Tell me what you want, and I will tell you what you have to do financially to get it !

 This page discusses thefollwing subjects:

Why people fail as investors

Basic Financial Planning

Setting Up Your Personal Spreadsheet Model

Why people fail as investors

Every Securities salesman will tell you that there are 2 reasons why people fail as investors, FEAR & GREED. Actually, there are 3 reasons - add laziness! If you are afraid to make the investment, it is because you do not know enough about it to be certain that you are making the right decision. don’t be lazy! Do your homework and you will be certain that you are making the right decision.

If the investment looks like a no brainer, and you are certain that it is a winner, then you have probably stopped thinking. Do your homework, and you will know what the risks are, and whether those risks are worth taking.


Murphy's Law:

"If something can go wrong, it will go wrong exactly when you can least afford the problem!"

In Financial Planning, thinking about Murphy's Law is not a matter of being paranoid. If you go about your business fat, dumb and happy, you may get lucky and nothing will interfere with your retirement plans. However, I am sure that it has rained on your parade at least once in your life. In Financial Planning, you plan for the worst, and you hope for the best.

Basic Financial Planning

Financial Planning is more complex than rocket science, and more dangerous than brain surgery. We have to deal with a lot of details just to make sure that we are accurately working on a financial plan that will produce the results that you want. You will spend the rest of your life paying for every financial mistake that you make. So we want to make sure that your Financial Planning is done correctly.

No one has a crystal ball. No one knows exactly what will happen for the rest of their life. However, you do know 100% of how you intend to spend your money, and at least 90% of what will or can happen in your future. You need to work with what you know and eliminate 90% of your uncertainty. You will feel better about what you do know, and that will restore your confidence.

You will also be able look at the uncertanties from a much different perspective. The uncertain realities will not change, but you will be confident that you are prepared to deal with those uncertainties based upon the Financial Planning work that you have done.

The reason that you have so much concern about your future finances is that you have described the problems in words, but you have not translated those words into numbers. Words help you to describe your problems, but they do not solve financial problems. Mathematics is the language which allows you to solve your problem. You have to translate your words into numbers so that the mathematics will solve your problem. Then, you translate the numbers back into words so that you know what to do.

Don't be afraid of the word Mathematics. Anyone with an 8th grade education can do a wonderful job of Financial Planning. As long as you know arithmetic, and can balance a checkbook, you can do all the math which needs to be done.

Setting Up Your Personal SPreadsheet Model

1. Create a Spreadsheet Model of your financial lifestyle.

 This can be done on a sheet of paper with rows and columns, but that is a lot of work. It would be tremendously better if you put all those numbers on a computer spreadsheet.

You start out with 8 columns on your spreadsheet.

              HIS    HER                                                            NET


2010        55     52      $50,000    $5,233      $41,276        $3,491         $110,000

2011        56     53        50,000      5,233        42,556          2,211           138,215


Income minus Taxes minus Spending yields Net Income.

If the Net Income is positive, you add it to your Assets.

If the Net Income is negative, you subtract the amount from your Assets as a withdrawal to pay your bills. 

Each row on your spreadsheet represents another year of your life. Make sure that you have enough rows to go all the way to age 110.

The columns above seem simple enough, but they hide a lot of detail.

Your Income may be provided by wages, bank interest, stock dividends, capital gains etc. Somewhere on your spreadsheet, you need to break down that Income number into all of your actual sources of Income. Again these numbers will change from year to year; so, you need a row for each year, and some columns to identify each income source for each year.

TAXES    includes not only Federal income taxes, but also state income taxes and local Wage taxes.

SPENDING includes food, clothing, household, transportation, vacation, gifting etc. Each one of those areas of spending needs to be expanded somewhere on your spreadsheet so that you can create a model of how you are going to spend your money in the future.

Project your future costs growing at 3.1% per year because that is the aveage annual rate of inflation since 1926.

Once the numbers are established on the spreadsheet, you will be able to see whether you have enough money to pay for the lifestyle that you would like. If you do not have enough to pay for what you thought you wanted, make Make another copy of the spreadsheet on your computer (using a differnet name i.e. plan1, plan2 etc.) , and then change some of the spending and saving numbers. Maybe that will make it all work for you. You can play with the spending and saving until you see a lifestyle which you can afford.  

Analytical tips :  Remember-

Garbage In Garbage Out. If you lie to the computer, it will lie right back at you.

Be as accurate as you can be.

Don't be distracted by the fact that every number is an estimate, and in some cases, a pure guess. I know this as the Delphi Principle: 

If you make one guess at a total cost, your guess could have a lot of error -  way  too high or way too low. However, if you break the same problem down into many, much smaller details, the errors in all those detailed guesses will cancel each other. Each guess will still be in error, but the errors will tend to cancel each other and give you a reliable answer.

Involve your spouse from the beginning as a project that you both are working on. After all, the future belongs to both of you. Furthermore, nobody likes to be told that they will have to reduce their spending. When your spouse sees how the spreadsheet shows that you cannot afford a certain lifestyle, it will be easier for your spouse to understand why some reductions in spending are necessary.

2. Generate Your Income Correctly

While you are working, assume that your paycheck will continue.

