Willow:
I had just emerged from grad school. I had a six year old kid and I had debt still.
Jamie:
Meet Willow. Most of her life, money had gone straight to cover immediate needs.
Willow:
All of the questions in my mind about what to do with money were answered, just because there was only a certain amount of money, and it had to go to very specific things.
Jamie:
Willow had her son in her twenties and raised him as a single mom, at the same time as putting herself through school. Saving and investing weren't options then, but they are now. Willow is in her forties and runs her own company, consulting to startups in the energy sector. She's married and lives mostly in the San Francisco Bay area, but Willow is concerned that it's too late to recover from such a slow start.
Willow:
My biggest worry is that we're just so far behind, we'll never be able to get to that magic number that we need in order to do retirement, without really putting ourselves through hell to get there.
Jamie:
Even with her annual income, which is now $350,000, combined with her husband's income of $150,000, Willow still feels they're in a vulnerable position. What if they couldn't work and needed their savings?
Willow:
Cause if that happens before we get to a certain point, or a certain age, there's no way we'll be able to get to that end goal.
Jamie:
And that end goal isn't extravagant. It's not a big house or a fancy car. This is what Willow wants.
Willow:
I want to be looking at something pretty when I die. That's basically it. I'd like to have some patch of land, by some beautiful, natural thing. I'm not really a stuff person but I do want the nice thing to look at, that's for sure.
Jamie:
And so, Willow is faced with a few choices. She's got about $120,000 in savings and will need some of that to help her son through college in the next few years, an expense she'll share with her son's father. She's also got, with her husband, around $200,000 in company stock from previous employers. Their yearly expenses come in close to $160,000. They both work remotely, so could live anywhere and that flexibility is important to them. Because Willow owns her business, she could choose to work a lot more or less. She's not sure how much she needs to reach that picture perfect retirement location. She's not sure how to think about her finances at this stage in her life.
Willow:
The extent of my forward thinking is just build a pile of cash and then I'll have a pile of cash, but that's about as far as it goes. I don’t know what I don't know about financial planning.
Intro
Jamie:
That we can help with. That's where we'll start today.
Jamie:
I'm Jamie Roo. Welcome to, What Should I Do With My Money, an original podcast from Morgan Stanley. We match real people asking real questions about their money with experienced financial advisors. Here at Morgan Stanley, we work with a range of clients. Some, are experienced investors. Others, are new to working with a financial advisor. On this show, you get a front row seat to hear what these initial conversations are like. And get answers to some of the questions you might have yourself.
Willow's reality of being in her forties and only now being able to think seriously about things like savings in retirement, is very common. It can take many years after school, getting careers going and kids, before there's money available to even be thinking about finances beyond everyday expenses. And the longer you wait, the more urgent the questions become.
Should I be doing more with my savings? When and how should I be thinking about investing? Is it okay to rent forever? Or should I really be trying to buy? And how much is really enough to retire?
We'll offer some guidance to Willow, with help from one of our financial advisors. Sarah joins us from Ridgewood, New Jersey. Sarah's a Senior Vice President and a Financial Advisor at Morgan Stanley. Her passion and her specialty is focusing on the financial needs of women.
Sarah:
It's an underserved market and I'm not exactly sure why that is, as 51% of the population. The difference between women and men, as it relates to finances, tends to be a crisis of confidence. And so, just breaking down that barrier and making people understand that they don't need to feel bad for wherever they're at. Let's figure out where you are today and then, okay, what do I need to do to move forward?
Jamie:
Sarah starts by creating a plan of manageable steps.
Sarah:
It's really hard for someone to sit there and say, "I need a million dollars. I need $2 million. I need $10 million." It feels impossible if you're not close to that but when you break it down and you say, "Okay, I'm going to put away $500 a month for college and a thousand dollars a month for retirement." Over time, when you do that the right way, it adds up and you get to that big number and so we just try to make it easy for people to understand that they can get there.
Jamie:
Willow has a good income. She knows how to stick to budgets. Now, for a plan to help her get there.
Conversation
Jamie:
So Willow, Sarah has been briefed on your background and some of what you're interested in learning about today. She might have some questions as you go, but really today is about you and your questions. So, I'll let you take it away and we'll chat again after.
