Simple Financial Questions Need More Than Simple Answers

Last week I was interviewed for the article: What Do You Do After Maxing Out Your 401(k) and IRA? that appeared in Yahoo Finance’s Financially Fit, Ask Farnoosh. They had questions from two readers and I thank them for including my comments.

To give you more of my thoughts on the two scenarios, I wanted to share them here because I find it’s easy for most of us to want simple answers so we keep our questions simple, leaving out important details. But with financial advice, there are many degrees and variations to a situation. Sometimes knowing just a bit more can make a significant difference in recommendations.

Scenario 1: Appears to Be On Track

One reader had created a good foundation for long term goals and short term emergencies and they wanted my suggestions on what could she do next. I suggested she might want to consider identifying intermediate term life goals — things that would occur more than 5 years out, but not as far away as retirement — and to look at setting up a more conservative investment account to fund such goals. i explained she might be able to take more risk than the cash she holds for emergencies but not as much risk as in her retirement plan because these assets would need to be tapped sooner to fund her intermediate goals.

I also suggested that if she truly has all of her bases covered and she wanted to splurge a bit, she should do so. It’s hard to tell from one question and no background to her story, but it sounds like she is doing the right things and creating a solid financial foundation. Rewarding herself for being committed seems like a reasonable activity — if she wants to do it.

I find in working with some clients that are extremely committed to saving and investing for the future, it can be hard for them to splurge without feeling guilty. I know we talk so much about people who over spend and are in debt, it’s hard to believe that there are people that struggle with making purchases for fear they will not stay on track or may be overdoing it. I don’t want to promote fear driven hoarding so I will often suggest creating an opportunity fund or splurge account. This way, when they ready to spend and feel comfortable with it, the account is funded and they can do so — hopefully without guilt. Setting limits can be comforting to people who are use to following the rules and need to have a way to give themselves permission to spend. It should be about spending with awareness, not guilt.

Scenario 2: In Dangerous Territory?

The second question I found to be very interesting as I think this is probably a more complex situation than it first appears. It came from a reader who was writing on behalf of her friend (?) who is in her late 40’s, had just received a $100,000 settlement, worked part time, and had no retirement savings. The reader wanted to know what could her friend do to save for retirement in addition to funding a Roth IRA. This question sent off some major warning bells for me. Before you focus on retirement savings, fix the current problems or the retirement savings will be a waste of time.

First off, she’s in her 40’s with no savings and working part time. Reading between the lines, it seems she has no solid foundation which leads me to worry she is living paycheck to paycheck — if she’s lucky.

The second warning bell was that the $100,000 was a settlement. From what? Were damages of some sort incurred or experienced by her? Perhaps she is dealing with a mix of life changing issues, all of which can have a major and compounding impact on her financial security.

My suggestion was before assuming all of this money should go into retirement accounts, she needs to get a solid footing — now. Deal with this in chunks and prioritize: First make sure she has no excessive debt, create an emergency reserve, put some into a retirement account and use some to get educational or skill training from a legitimate educational source to boost her human capital earning potential. However, the specific amounts that should be applied to each area are impossible to give if we don’t know her full back story.

As you can see, there are no simple answers to simple questions. Hopefully this provided some direction to the readers but as the saying goes, “the devil is in the details.”