Tim Maurer, a Charleston, S.C.-based Certified Financial Planner and Forbes contributor who just wrote the book Simple Money: A No-Nonsense Guide to Personal Finance has an enlightening, if unconventional notion. To Maurer, personal finance is more personal than finance.
“As I looked at the landscape of personal finance books, there is almost a shtick they have developed into: Here’s what you need to do and now go and do it,” Maurer told me. “But from my perspective, there hasn’t been enough about motivation — why people need to do things. There’s been very little on the emotional aspect, which is more nuanced. It’s the behavioral finance end of it.”
That makes sense to me, so I had a conversation with the bow-tied iconoclast to hear his personal finance advice, particularly for people in their 50s and 60s.
Maurer’s day job is a wealth adviser and director of personal finance for Buckingham Asset Management and the BAM Alliance. The married father of two sons told me he wrote the book because “I wanted to see what would it look like if we looked at personal finance through the Why. It’s the semi-rebellious spirit in me that never liked people telling me a handful of things I was supposed to do and a whole bunch not to do.
In our talk, Maurer discussed how he and his financially polar opposite wife Andrea manage to manage their money together; why we need to get over our excessive fear of rocky stock markets and what he considers the No. 1 financial move people need to make.
Next Avenue: You write that when setting money goals, it’s important to appeal to both the elephant and the rider. What do you mean?
Tim Maurer: The elephant and rider is an analogy used to describe what Daniel Kahneman, the psychologist and author of the bestseller Thinking Fast and Slow, calls System 1 and System 2 thinking to make financial decisions.
System 1 is our gut; it’s reflexive, immediate, fast thinking that many describe as emotional. It’s what we use to make the vast majority of our financial decisions. It’s the elephant. System 2 is the more reflective thinking part of our brain, the logical part that thinks things through. System 2 is the rider we use to rationalize the decisions we just made.
So you want to ask yourself: What makes you think and function the way you do? Is it the elephant directing or the rider?
We shouldn’t assume the elephant is the bad guy and the rider is the good guy. I fear that is the perception of financial advisers and the predominant realm of personal finance. It’s almost as if the personal finance universe said: ‘Take your emotions and throw them aside.’ But that doesn’t work. The elephant can be an incredible source of positive growth if unified with the rider.
You think many people don’t set money goals well. What do people in their 50s and 60s do wrong and what should they do instead?
One challenge we all have is what’s called hyperbolic discounting. It says the money I have to spend today is far more valuable to me than money I won’t get to spend until well down the road. That’s why it’s such a challenge to save for the future.
An awful lot of people in their 50s and 60s say ‘I’m already behind, what do I do now?’ Then, the only options available are unpleasurable: ‘I’m going to have to save so much, I can’t enjoy the five or 10 years prior to retirement or I’ll have to subject myself to a miserable retirement because I won’t have enough money.’
You need to reorder how you see yourself. If you’re in the majority without enough money in retirement savings, I try to offer encouraging words to give some hope. It’s not just about tightening your belt to the point where you can’t breathe; it may be about reshaping the way you look at life and work.
It may mean you’ll work to 70 or 75; that puts you in pretty good company. If you know you will need to, then is it possible to make a career shift that would reduce your income in the short term but could lead to a more satisfying career that you’d be happy to do longer?
Or you might reshape your idea of what retirement looks like.
How can you do that?
Downsizing is often about as appealing as budgeting because people look at the negative versions. But you could envision an almost adventurous form of retirement where you take your assets and transfer them to a completely different geographic location with a lower cost of living.
That doesn’t work for everybody, of course. But there are so many neat cities around the country. If you build up a nest egg in the Northeast or in Silicon Valley, you can pick and choose any number of college towns where the cost of housing will let you buy a home that’s the same or nicer than what you had. That starts to provide you with an awful lot of options.
You say that it seems like you and your wife Andrea are polar opposites sometimes when it comes to money. So how do you deal with it and how should other couples in the same situation?
The first step is acknowledging how each of you became who you are — to write your personal money story.
My dad and my wife’s dad grew up in relative poverty and each interpreted that in different ways. My dad became extremely frugal; he felt exposing his children to want would be a good thing. My wife’s father, a phenomenal guy, decided he didn’t want to make his children feel a sense of being deprived and made decisions that were quite different from ones my dad made. That means my wife and I have two different approaches to looking at money.
