Returning to work—items for your budget

Posted on May 3, 2012May 3, 2012 by Danielle

If you’ve been raising kids for the last ten or twenty years, you’ve been plenty busy but your focus has probably not been on the job marketplace. So let’s say that now you find yourself thinking about returning to work. It doesn’t really matter why—could be a good thing or a bad. Maybe the kids are headed off to college, or you’re getting a divorce, or you have a great idea for a business, or whatever—here are a few budget items that you should incorporate in your planning:

The cost of a professional wardrobe. No, that’s not the funky but style-y stuff you and the kids have snapped up at the resale shop. If you’re returning to work, starting a business, or looking for a job you need to radiate confidence, and unfortunately for your pocketbook you need to look as good as people who are already successful in the desired job. You need to purchase enough outfits to (at least) get you through several interviews (and more as soon as you land the job). If you’re starting a business, you may be able to schlep in jeans while you’re working from home, but you need enough outfits to carry you through meetings and networking events—five, maybe? If you’re a woman, check out this blog to get lessons in some creative wardrobe combining.
Deferred medical. While you’re busy hauling the kids in the family van to orthodonists, soccer and music lessons, my guess is you didn’t stop long enough at the doctor. If you need dental work, dermatology (you’d be amazed at what they can do), podiatry, or some de-stressing treatments, it’s legit. Get it done and you’ll be more ready to go out and slay dragons.
The real costs of starting a business. Many people who return to the work force in their forties or fifties quickly reach the conclusion that they might make more starting a business than getting someone to hire them—especially if they can do consulting or some sort of professional service. If you’re going to manufacture some product, it’s going to require serious number crunching. But if you’re thinking of a “cheaper to start” professional or consulting service, there are some unlooked-for expenses there, too. Don’t forget the cost of ongoing professional education (mandatory in some fields for accreditation or maintaining licensing), professional membership organizations (can be thousands of $$), at least one professional conference a year (and travel to it), workshops, and networking organizations like Chambers of Commerce or networking associations.
Computer equipment. If you’re starting the business, you’re going to need better than your teenager’s cast-offs. Also, software, a consultant to help you set it up, professional bookkeeping or bookkeeping software, reference materials, and file backup services.
Professional services. Besides your computer repair guru, you’ll need an accountant, an attorney, and maybe a financial advisor, a career counselor, and a psychologist. These people all cost, but can save you tons of time and money spent on mistakes and the learning curve.
Increased transportation. You may need another car. You may need to pay for parking. More gas. Even if you use public transportation, you may need a cab for late nights at the office. On the other hand, if you stop hauling the kids so much, this might actually go down, or you might be able to downsize the vehicle.

If you know of other expenses that came as a surprise, please do add them in the comments section below.

And…break a leg!

Budget busters: You won’t know what hit you

Posted on April 18, 2012April 18, 2012 by Danielle

225 (Photo credit: Wikipedia)

Worrying about money may be near, if not so dear, to our hearts but no matter how careful we are, there are always surprises. You can’t think of everything, but we all want to do what we can to avoid the black swans—the strange anomalies that we never see coming. Watch enough Star Trek and you’ll learn pretty quickly that even anomalies occur episodically. I mean, when will they figure out the shields won’t work, there’s an alien in the computer system, and someone has a worm in the brain? Every week. So here’s a list of budget “surprises” that are pretty predictable once you think about them:

College

If your child goes to a college that’s far enough away from home base that flying is in their future, you’re going to be shocked at how much airfare Junior is going to rack up. Think you’ll send your kid off in September and see him at Christmas? Think again. For a lot of places, there’s mid term break in October, Thanksgiving (the kid who never wanted to see the relatives is suddenly burning for your old traditional celebration); Christmas (often for a month); spring break; and back home again earlier in May than you imagined. With all those weeks off, it’s amazing how they can eat enough to justify those room and board charges, no? That totes up to 5 round-trips a year. Plan on visiting lil’ Amber on campus? Wait to you check out the costs of those cute little bed-and-breakfasts in college towns. Add $2-3,000 for flights home and one trip to campus for mom and/or dad.