Willow:
So given our situation and the amount of money that we've saved so far, I'm trying to figure out what's the balance between money for my son who's entering college, money for retirement, and then money for something that looks more like property or even stock market kind of activity, something that's maybe more traditionally considered to be an investment.
Sarah:
So the balance comes down to a few different things. One thing that we recommend is that everyone have six months of living expense as cash. If your spending is around $160,000 a year, that's about 80,000, at a minimum, that should be in cash anyway. Once you're at that level, that's when you want to start allocating to goals.
And for you and your husband, one of the things that I think might make a lot of sense to think about is a retirement plan as part of the business. So, you could save money for retirement, but also take a tax deduction for having some plans in place and there are a lot of options available to people who are self-employed, where you can actually put away more money than people who are working in a traditional work environment, where they may only have access to a 401k.
Then there's the college savings piece. …
Jamie: Based on Sarah’s quick math of Willow’s cash – that baseline savings number, she has some available to go towards her son’s first year of college. Earnings can contribute in future years.
That covers three major goals: cash, retirement, and college.
Now Sarah brings up a few things she likes to remind her business-owning clients – some things they should bring up with their tax advisor, or accountant.
This answers Willow's question: What would happen if all of a sudden she couldn't work?
Sarah:
Are you maximizing all the potential business expenses and advantages that come with having your own business?
One of the things in particular that some people like to think about are options that relate to potential long-term care health insurance policies and whether or not those can be considered a business expense, as well as disability insurance. If you're self-employed, it's so important to be able to have an income stream in the event that you can't work.
And so while disability insurance may be kind of expensive, it's oftentimes worth it because it can pay a good chunk of what your current income is, up through the age of 65, and it's important to have that in place as a sole provider, if you're a business owner.
Willow:
That makes a lot of sense. I have been wondering how to get more expenses because my business is very lean and so I do feel the tax burden significantly.
Sarah:
Just making a list of your everyday expenses and then showing that to the accountant, they can let you know what makes sense or what doesn't.
Willow:
That's great. Thank you.
Sarah:
Ask me anything Willow.
Willow:
Well, I have a big question around property because everybody who's significantly older than me, has property, and it's been the thing that you're supposed to do. Even if you don't know what else to do, buy a house. And especially as a person who's living in the Bay Area and thinking about, wow, just to get a down payment on that house, what would that be like? We've just been renting and I was wondering, is this a huge problem?
Sarah:
I have a saying that I'm not sure who I got it from, which is renting is for the rich because oftentimes it can be equally as expensive to rent or to own and so it's a math problem. But what the rent allows you to do is gives you some flexibility in terms of cash flow. So just to use rough math, if you were going to buy a place that might wipe out a lot of your cash savings and there's still going to be a monthly carrying cost for that place that you've now owned. When you add all that up, it may be if you live in the right part of the country, more advantageous for you to rent instead, especially when there's good options.
Now, there's suburban areas, or rural areas where there aren't a lot of good rental options. And so in those cases, it may make a lot more sense to buy, especially if you know you're going to be there for at least five years.
I do get people all the time, they'll come to me and they'll say, "My uncle told me that I'm completely wasting money on renting." And I'm like, "Okay, so let's run the math." And we run the math and we figure out maybe not. Maybe you're actually a lot better off having rented all this time, rather than buying.
That being said, I clearly, by the nature of what I do, have a tendency to come at these things overly mathematically and pragmatically, and some people want what they want. And so, there's value there just because financially it may make more sense for you to rent than to buy, that doesn't mean that you shouldn't take into consideration the fact that you might want to own a place live there a long time and make it your own.
Willow:
Yeah, that totally helps.
Sarah:
You're not bad for renting.
Willow:
I have always favored flexibility. It's the way I've been able to follow opportunity, was being more flexible and just being able to pick up and go somewhere, or just have expenses that I wasn't tied to – house payment, car payment, any of those things.
Sarah:
The other thing about buying versus renting, is it's really important to think about how long you'll be somewhere. So to your point on flexibility, if it's not going to be at least five years, oftentimes financially, it doesn't make sense to buy rather than rent.