I could demonize her for spending too much and she could see me as loving money more than I love her. But by acknowledging who we are, that takes pressure off each other and makes it easier to make joint financial decisions.
You take issue with some conventional rules of thumb, such as how much people should have in emergency savings. Often they’re told it should be three months of living expenses. What do you say?
I feel in general that the notion of having three months of living expenses in cash is absolutely a good thing. But statistically, the vast majority of people don’t have that much. I try to say: What’s a start? Getting to one month’s expenses, so the money that comes in today isn’t used up this month, has an incredibly positive impact.
And you say that every homeowner who doesn’t have a debt problem but has home equity should have a home equity line of credit. Why?
Because a bank is never going to give you credit when you really need it. So opening a line of credit doesn’t mean you’ve actually taken on debt. It does mean you have access to a line of credit with a relatively low interest rate — about the prime rate plus 1% — and that’s a good thing to have. Businesses function that way, so there’s no reason households shouldn’t treat their finances the same way.
When it comes to investing, you recommend what you call the Simple Money Portfolio. How does that work?
The Simple Money Portfolio is a three-factor model.
The first factor is that stocks make more money than bonds over time, although bonds provide an incredibly beneficial stabilizing force in your portfolio. The second factor is size: small companies have outperformed large ones over time. The third factor is that value stocks have outperformed growth stocks over time. It uses the Warren Buffett mindset to buy stocks when they are on sale.
The path to make it work is owning low-expense index funds or ETFs (Exchange Traded Funds) to keep your costs down over time.
What do you tell people who are worried about the stock market’s recent volatility?
It’s completely understandable that they’re worried. We feel the pain of investment losses twice as much as the pleasure of investment gains. So why do I encourage people to stick with it? The primary reason we expect stocks to make more than bonds or cash over time is precisely because they are volatile. If we didn’t go through many periods where stocks scare us, we wouldn’t make any more in stocks than with bonds.
But it’s really important not to overexpose your portfolio to stocks and get greedy. The Simple Money Portfolio starts with 60% in stocks and 40% in bonds.
Remember: the point of investing isn’t to make money. It’s to have a better life.
You suggest that people in their 60s give themselves a Retirement Stress Test. How do they do it?
It’s very simple. Add a projection of the amount you expect to receive from pensions and the amount you expect to receive from Social Security. Then take the balance of your savings and multiply it by .04 — 4% is a good starting point on how much you can responsibly take out of savings on an annual basis. Then add that amount to your pension and Social Security. Is that enough to live off of in retirement?
If the answer is yes, or it’s more than enough, you passed the stress test. If it’s meaningfully below what you anticipate your retirement needs will be, you’ve got some work to do.
You also suggest phasing into retirement in stages to reduce the stress of retirement. Why is that a good idea and how do you do it?
It puts less stress on your portfolio. If you retired in 2008 or 2001 or January of this year, when you would see your portfolio taking a meaningful dip, and you then took money out, that could compound the negative effect of volatility. That’s why it’s generally helpful to ease into retirement by working part-time or whatever it takes to take less money out of the portfolio.
Psychologically, this makes even more sense. Retirement is one of the most stressful things in life. It really stresses people out to turn off the spigot of income creation.
What do you think about buying long-term care insurance in your 50s or 60s?
I think long-term care insurance is oversold and my fear is that has dissuaded people from getting coverage that’s beneficial. They’re pitched bells and whistles that make the policies look way too expensive so they wind up getting nothing.
Instead, I think most people should partially insure through long-term care insurance but without those bells and whistles. They could buy maybe fifty to sixty percent of the coverage of that policy.
You’re not big on traditional IRAs. Why?
The traditional IRA is an excellent tool, but a Roth IRA is superior for most people. The traditional IRA reduces taxes today; the Roth reduces taxes in the future. And there are also income caps on traditional IRAs that are lower than for Roth IRAs.
Estate planning is at the top of your list of financial planning moves for people. Why is that?
Because the majority of us don’t have adequate estate planning documents; 80 percent of people don’t have a basic will. People think ‘I don’t have an estate; I’m not rich.’
But the No. 1 priority for virtually every adult, especially if you have minor children, is your will. The frightening implications of not planning for your demise puts it in the top financial priority spot.
This commentary originally appeared March 9 on Forbes.com
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