The chances are that wherever you live, you could immediately compound your retirement savings and lifestyle if you are willing to move. When you take a lifetime of savings, pension, Social Security, and real estate from one area to another, you could reasonably go from barely making it financially to being quite comfortable. I don’t want you to move if you don’t want or have to, but this possibility gives you options if you feel stuck. If you’re thinking about moving, in addition to the web site mentioned already, www.retirementliving.com is another excellent resource that will show you, among other things, a tax comparison tool for each state.

At the beginning of the chapter, I posited we could all use the insight I’ve been gleaning from college students a year or two away from graduation. Students generally aren’t looking for a way out, and they don’t have a very high opinion of that which we’ve come to label as retirement. There is no written or unwritten law demanding this optimism can’t accompany us in the later stages of life. You can see retirement as yet another commencement. Instead of feeling the pressure to work like crazy for another two, five, or 10 years to stay on track with a computerized projection of retirement, consider instead taking a step down in compensation to create your dream job and work at it with no desire to quit. Instead of going from full-time work to full-time retirement and putting your productive psyche and your nest egg into shock, work part-time doing something you love, giving your body and mind, as well as your personal financial statements, a chance to ease into so-called retirement.

This chapter could have been another one of those lessons on delayed gratification and compound interest you’ve already heard or read. Know that I believe very strongly in the power of both, but life is not the linear projection we sometimes make it out to be. You don’t even know how hard it is for me to close this chapter on retirement planning without telling you how much you need to save each month to save $1, $2, $5, or $10 million. I am, after all, a financial planner! But much like politics, we as financial planners can make those numbers say whatever we want. And not surprisingly, when people follow generally prudent principles of living within their means, the simple, grandfatherly wisdom of saving 10 percent and giving 10 percent of your income will adequately provide an eventual retirement lifestyle similar to your current one.

Give up on planning only for your future. Question what you think you—and your advisors—know about financial and retirement planning. Don’t sacrifice your present, where you’ll be spending the majority of your days on this earth, for blind faith in a projection of the future that may or may not come to pass. Take joy in knowing you can work instead on a plan that will bring financial fulfillment to all your days by aligning your short-, mid-, and long-term financial plans with your Personal Principles.

1. This is horribly confusing. Let’s say you have one IRA that you consider your “nondeductible IRA.” You contributed $20,000 and it’s currently worth $30,000. But you also have a rollover IRA from a previous 401k, all of which consists of deductible contributions, and its value is $100,000. You may be tempted to only convert your nondeductible IRA—after all, $20,000 of it is after-tax contributions on which you’ll pay no taxes and only $10,000 of it would be taxable growth—but that’s not how the IRS sees it.

They will view you as having only one IRA with a total value of $130,000—$20,000 of which consists of nondeductible contributions. So, of EVERY dollar you convert, 15.38 percent of it will be considered nondeductible contribution. If you mistakenly assumed you could only convert what you considered your nondeductible IRA with $30,000 and only $10,000 would be considered taxable gain, in reality, the pro-rata portion considered after-tax contributions is only $4,615 . . . making over $25,000 of that conversion taxable. Yes, if you’ve managed to follow this twisted tale thus far, that means in order to completely weed out those nondeductible contributions, you’d have to convert the entire $130,000 in IRAs.