Willow:
Got it. I had another question which is around the stock market and investment in things. And so, 401ks and the stock market to me are a little bit of a black box, and so I'm wondering, okay, once you have that, then what do you do?
Sarah:
We typically encourage a diversified portfolio of high quality assets and those assets would be from the stock market, potentially the bond market or alternative investments, and we would come up with what does that exact allocation and strategy look like, based on the goal that you have in mind.
So, as an example, if college is a short term goal, we don't want to invest that money in something that would be a risk asset because we know we need it in the next few years and we don't need it to incur any declines based on market conditions.
However, you're probably not retiring for I'll just go with hypothetically 20 years, and so given that timeframe, there's some time to allow for some volatility, but if you were consistently putting money away into a diversified portfolio, history tells us that would grow over time. And based on your comfort level around risk, we would determine an appropriate risk level for that investment, putting something together that is thoughtful, cost-efficient, and has a long term growth objective, I think would make a lot of sense for you.
Jamie: Willow and her husband also have their equity from previous employers to consider – the $200,000 in company stock. This too could be part of their diversified portfolio if it satisfied, like Sarah said, their risk tolerance and any timelines for their specific goals.
Willow:
With inflation, with stock market volatility, with recession fears, it seems like a scary time to start making financial decisions.
My financial risk tolerance is like, I don't know, maybe I shouldn’t do anything right now. Just wait another year or two. I'm wondering what to do in that situation.
Sarah:
So the financial markets, the stock market, as an example, is the only store in the world that when they have a huge sale, no one seems to shop and right now everything is on sale, including luxury goods. Every department is having a sale right now. We don't often get that. We haven't had this in the last 50 years where the bond market and the stock market have both been on sale to the extent that they are right now.
So, it's actually a great time to be investing because you're buying low or lower than it was.
Jamie: I have to add, this bit of information was relevant the day this episode was recorded and not necessarily the reality of the markets today – the day you’re listening to this. Okay, back to these two.
… so in your case, it would be above and beyond that emergency savings, above and beyond what you know you might need for college in the next few years.
But let's say you were going to start contributing to your retirement plan. Now would be a fantastic time to do it because you're not going to be touching that money for a long time and depending on the day, the market is down. So it really makes sense, I think, to take advantage of that sale and to not be afraid of it.
Willow:
That's super helpful. I do love a good sale.
Sarah:
Loves a good sale.
Willow:
How much time do people who are managing their money well, spend managing their money?
Sarah:
That's a great question. I had read previously that something like three hours a month was sort of the minimum amount of time someone should spend. I'll tell you with my own assets, I spend more time than that and I take a look at what are my plans? Do I have my plans lined with my goals? I check all my accounts, all of that stuff. So somebody who might be newer to it, might be more time, just because you're looking to understand and comprehend. There's a lot of great tools out there though.
Jamie:
There's no shortage of financial planning tools online. You just need an inventory of your assets, your liabilities, as well as your income and expenses. And if you're doing this yourself, you can model it out, based on an implied growth rate, to figure out where you'd be in say 20 years.
Morgan Stanley has a few tools we use these with our clients to help them set goals, develop a plan, and track progress through all kinds of market conditions.
What Willow really wants to know here is, how can she know when and if she'll ever have enough to retire.
Willow:
The only kind of calculation that I had done before was look at how much money you are spending now and multiply that by some sort of factor and how many years you expect to live or work, and then be like, "Oh, it's X million dollars that you need."
Is that a useful way of figuring out how much money I need?
Sarah:
I can give you on the back of an envelope. There's something out there. It's a financial planning rule that's been around for a long time called the 4% rule. There's arguments that that number of 4% should be 3%, should be 5%, and there are inflation factors you’d want to include, but the 4% rule's been out for a long time. It basically says that when you go into retirement, you can spend 4% of your asset level for the rest of your life and essentially not run out of money, or likely chance you won't. So, if I just back into that, as an example, if you had a million dollars, you could spend 40,000 of it a year, that’s 4%, and if that money is invested thoughtfully, and let's say a moderate growth type of allocation, you would, historically speaking, not run out of money for the rest of your life.
