Do you ever find yourself getting right up to the point where you finally deal with something that bothers you, and at the last moment you back away from solving it? A coaching client wanted to start saving for retirement. She is in her early forties and has spent her life as an alternative health practitioner also devoted to creative pursuits. Money has not been her motivation nor a subject she has focused on. Rather, personal finances have just been a thing to worry about or forget about. She is afraid of numbers and worried about making mistakes. In our first coaching session, she got clear on what is going well and what needs work in her financial picture. Then we assessed what retirement savings goals would meet her needs, and established a plan for getting there. The client experienced a lot of relief at finally having clarity on her finances and demystifying what "I should really start saving for retirement" means. Implementing the plan turned up some interesting resistance, though. Fears and concerns had to surface to be dealt with.
How much should I save for retirement?
That question comes up a lot and there are many great calculators and tools out there to help answer it. My favorite is: Bankrate's Retirement Calculator but my instinct tells me that the implied level of precision is delusional when you are looking at events in the distant future. Our cost of living may change, events may derail our planned income or life expectancy, a windfall can land in your lap - life is crazy, at times random and often beautiful. The value of a plan is that it directs your actions today and gives you the peace of mind to not get caught-up in the uncertainty.
For my coaching client, who was starting from a blank slate as far as understanding financial planning, I wanted to give her a general sense for the magnitude so we talked about the 4% Rule. She was shocked at how big the required nest egg seemed. To maintain her frugal lifestyle throughout a long and healthy retirement, she would have to pull together what seemed to her a huge sum of money. After we showed how compounding grows your savings, even with conservative risk and return parameters, we broke it down to what that means for the amount she will set aside monthly. She realized how feasible meeting the goal would be. "This is huge, but I can do it.[sigh of relief]"
Getting started is still the hard part
Fast forward a couple months, our client reports that she is doing great with her budget and has been setting money aside, as planned, no problem. But wait, there is a problem... the plan called for her to invest that money, in a retirement account where it could grow tax deferred, to meet her retirement goal. Without investment returns and compounding, there is no way she can save up the amount she will need. She had not taken that required action of opening the retirement account, in her case a Roth IRA, and moving the money.
Don't push past your fears, have a conversation with them
What was holding this client back was the fear "that the money would be blocked". We had to address that and bring some facts to the table. Investing is exactly that, it means putting money to a specific use and blocking it from being spent or sitting in cash not earning. This client lives a frugal life and has no dependents, she has good credit. In the event of a small emergency, she could rely on her credit cards versus cash in the bank until she's able to move money. It reassured her when we got into the specifics of the Roth. She would only be moving $5,500 of her savings into it per year, while the rest would still be in her brokerage account. We also discussed the circumstances where an early withdrawal from a Roth would not lead to penalties. The early withdrawal penalty does not apply to distributions that:
Occur because of the IRA owner's disability. (This can be a very narrow definition, so if you get a severe paper cut, don't consider a Roth IRA distribution for a disability until you review IRS Code Section 72(m)(7) and IRS Publication 590.)
Occur because of the IRA owner's death.
Are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.
(Read more from The Motley Fool post here)
So now, armed with more facts and ready to put her plan into action, let's see if our client is able to take care of something she had, for years, put off even thinking about.