Tag: importance of cash flow

Erin Botsford (R) Transcript 8/24/12 #909

August 24, 2012

WEALTHTRACK Transcript #909- 8/24/12

CONSUELO MACK: This week on WEALTHTRACK, running the retirement marathon at your own pace without running out of money. Financial planner and author of The Big Retirement Risk, Erin Botsford, has a training strategy to make sure your investments match your lifestyle along the way, next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. This week on WEALTHTRACK we are focusing on avoiding every retiree’s nightmare- running out of money in retirement- and achieving every retiree’s dream of having a comfortable retirement. For many Americans, the nightmare appears to be a distinct possibility and the dream just that: a pipe dream.

Pessimism about retirement prospects is rampant. According to the annual “Retirement Confidence Survey” put out by the Employee Benefit Research Institute, workers are about as pessimistic as they have ever been in the two decades since the survey began. More than a quarter of workers say they are “not at all confident” about having enough money for retirement. And the percentage of workers feeling “very confident” about a comfortable retirement is near record lows. Although Americans spend less overall as they get older, they spend more on healthcare. And increasing numbers of older workers and retirees say they are cutting back on that to save money. One in five older Americans report actions such as switching to generic drugs and reducing dosages, while nearly as many are skipping or postponing doctor appointments.

This week’s WEALTHTRACK guest wants to reverse those trends and has some novel, but common sense approaches to do so. She is Erin Botsford, founder and CEO of the financial planning firm The Botsford Group and author of the new book, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time. Botsford believes traditional financial planning models no longer work with the new realities of retirement. Instead she has devised what she calls lifestyle driven investing: matching different investments with specific life style needs and goals. Botsford’s dedication to financial self sufficiency and independence started way too young, with a childhood tragedy. I asked her to tell us what happened.

ERIN BOTSFORD: When I was 11, my dad died, and he left my mother with six children and a $10,000 life insurance policy. And I always like to add that my father was a highly educated man. He had a PhD in Psychology. But he had borrowed against his teacher’s pension plan because he was going out to fulfill his dream, which was to build a clinic in San Diego for early childhood education. So we moved out to San Diego, he borrowed against the pension, moved to San Diego, and within six months he died. And he left my mother with the $10,000 policy and six kids. So I always tell people we went from middle-class to food stamps overnight, but the truth is, food stamps didn’t exist back then, so that’s not exactly right. It was worse than that.

Where things got a little interesting for me was, when I was 16, I was on my way to work at McDonald’s, my first real job. And it was the day after Thanksgiving, and I was involved in a very bad car accident. And I hit a guy on a motorcycle, and he was killed. And unfortunately, I was charged with involuntary manslaughter by the State of California, and when my mother and I met with an attorney- because when you’re charged with a crime, you have to defend yourself- it was a very interesting meeting because my mother was very honest about our financial situation. And so after hearing that, he said to my mother, “Well, Mrs. McGowan, this is purely a matter of economics. If your daughter will plead guilty to these charges, I’ll be happy to enter the plea at no cost to you, and she’ll just get whatever sentence the State of California hands down. But if she wants to defend herself it’s going to cost you a lot of money.” Well, money was not a resource that we had. So she picked up her purse, thanked him and said, “Well, thank you very much, she’ll just plead guilty.”

Well, pleading with my mother and I said, “Please don’t make me plead guilty to killing this man. Mommy, it was an accident, I’m a good girl.” And she looked at me and she said ten words that forever changed my life, and these were the words, she said, “Honey, I’m so sorry. We have no money, and therefore we have no choice.” And I always tell people that was the day that I learned money buys you choices.

So we got home, and fortunately my older brother, Tim said, “Mother, we can’t let her plead guilty” and so he suggested that my mother take a second mortgage out against her house. Because she’d done one good thing; she’d bought a house in Southern California, it had appreciated in value. And so we took a second mortgage against the house and we paid for my defense and we found that, in fact, I didn’t hit him; he was actually going well over the speed limit, he hit me. And so the charges were dropped against me. The judge threw the case out and said, “Take this little girl home, she’s been through enough.”

We got through all the legal battles, and then by the time I was 20, I had saved $22,000.  And people say, wow, that’s really good. Well, the truth is I went on the “Wheel of Fortune” and I won. So I took $3,000 and I started investing. I put $3,000 in a townhouse. I went with a partner of mine and we bought a condo in San Diego County. And that worked out okay. And I gave the other $19,000 to a stock broker and he lost all of it for me. So by the time I was 22, I had learned so many incredible lessons. I’d had a college education in the School of Hard Knocks.

CONSUELO MACK: Here you are, you’ve got a terrific book, and you are helping people avoid the pitfalls and really some of the tragedies that you and your family have gone through. So you are very critical of traditional financial planning models. As a result of what you’ve been through, but also as a result of clients who come to you and who are in worse financial shape than they should be. So what’s wrong with the current approach to financial planning?

