Atlantic Capital Management

Atlantic Capital Management (105)

Tuesday, 11 February 2014 00:00

Women and Financial Independence

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As we discussed in last year’s article on the growing increase in life expectancy (“Financial Security for Longer Life Expectancy” ), Americans are living longer. Women in particular are living well past the average life expectancy benchmarks. Recent longevity statistics tell us that women will generally outlive men by 5 to 7 years; the promise of a longer life is even better for those that are married.

Most women of the “Baby Boomer” generation seem to realize that their life expectancy will exceed that of their parents' generation. Less obvious are the financial consequences of extended longevity. Boomer women have embraced living longer, but remarkably few of them have done the kind of retirement planning necessary to address that possibility. Studies indicate that less than one-third of women age 55 or older have enough retirement money to match income projections based on their average life expectancy and beyond.

So, what does all this mean for women in terms of graciously living out this expected and predictable extension of life? Our many years of experience tell us this: having a retirement plan that addresses this scenario is a necessary, and fairly simple, requirement! Here are three suggestions that will help you get off to a good start:

1. Be brave. Not having enough money for later life is a scary thought, and can be emotionally paralyzing. Instead of letting that fear lead to procrastination, take an objective and creative look at your situation. Explore your options…all of them, no matter how daunting or trivial. Simply being aware of the options for reducing your lifestyle can be empowering. For example, you may need to consider “downsizing” out of your family home. Getting through the emotional aspects of this decision is hard. But being brave, and being proactive about the idea of making a change, will help to strengthen feelings of being in control of your financial future.

2. Don't wait. Procrastination isn't an option. The planning and decision-making processes take time. Take one simple step right now: determine how much cash flow your current lifestyle is requiring each month, and make the necessary adjustments to your spending and saving habits with your retirement goals in mind. Get started now. It won't be easier or better or more comfortable if you wait to begin your planning process.

3. Be realistic. If you don’t have the experience or information to plan your financial future over the next 20 to 40 years, the “do-it-yourself” approach might not be for you. Ask for help! The statistics are staggering: 74% of women over the age of 50 don’t have a financial adviser to help walk them through this process. Start looking for someone to work with now. Interview tirelessly until you find the person who has both the credentials and personality you are comfortable with to help you on your journey.

If you are like most Americans, you probably don’t have a good sense for how you actually spend your money on a month-to-month basis. Sure, you probably know the precise amount of your mortgage payment and your car payment, and you probably have a good idea of what your “regular” bills like your cell phone or your cable TV bill add up to every month. But do you really know how much you’re spending on your morning latte, sneakers for your kids, that lunch you grabbed at the deli between meetings, or those last-minute trips to the big-box store or the mall?

Discretionary income is loosely defined as the portion of your income that is spent on goods and services that fall outside of the “necessities” like food, shelter and utilities. Discretionary spending is the natural result of having discretionary income. Having discretionary income is certainly not a bad thing, but not keeping a keen eye on your discretionary spending CAN be. Undisciplined discretionary spending can negatively impact your overall financial situation in two very important ways:

a. Accumulation of unexpected and unplanned-for debt;

b. Less money to fund your investments and long-term financial goals.

The second point is more straightforward than the first; if you’re spending discretionary income on “stuff,” you’re not using that income to fund your investment portfolio, or your retirement account, or your rainy-day fund. Curbing unnecessary spending leaves you with more money to invest, and having more money to invest will, in all likelihood, provide better long-term results than the “stuff” that you acquire haphazardly.

The first point is more ominous. These days, it’s too easy to rack up high-interest debt one unnecessary purchase at a time. Credit card debt is the most obvious issue in this scenario; it’s very easy to fall into the trap of “pulling out the plastic” for those “little things” that we need or want on a daily basis. The end result is accumulation of debt, a little at a time, that puts a further damper on your ability to contribute to your financial future. Instead of getting returns on your investments, you’re paying down interest. Your money is effectively working against you in that scenario, not for you.

If you want to get your discretionary spending under control, and manage your debt effectively in the process, we suggest taking two critical steps right now:

1. For a pre-defined period of time (at least a week; a month is better), keep track of everything you spend money on, from your major bills and expenses to those “little things” like lunches and haircuts. At the end of the time frame, add up your fixed expenses (mortgage, rent, food and utilities, etc.) and your discretionary expenses (all of those “little things” you spent money on). Chances are, once you see in black and white how the discretionary expenses add up, you’ll have a good idea of where you can start cutting back on discretionary spending. For further insight, determine what percentage of your monthly income is taken up by discretionary spending. We bet it will be an eye-opening number.

2. Once you’ve made a plan for trimming back your discretionary spending, make the savings work for you, and stick to it. The first riskless strategy is to pay down high-interest debt. So is putting money into an investment vehicle of your choice, even if it’s just an interest-bearing savings account.

Taking stock of your discretionary spending and resolving to make that money work FOR you, rather than against you, will go a long way toward helping you manage your debt and strengthen your financial future.

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