The stories I will tell now are true or mostly true. I’ve changed the names and taken some liberty with the details. There are things you need to know. It isn’t easy to tell anyone that they are living in an illusion, that they have unrealistic expectations, and that they must make changes, sometimes painful, if they don’t want to find themselves in a heap of trouble later on down the road.
As a financial adviser, I had a great deal of respect for my clients, a great deal of love actually for many of them. Love is a powerful emotion and it is tempting to do almost anything to help those you love. That honesty is an expression of love seems obvious. The problem with honesty is that it is most difficult when it is most needed. Let me quote a philosopher I’ve quoted before, Walter Kaufmann.
A little honesty is so easy, so common, so unavoidable, it is hardly a virtue. But thorough honesty is the rarest and most difficult of all the virtues; and without that, each of the other three is somewhat deficient. Lack of thorough honesty takes so many forms . . . dishonesty says: my views are what I mean; yours are what you said. Dishonesty says: you are doing all you can. Dishonesty approximates the mythical ubiquity of original sin. It finds expression in unnecessary complications that, even if not designed to look impressive to the gullible, help to deceive the writer, or the speaker, about his own lack of clarity and other weaknesses.
Kaufmann also said: Modesty is so much easier than honesty because it is compatible with sloth.
Tough Love 1
Two friends, clients of modest means, walk into the office late in the morning on a beautiful spring day. Let’s call them Fred and Marge. Fred has a prestigious job in the community, a good salary, and he will have a substantial pension at retirement that he hopes will be in about ten years. Marge quit working years ago to raise their two children, now grown and in college. She did not work long enough to qualify for social security. She has few work skills and would find it difficult, though not impossible, to go back to work.
“We’ve decided to get a divorce,” says Fred. He takes the bull by the horns while Marge sits quietly by his side with little expression other than mild apprehension.
“We want this to be amicable,” says Fred. “I want to be sure that Marge is taken care of. She is hoping to go back to work but we can’t be certain when that might be or how much she could earn. I want to support her until she gets on her feet and be sure she will be comfortable down the road.”
Gulp. I knew this was going to be hard.
“I see. Let’s think about this. How do you propose to take care of her, to provide for her now and later?”
Marge shifts uncomfortably in the chair. Fred reaches into his briefcase and pulls out some papers that he places before me.
“You have our investments. In addition to those we have these bank accounts and a few other assets that I’ve listed.”
“Your investments are quite modest, Fred. You have about $25,000 in your retirement savings. Let me look over your other assets.”
Pause. I’m thinking, how am I going to tell them? They have another $25,000 in bank accounts. They have been living well on Fred’s salary and not saving much knowing that they would have his pension down the road. They own a term life insurance policy that would cover Marge if Fred dies early. They still have a mortgage on their home.
Fred is smiling, confident. Marge’s face is flushed. They don’t look at each other but stare in my direction hoping for a not-too-painful solution. There is none, of course, but I can’t tell them yet. I have to think carefully how to approach this.
“I suppose a divorce means you will be living apart?”
“Yes,” says Fred, “of course. I’m going to rent an apartment. For now. Until Marge gets on her feet. Then we’ll probably sell the house and … I guess split the money.”
“My experience,” I say matter-of-factly, “is that supporting two separate households is more costly than supporting one household. That would likely mean a substantial cutback in lifestyle for each of you.”
“We don’t live extravagantly now,” says Fred. “I mean, we don’t take expensive trips or go out to restaurants too often.”
Marge suddenly brightens up. “We’ve been putting all our money toward the boy’s college.”
“How much longer will they be in school?” I ask.
“That depends,” says Fred whose smile has disappeared, “on whether they go to graduate school or not. I did and we want them to have every advantage.”
“You know,” I straighten my spine, move in toward the desk, and put my arms on the table, “I don’t think a divorce is something you can afford. Not the way you’re thinking. Your equity in the house is not enough to live on. Rents go up while mortgages don’t. You would have the house paid off by retirement but if you sell it, well, that’s a very different ballgame. The boy’s college expenses are substantial and they could go on for some time. And, the extra living expenses of two households … I’m not sure I can see a way to put this all together. It’s up to you, of course. I can help but I can’t pull rabbits out of a hat.”
Silence. For the first time, Fred and Marge look at each other. Fred gathers up his papers and puts them back into the briefcase.
“You know,” says Fred, this time without the smile, “maybe you’re right. Maybe we should think this through a little longer before jumping to conclusions.”
I didn’t see them again for several weeks until one day I run into Marge on the street.
“How are things, Marge?”