However, in retirement, do not use Systematic Withdrawal to provide the bulk of your retirement income over and above Social Security i.e. don't calculate your income from investments as a percentage of your assets. That process is called Systematic Withdrawal and can lead to bankruptcy. It already has caused bankruptcy several times in the past (click on the Don't TAB above for discussion and examples from past history)

The correct way to calculate that necessary income on your spreadsheet is to use a guaranteed stream of cash flow - either a Term certain Annuity, a Bank CD ladder, or a Deferred Annuity ladder whichever can provide the necessary cash flow at the lowest cost. (Click on the Retirement Planning TAB above for more informmation about how to generate your retirement cash flow).

Unless you are retired right now, you do not know which method will cost the least at a future date. Call your Insurance agent and get a 15 year Term Certain Annuity quote. That number will be good enough to determine the cost of providing that guaranteed income stream for your calculations. When you actually retire, you will shop for the product which provides the lowest cost for your cash flow.

Your spreadsheet will now show 15 years of guaranteed cash flow. That will allow your remaining assets to grow in the stock market because you do not have to touch those investments for 15 years.

Why 15 years? Historically, the average stock Mutual Fund never lost money over a 15 year period or longer. For all periods less than 15 years, stock Mutual Funds actually lost money for the entire period! So you go with the odds, and do not intend to touch your stock investments until they have been invested for at least 15 years! There is no guarantee that stock Mutual Funds will not lose money over some future 15 year period, but we are using the fact that less than 15 years has failed. (Click on the Retirement Planning TAB above for more informmation about how to generate your retirement cash flow).

3. My Mother's Envelopes

Even Einstein could not mentally envision your financial future accurately in his head. However, your Spreadsheet model remembers every bill that you will have to pay, and, like a checkerboard shows you exactly when that bill will have to be paid. At certain times, many bills will add up to be more than your your "normal" income. You will need to withdraw significant amounts from your aseets above in order to pay those bills. You will treat those irregular situations with a special process - my mother's envelope method..

Every payday, my mother would take cash and put it in envelopes that were marked Electric, Gas, Water, Mortgage etc. By the time that a bill was due, there was enough money in that envelope that she could pay that bill. You could say that the investment represented by each envelope "matured" when the bill was due to be paid.

With your Spreadsheet model of your future finances, you know when your bills are going to exceed your normal income for that year. You will create a special "envelope" for that excess amount. You are going to calculate how much has to be invested now so that it "matures" to the desired amount later when that excess amount is due. The amount you invest now is called the "Present Value" of those future excess bills.

4. Where are you going to invest that "envelope"?

Use the rules of investing to determine how much, and where to invest portions of your savings (assets). Like a CD matures to a certain amount at a certain date in the future, you will make investments which mature just in time with just enough money to pay your irregular bills in the year they are due.

A. If the bill is due in 10 years or less use Bank CDs, or CD like Fixed (guaranteed)    Deferred Annuities whichever pays the highest interest rate.

B. If the bill is due between 10 and 15 years, use High Yield Bond Mutual Funds.

C. If the bill is due more than 15 years from now, use the stock market.

Now, you have projected a guaranteed regular income for the next 15 years, as well as a guaranteed way to pay your irregular bills for the next 10 years, and a reasonably assured way to pay your bills in years 11 through 15! It does not matter what happens in the stock market; you know that you can paty your bills for the next 15 years!

5. Surprise, Surprise, You do not have enough money!        ITERATE!

The lifestyle that you want has a cost. Your savings account has a balance. 
There is no relationship between what you have saved and the cost of the life that you want because you never did the homework to bring those two numbers together! The whole purpose of this spreadsheet model is to give you an accutrate framework that you can"tweak" until you do haveenough money topay for the lifestyle which you can afford!

Make a new copy of your Spreadsheet, and give it a new name i.e. plan2.

Then, lower your spending some, and balance your checkbook all over again. That increases your savings, and you “pay” your bills all over again with the new costs. You keep lowering your spending until your savings do not disappear until after age 93 when you and your spouse will probably be dead. Age 92.5 is the aveage life expectancy for couples in thir 60s.


After a while, you will want to go back and compare various choices that you have explored.

6. Reality Check

The life expectancy for a retirement age couple in their 60s is age 92.5 for the older spouse ~ 27 years.. You will run out of money at some time in the future. If you cannot pay your bills up until you would be age 93, you cannot afford the lifestyle that you have chosen. Reduce your spending until you can pay your bills until age 93, or hopefully, age 100.

7. Death

You will die sometime. Pick a few different dates, 7, 12, 16 years into the future, and see what happens to the finances for the surviving spouse. Do the same thing assuming that your spouse is the first to die. Remember: The deceased person’s Social Security income is no longer available. Some expenses will be reduced because they were for the deceased spouse. A surviving spouse pays the single tax rate; whereas, the couple paid the joint tax rates.

8. Long Term Care

In Pittsburgh, it costs about $168 per day for Nursing Home care, and the average stay is 3 years. A Nursing Home will not admit you unless you can prove that you can pay for at least 1 year. Most will accept Medicaid after that first year. Create a new copy of your spreadsheet. Pretend that  you enter a Nursing Home for 3 years and then die. Then look at the finances for the surviving spouse. Do that for 3 ages 5, 10, and 15 years into retirement in order to "see" what the impact of a Nursing Home stay will be on your finances.

Do the same calculations assuming that your stay in a Nursing Home will be for 8 years which is more typical of Alzheimers patients.