It’s the second week of 2014- how are you doing with your resolutions? Last week we talked to Mary Hunt about her financial planning and retirement strategies. As we continue that series, this week we introduce you to Erin Botsford, 4word board member and author of “The Big Retirement Risk: Running Out of Money Before you Run Out of Time.” Having worked in the financial field since 1989, Erin brings her wealth of experiences and expertise into today’s conversation.
4word: How is Lifestyle Driven Investing different from the traditional retirement plan?
Erin: Lifestyle Driven Investing™ is very different from traditional planning. It begins with the end in mind by creating what we call your “House of Security.” First, we look forward to a time in the future – you can call it ‘retirement’ or ‘financial independence’ and you imagine what things will cost at that time. Second, we segregate our expected expenses into four different categories – “Needs,” “Wants,” “Likes,” and “Wishes.”
Needs are your basic and non-negotiable expenses; things like food, shelter, health insurance and the basic necessities of life.
Wants are the extras – the country club memberships, vacations, dining out.
Likes are generally big ticket items like a second home, an RV.
Wishes are your legacy wishes – what portion of your finances you want to leave to your family or to charity.
Once we have those expenses laid out, we match the category with specific investments that will generate the cash flow to fund those expenses.
The problem with traditional asset allocation is that all expenses are considered equal. We believe food and shelter should take a higher priority than country club memberships and vacations. Hence, we believe the investments one uses to fund a Need should potentially be different from an investment that funds a Want. In fact, we assign specific names to the criterion one should look for when choosing investments: We fund “Needs” with “Lifestyle” investments.
The criterion for a “Lifestyle” investment is that it must produce an income, now or in the future. More importantly, the income from that investment must be either safe or predictable or guaranteed. It must be able to defend one of those words. Why? Because we want our non-negotiable expenses to be funded by investments that provide this type of financial security.
We fund “Wants” with “Hybrid” investments – the investment will most often produce an income, but by its nature you could never say the income was safe, or predictable or guaranteed.
4word: In your book, “The Big Retirement Risk,” you break down the myths of Wall Street. Being told that traditional retirement methods are faulty and unreliable can make readers even more confused and panicked about the future. How can women sort out the maze of options before them?
Erin: Women love “Lifestyle Driven Investing™” because it makes perfect sense. They can begin working towards identifying investments that will eventually fund their future retirement and can have confidence that things are going to work out, instead of hoping that the asset allocation models they chose in their 401(k) will work out. What happens if the markets go down by 40% three months before they were planning to retire? The problem with traditional investing methods is that they do not anticipate what happens in bad markets; the hope is that the markets will recover before you exhaust your magic number. We think there is a better way to manage that risk.
4word: How can women make the best decisions about who to trust with their hard earned money?
Erin: As I have told my son and daughter-in-law, ultimately each one of us has to take responsibility for our own outcomes. You can trust other people, but as Ronald Reagan said, always “trust and verify.” For one thing, I would want any advisor with whom I worked to be able to clearly articulate their philosophy about money. If they can’t articulate it well, do they know it or are they merely a spokesperson for a larger entity? More importantly, I would want to see their investment portfolio to see if they were personally investing in the same manner they were recommending for me.
Interestingly enough, in the twenty five years I have been advising individuals, I have NEVER been asked to see my investment portfolio. I find that both fascinating and terrifying. I normally show my clients my own portfolio so they can see I indeed ‘eat my own cooking!’
4word: What is the single best thing our readers can do for their financial futures in 2014?
Erin: Download some of the tools from the website and check out my book. Women need to envision their “Preferred futures” – how they want things to turn out for them when they are 55 or 60 or 65. Then start creating a plan to build their House of Security.™ If they read the book, they will see I was raised in abject poverty so I know it can be done. But they have to start NOW; time is their greatest asset. It only takes setting aside a small amount of money every month now but if they don’t start now, it will take a lot more money down the road.
When you think about your financial future, do you feel secure? What do you need to keep doing and what do you need to change?