Home renovation

If you’ve ever been through this, skip to the next section. I don’t want to cause you any more pain. But for anyone thinking that maybe they’ll re-do the bathroom (especially after they retire), take whatever you think would be the reasonable cost and double it. No exceptions. If you’ve already taken bids you’re already in shock, but take the highest one and add at least 25%. I’m on my third house renovation and let me assure you I’m being conservative.

Also, if you work at a job that depends on your own efforts (not salaried), take your income down at least 10% for the period of the renovation. Chasing contractors around will become your part time job, guaranteed.

Income tax

If you’ve been doing your own taxes, you are going to be very surprised by what CPAs charge. If your taxes are simple enough that you can do them yourself, CPAs are cheap. But if you actually need help for some slightly more complex matter, surprise! In retirement, your taxes can get a lot more complicated than they ever were when you were working. $1,200 to a CPA once a year is $100 per month more that you need in your retirement budget.

Retirement

Inflation may be the worst enemy here—not regular consumer price index inflation, but sectors that inflate much faster—like nursing home costs, property taxes, or supplementary health insurance costs. Your personal inflation rate may be quite different than the CPI.

Also, poor health or health crises (like a knee or hip replacement) can have a lot of “support” costs. For example, you may need someone to do more yard upkeep, have groceries delivered or meals prepared, manage bills or finances, or help you get to and fro. If you don’t already use these services, you will. If you already do, you’re probably going to need more. Finding assistance, even when you’re able to pay, can be time consuming and even expensive (if you need to secure a “care manager”).

One of the most common things any realtor can report is that as we age, we may be less able to keep up with updating and maintaining our homes. This deterioration of one of our biggest assets can really eat into equity. Think through whether it’s really so noble to hang on to that house until someone wheels you out, and what it’s costing you in wasting assets as well as out of pocket.

Long term care

If you haven’t looked into assisted living/homecare/nursing home care you are going to have a heart attack when you find out the price. Really, just call your local facility and check out the price for sharing a room that’s way smaller than Motel 6. Think you’ll stay home instead with some nice lady helping you? Try 3 nice ladies for ‘round the clock care, plus more for weekends, plus a backup emergency service for when your first string gets sick or has their own family emergency (at twice the price). Okay, I’m Dani Downer today but making like an ostrich doesn’t help.

But even at coronary-inducing prices of $7-8,000 a month in a facility, you’re not done yet. Those charges don’t reflect the costs for any non-Medicare incidentals you might need—mouthwash, aspirin, Depends—all charged at premium prices. In my experience, it’s very easy to incur extra monthly charges that will easily eat up an extra $1-2,000 PER MONTH.

Do you have a parent that might need your help? This can be not only a financial dent, but a tremendous consumer of time. The responsible adult child is going to take a big hit to his or her work life. If you have an elderly parent, better hoard that comp time now.

General daily living

Do you have a budget item for computer emergency repair? Thought not. Ever had a computer emergency? Thought so. Even if you have a 15 year old on-call, they’re probably trying to earn money for college and it’s amazing how much it costs to ferret out what’s wrong. I admit that it’s getting a little better now that our friends in India can take over our screens, but one good computer meltdown can cost you a lot. Last summer I operated for two weeks from my daughter’s computer, my phone, and my iPod touch while I waited 10 days for Dell to deliver (I’m too cheap to pay for overnight service), and another two weeks ironing out which software would still work, and which had to be upgraded. The software turned out to be the really expensive part—kinda like razors and razor blades. Putting in place a backup system ain’t cheap, either. And really, you don’t want to live with a teenager who can’t access her chats at a moment’s notice. Plan to replace your computer and your software every three years. And if you don’t have to, well, you’ve just gotten a get out of jail free card.

I’m sure there are many other blindsiders that I haven’t seen coming just yet, and I’d like to hear about them. But in the meantime, you can see why I recommend that everyone have a very substantial emergency fund. And that’s not called “credit cards”. These are the kind of things that can dig through prosperity and produce a financial avalanche. But one thing we can know for sure: plan for the certainty that unexpected financial emergencies will happen. And double check your force field.

