Surprises are no fun when it comes to retirement, since few are unexpected windfalls. That’s why financial advisor Erin Botsford, CEO of the Botsford Group in Frisco, Texas, and Atlanta, Georgia, asks blunt, tough questions of her clients to help them prepare for the future – and evaluates the answers to help them plan accordingly.
"Money is money. It is what it is," says Botsford, 53, whose new book, The Big Retirement Risk, aims to strip uncertainty, worry and potential calamity from the long years of life that are likely to lie ahead after people stop working.
Say you’ve got a million dollars sitting in a balanced portfolio. That’s certainly well above the $900,000 the Employee Benefit Research Institute (EBRI) recommends each of us put away for our later years. But what if that million dwindles to half its size? "It’s amazing how few smart, well educated people ask themselves tough questions like this," says Botsford, who was named to Barron’s 2012 list of Top 100 Women Financial Advisors and currently manages more than $750 million in assets.
Botsford knows all too well the risks of not being prepared. When she was 10, the sudden death of her father plunged her large family of six children into poverty. And at age 20, a stockbroker lost every cent of the $20,000 she invested with him – money she had earned during a lucky appearance on "Wheel of Fortune." It’s no wonder Botsford decided to specialize in risk management and retirement planning for her life’s work.
Here are six questions everyone at any age should ask:
1: ‘Will I Be Able to Afford the Lifestyle I Want?’
Instead of obsessing about a "magic number" to aim for in retirement, ask instead, "What does it cost me to live – and how am I going to create cash flow in order to cover that cost?" Very often, says Botsford, "our non-negotiable needs – housing, health care, utilities – are pretty much covered by Social Security and pensions, at least for most people reaching 65 [today]." But for other expenses, we need additional income.
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"People will say, 'I want to grow my money from $100,000 to $200,000.' But I would rather they say, 'I want my $100,000 to give me a 5-percent return every year.'" Botsford uses this analogy: You own a Renoir worth $10M. It’s your pride and joy – and it looks great on your balance sheet, never mind on the wall of your apartment. But it generates exactly zero retirement value for you. "But if you put a light over that painting and charge folks for looking at it – then you’ve created cash flow."
2: ‘Have I Considered Dividends As An Income Stream?’
Particularly for young people in a position to begin building their personal portfolio, Botsford recommends buying a few solid, reliable stocks that will produce good dividends over the long term. "Everybody’s going to need cereal, soup, diapers, water and other consumer staples," she says. "So pick 10 stocks of companies that make those things, put $1,000 in each one, and invest in those companies via dividend investments." Research is critical, of course. "Some companies pay dividends every quarter and have for 50 years – and some have raised dividends every year for the last 10 or 20 years."
Don’t worry what the stocks are worth, she advises. Instead, focus on the regular income you can get from them. "Your bills have to be paid. The value of the stock should be secondary to the cash flow it spins off."
Unless they’ve got untold millions, most people in their 50s need to consider downsizing in the near future so that they can cut costs. "They need to rethink what their life’s going to be like," says Botsford. Be realistic, she urges. A couple in their mid 50s might consider selling the big house they’ve raised their kids in and downsize to a smaller condo or apartment, where they can live for less. "They may need to be able to live on $10,000 a month," says Botsford, "but right now they can’t because their life is too large for that."
If they can figure out what their needs will be at age 65, they can say, "OK, if I need $30,000 a year to pay my bills, and Social Security is going to cover $21,000 – then I only have a net shortfall of $9,000. You invest differently for your needs than you invest for your wants." Those needs, of course, include health care – so it’s important to ensure a wide safety net for those expenses.
4: ‘Can I Be Self Reliant?’
With many corporate and public sector pensions already having vanished or at great risk, Botsford urges a sense of independence as much as possible. "For younger people, Social Security and pensions will probably not be there – so the sooner they begin saving and investing, the better off they’ll be."
Botsford suggests that people of all ages "always have their hat in another ring." She says, "If you have a job, try to start something on the side. Sell Juice Plus. Do paralegal work. Do something you enjoy. Doesn’t matter what – just start something entrepreneurial on the side in case you ever get the dreaded pink slip." Botsford puts it this way: "I would not want to rely on somebody else’s benevolence for my ability to live."
So build "a second career in case you get axed from the first one."
5: ‘What About Buying Long Term Care Insurance?’
Those over age 50 would be wise to have long-term care insurance if they can get it. "It’s an important question for those in our generation to ask," says Botsford. "You want to have a really good long-term care policy so you can ring a little bell and have someone help you into the shower, or whatever your needs may be." Too many people overlook the value of an insurance policy that helps cover the costs of a nursing home or assisted living care down the road, she says.
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It’s important to make this decision no later than 55. "The less money people make, the more they need long term care insurance" – and she notes that "wealthy people get this concept and buy the insurance. They tend to understand the concept of leverage better. They say, 'I can pay $3500 a year for this – or someday I’ll have to pay $60,000 a year out of my investments for it.'"
6: ‘What Do I Know About My Financial Advisor?’
Where does the person who is advising you about your money have his or her money? Do you know? Have you asked? "Lots of financial advisors have declared bankruptcy, not once, but twice – and still people don’t ask them about their own money," says Botsford.
In general, "I don’t think people ask enough questions. You have to do your research, know something about the people managing your money."
She also says she wishes that "older women – many of whom once trusted their husbands to manage the household money – would have more confidence in themselves and their abilities to make financial decisions. The even better thing would be to have their children accompany them" to any financial planning meetings – instead of blindly putting their trust in a financial advisor they barely know. "Get the kids involved. They’re advocates for you and your money – and your child is certainly an individual who has a vested interest in the success of your money’s performance."