“Great! The boys will be home for the summer soon and we’ve planned a drive up to Vancouver Island. You ever been there? I hear its lots of fun.”
“Actually, I have been there. I think you will have a good time. How’s Fred?”
“Oh, Fred. He’s fine. I keep telling him to put more money into our retirement plans. You know us women, always squirrelling away nuts for the winter. He says we can’t do it. Two boys in college, vacations, a night out here and there. He can’t figure where the money goes, but it goes. At least that’s what he says.”
Marge has an odd look on her face like she knows more than she wants to say.
“You’re right, Marge. You ought to try to save a bit more.”
“Why don’t you tell Fred that?”
“I will, next time I see him. So, you two are getting along now?”
“Better than ever.”
Tough Love 2
Arnold and Lottie were two of my favorite clients. They were both artists. They had moved to Mendocino from New York where they each had successful careers. They knew the art scene well and had been fortunate enough to save up a tidy sum in retirement accounts.
Arnold was always worried about the financial markets. He would drop in after picking up the mail and tell about the latest rumors of another major financial collapse. He was right to worry but not to obsess about it. We had his account well diversified with plenty of cash and short-term bonds to cover immediate needs. Even at his age (he was 80), he had the time to ride out most market setbacks. But still, he came by regularly and called often with additional concerns.
Lottie took it all in stride. She laughed at Arnold until he laughed at himself, but he still worried. She was a risk taker. Her problem was that she was an inveterate spender. She remembered the high times she’d been able to afford while working in New York and she was in no mood to slow down. The problem was that she was no longer working. Even with the best of returns, her savings was dwindling from the excessive withdrawals.
I’d warned them about spending too much but without effect. Finally one day I gathered the courage to, as Nike says, just do it.
“I’ve simply got to say this as clearly as I can, Lottie.” Arnold sat quietly watching. “Your spending is out of control. You can’t count on high investment returns to bail you out every time. There’s going to be a year or maybe more when investment returns are lower, even negative, and combined with those large draws, your account will start to implode. If you keep up like this, you’re going to run out of money and it’s going to be ugly.”
I thought poor Arnold was going to have a heart attack. Lottie just laughed.
“Oh, you worry too much. At this point in my life I’m not going to worry about it.”
As it turns out, Arnold did have a heart attack. I hope that it had nothing to do with his concerns about the markets or worries of running out of money. I’ll never know. In any case, Lottie did run out of money eventually but not until she’d moved back to New York to the life she loved. By the time she ran out of money she had Alzheimer’s and likely had no idea what happened.
I remember before she became ill she used to call me on the phone and laugh: “You told me I was going to run out of money and it was going to be ugly. You were right!” She thought it was the funniest thing. And maybe it was. She got the last laugh.
Tough Love 3
Mary had just arrived in town and was happy as a clam. She had retired early. She had a small pension and a moderate retirement account. She was looking for a house. She came in for a “financial check-up.”
“I’m so happy to be living in Mendocino at last. It has been a life-long goal to be here. Now I can finally live the life I want.”
Was her plan realistic? That was my immediate concern. The house she wanted was going to take most of her nonretirement savings. She would be taking on a mortgage, property taxes, insurance, upkeep, etc. She was planning on creating a rental or sharing the house to cut expenses.
“I am happy that you’ve been able to follow your dream, Mary, but I am concerned that you might not be financially secure into the future. By retiring early you took a large cut in your pension. You are exceptional in having saved as much as you have at your age, but I’m afraid it might not be enough.”
The look on Mary’s face changed from happy to sad in a heartbeat.
“Listen, I didn’t say you can’t do what you want to do. I simply said that some adjustments might be necessary.”
“What kind of adjustments?”
“What about working a few more years, maybe part time? This could allow your savings to grow and it would add to your pension when you are fully retired.”
Her first reaction was “I’m not doing this. I’m all set to retire and change my life.”
“That’s your decision. I’m merely pointing out the facts as I see them.”
Before she left, we agreed that I’d “crunch the numbers” and “put together” some options for her. We agreed to meet again in about a month.
A lot can change in a month. When Mary returned she was already back to work. She had resumed her job as a teacher. It turned out that a local teaching job was available allowing her to remain in the area. What’s more, she loved the new job and the people she worked with.
“I’ve been so lucky,” she said when she walked into the office.
It was the Roman philosopher Seneca who said luck is when preparation meets opportunity. Mary was one of my great successes. A few years later she managed to retire in a much stronger financial position. If only tough love always produced such happy results, it wouldn’t be so tough.