Now, this is a very basic, rudimentary approach to estimating this that doesn’t take into account your own spending habits, your portfolio’s asset allocation, how the market might perform or inflation. When we do financial planning with our clients, we use more sophisticated tools that look at a multitude of factors, personalized to their specific situations, and run models to determine how much money they would need to reach their goals with a confident probability of success. And we revisit it regularly as circumstances change. But the gist of it is that you’ll need a certain amount of money, invested a certain way to provide you the income you need when you retire.
Willow:
I'm really happy that you explained why that the pile of money has to be a certain size. I'm like, oh yeah, I'm a scientist. That makes total sense to me.
Sarah:
Right. so, to your point on, I want to look at something pretty but maybe it's not San Francisco Bay when you retire. Maybe it's something that's a little more cost effective. Everything's a choice.
Willow:
Well, I do want to know, this isn't a question. This is more of a seeking validation. I'm like, are we going to be okay? We have enough time, right?
Sarah:
Yes. I think you're going to be okay. I think you guys are in a very unique situation, in that you have some real awesome tools available to you that you probably haven't taken advantage of yet.
Based on our conversations today, I think that there are some next steps that make a lot of sense. First, we need to get more detailed. We need to sit down together and do some math to determine your cash flow needs and get a sense of your budget, your income, and your expenses. That's the first step in a financial planning process.
The next thing we need to do is we really need to look at that retirement savings plan for your business. You have a lot of options available to you, and we need to figure out what makes the most sense. Also, we need to look at what it would be to have a diversified portfolio that aligns with your risk tolerance.
And is also optimized for tax efficiency so that you can make the most of your money. And finally, I think we should keep on the list your goals around talking about buying and investing in property or whether it makes sense to keep renting and taking a look at all of the cash flow needs. Um, I think it's just something to keep on the list and as part of the financial planning process, we're gonna come back to these goals on a regular basis.
Willow:
That's great.
Sarah:
I also, I want to say something that is really, specific to you, but I wish everyone was like this. The fact that you understand that everything is a choice, puts you at such a advantage. So, if it's important to you to be able to have flexibility, or to travel, then that means you have to make choices other places to be able to do what you love.
And so in thinking about work, as an example, do I work more? Do I work less? It would be nice to run the math, to figure out, how much do you need to put away, to be able to achieve the lifestyle you want, so that know and you don't feel guilty about whatever it is you decide. Because at the end of the day, what for, right?
And so it's just so refreshing to talk to someone who has such a wonderful perspective on life and money, and really cares about making sure that this gets right. I wish everybody had such an open mind about things because it's great to talk to you.
Willow:
Oh, thanks.
Wrap and Recap
Jamie:
Sarah, this has been so great today. So much good information for Willow and anybody listening who's in a similar situation. Thank you again, for joining us.
Sarah:
It's my pleasure. Thank you.
Jamie:
Willow, I’d love to know: How was that for you? What did you take away from the conversation today?
Willow:
It felt good. It felt like, A, there's a person who's seen people in similar situations to me and not all hope is lost. Time to get started. B, it felt like there's low hanging fruit that I need to investigate. So, I feel empowered to go pulling on some threads that right away, maybe able to keep more money in my pocket, which I like that. Like not spending more money on taxes, et cetera, than I need to and also maybe being able to get a jump in a way that I didn't really understand was possible.
I feel validated in some ways, for knowing who I am and knowing that flexibility is super important to me, understanding that risk in terms of career growth, probably wasn't necessarily the wrong decision, that we are still in a position where we can get to where we need to be by the time we're old and that feels good. It feels like maybe I made the right trade off for me and my family, even though perhaps our financial picture looks different from other folks our age.
So, I'm ready. I'm ready to make some decisions and do more research and then also I'm excited to bring my son up to speed on this conversation and I think that it could be a good teaching moment for him to realize that, he will be so far ahead if he also takes this advice and starts making his own decisions about what he wants for his life and money. So, I'm excited.
Extro
Jamie:
That's it for this episode of, What Should I Do with My Money? An original podcast from Morgan Stanley.
If you would like a deeper dive on what was discussed today, including a guide to talking to your kids about money, and more about the Morgan Stanley tools mentioned in this episode – including a tax efficiency tool, come see us at morganstanley.com/mymoney. I'm Jamie Roo. Talk to you soon.
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