When to claim Social Security

Posted on April 12, 2012April 12, 2012 by Danielle

Modern Social Security card. (Photo credit: Wikipedia)

Ask just about any fee-only advisor when you should claim Social Security and most of us will jerk our knees and tell you, “70”. Then, you’ll go out and do it early—approximately 43% of men and 48% of women take their benefits at 62. So nobody is listening to financial planners? Why are planners clueless on this?

We add numbers, and we know that you’ll collect approximately 1/3 more for each period you wait—1/3 less at 62 than 66, 1/3 more at 70 than 66. The difference between 62 and 70 is huge. So, let’s look at the dumb reasons people take it early (I’ll get to the smart reasons in a minute).

I want to get it now because Social Security is going broke. Oh come on, I’ve been hearing that one since I was in grad school, which was a long, long time ago. So you vote? Do you know the clout of the AARP? Do you seriously think there is a sole politician who could get elected in this country if he voted to eliminate Social Security? Yes, there will be changes in the future, but if you’re old enough to be able to collect or accurately estimate your current payments, I think you can get off the crazies bandwagon.

I could use the extra money. In some circumstances, I think this is actually smart (see below), but most people I see who use this excuse have a lot of budget problems, and would be better off addressing these through spending alterations. The saddest cases are when they or the spouse are actually working and they get to give back much of it to taxes while ALSO permanently lowering benefits.

I might not live long enough—so I’ll get the money now. One of the reasons Social Security is going broke is that people are beating the system as originally designed—they’re living much longer than the break-even point. For most people that break-even is early to mid-70s. If you have a serious or terminal disease or both your parents dropped dead from heart attacks at 50, maybe I can go along with this. But if you had a parent who lived past 80, and you don’t smoke or suck alcohol through a straw, you’ll probably live long enough for your kids to take your car keys away. Especially with the “advantages” of modern senior care.

Social Security isn’t worth that much anyway. Let’s take a look at a real life example. Joe Blow has done all right at his career, but he isn’t quite ready for that villa in the South of France. His full-retirement-age monthly SS payment will be $2,158/month. If he takes it at 62, the payment goes down to $1,535; if he waits till 70, he nails $2,984/month. So Joe tells me, I’m going to go for 62 and I’ll just withdraw the difference from my portfolio. How much more dough does Joe need in his portfolio? $186,900. If Joe waits until 70, the payout will be nearly double and his portfolio would need to be $434,700 bigger to equalize the draw. For most people, this would make a meaningful difference in lifestyle.

I’ll draw early and just invest it. I’ll believe it when I see it. Actually, I know of someone who did do this. He “invested’ it in a money market account. So, if you’re thinking of this, in order to equal the benefits of the escalating Social Security benefit you need to find a return of about 8% guaranteed, plus guaranteed cost of living increases. Let me know when you find that one, okay?

I hate this job. If you’ve lasted 62 years, you might be able to last another 3 or 4. Do you hate it $400,000 worth?

Okay, I’ve had my fun. Are there any good reasons? A few.

You really are sick. If you have an acute or chronically debilitating disease where the life span is limited, especially if you’re single, you may as well claim. However, if you have a spouse this may permanently reduce spousal survivor benefits, so be sure you’re weighing all the possibilities.

You’re out of work and there’s just no other place to turn. A lot of people find themselves in that situation lately. But if you find a job in a year or so, you’ve made a decision that won’t look so good in retrospect. Try everything else before you tap Social Security.

You have children who can get dependents’ benefits. This is a situation where you may actually need the money more now than later, especially if those kids are moving toward college.

Taking the money now would allow you to tap less of your portfolio in the early years. I’m skeptical, because as I discussed above, Social Security increases faster than your portfolio will in this economic climate, but in some cases it might work, as in the case of older parents with children entering college or people who want to travel now but will be willing to watch Netflix for the subsequent 25 years.

You’ve made other investments that will not or cannot pay off until you are much older. You have a partnership, or longevity insurance or some other exotic situation which will make up the difference in the future. You’re still giving up money, but it might be a worthwhile trade off.

If you have other reasons for or against, I’d love to hear about them. When so many people decide contrary to the best numbers-assessment, there must be good reasons. I’d love the input.