ERIN BOTSFORD: Well, the big thing that’s wrong is nothing has changed, when in fact, everything has changed. So the traditional models, the traditional planning, for some reason is always based on a premise that the stock market, the financial markets, are always going to go up. And you know what? Everything works out just hunky-dory if that’s the case, right? You can do almost anything and not fail. The problem is, if you do any research, you find out that more than likely, because of the 77 million baby boomers that are going over the hill, they’re the ones that have driven this economy. Well, I don’t think that’s that way it’s going to be.

I think that we’re going to have very flat, choppy markets. We could even have some down markets. And so I wrote this book because I started studying this 16 years ago, and saw there was going to be a time, just based on this huge demographic trend, there was going to be a time that came along that if people continued to invest the way they had been, retirees were going to risk running out of money. I said to my husband when the book launched a month ago, I said, “I’m on a mission to save the retirements of 77 million people.” And my husband said, “Really?”

CONSUELO MACK: So for the 77 million people in the baby boomer generation, of which I am one, I think it’s something like, 47% of us, and it’s possibly even higher than that, it’s expected that we will not be able to, in fact, fund our retirement. Or our health insurance costs, or underwrite health insurance costs. Isn’t it too late for most of us to save ourselves?

ERIN BOTSFORD: Well, no, I don’t think so. And there was one lesson I learned from my father, even though I was very young when he died.

CONSUELO MACK: Eleven, right.

ERIN BOTSFORD: He said something that has always stuck with me, and he would say to you, “Consuelo, the next ten years are going to go by. Right? The question is, what are you going to have to show for it?” So unless you’re planning to die in eight years, I mean, we have no choice but to address things. This is the way life is now, okay? Regardless of where you’ve come from, what happened in 2008, this is now. And so deal with it. And so my book is entirely, the whole idea is empower yourself and take responsibility for your own outcome. Relying on what Congress is going to do, relying on what a pension is going to do, I mean, my husband flies for a major airline and his pension was just cut. I mean, the good news is we never relied on it. But there’s a lot of people, and I think gone are the days of the idea of self-reliance. And I think we need to get back to kind of more back to basics.

CONSUELO MACK: So how should we reframe? And this is part of the book as well, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time, is to reframe how we think about our retirement and our investments. So tell us how we should think about our retirement and our investments.

ERIN BOTSFORD: The question is, it’s all about cash flow. So what I have seen in my practice, what most people want, if they had their dream, is that the day after they retire, or the month after they retire, a check similar to what they were earning from their company would come into their bank account, right?

CONSUELO MACK: Right, it’s all about income is what you say. It’s not about the dollar amount, it’s about income.

ERIN BOTSFORD: Income. So what I focus on is, beginning with the end in mind, what are you doing putting your money in things? It’s kind of like the idea of buying condos in Florida to flip them, right? How many people got caught up in there? So what are you doing? You’re putting your money in ETFs and mutual funds and things, and the idea, so what’s the plan? Now, if you put in $100,000 and it grows to $200,000, then what? What’s the plan? How do you create an income stream?


ERIN BOTSFORD: If, only. Or what if your magic number is a million dollars, and it’s July 2008 and you’ve got $990,000 and you’re three months away from putting in your papers and retiring, and then the market crashes and you’ve got 40% less; then what? Well, you focused on the wrong things. And so I’m very much all about creating cash flow, and income streams, and focusing on that. And later on we’ll get into my house of security. I try and make it so simple for people, because it doesn’t have to be rocket science.

CONSUELO MACK: So in this day and age of really diminished income, I mean, does that model, does your model still work? Because basically the income that we’re getting is historically low, and kind of like zero, I mean, essentially if you’re in the safest, your CDs and money market accounts or whatever, you’re not getting any income.

ERIN BOTSFORD: I describe as if we’re going down a grocery store and you’re going down the potato chip aisle, you know? And it’s the Wall Street potato chip aisle and they all have the same stuff. Well, I think if you start looking outside the box, and you go to a less traditional format, you go to an independent advisor, you do your own research, we’re finding income products that are paying, three, four, five, six, seven, eight, nine percent. But you’re not going to find those going down that potato chip aisle of the traditional mainstream Wall Street firms. You’re just not going to find it.

CONSUELO MACK: So we’ll go into that a little bit later, but let’s talk about the house that you want us to build. And I know that you have what you call ‘lifestyle-driven investing.’


CONSUELO MACK: And so tell us about like what lifestyle-driven investing is. You know, how does it work?

ERIN BOTSFORD: Okay, now think about those words: lifestyle-driven investing. I want my investments to drive my lifestyle, or I want my lifestyle to be supported by my investments. That’s why I’ve trademarked it. Okay, so the house of security, it’s so simple. You form a foundation. And with your foundation, you look at what are my needs, okay? What are my real needs? Now, I call needs your nonnegotiable items. You have a need for housing, or shelter, food. You want to be able to pay your electric bill and your health insurance. And what are those nonnegotiable items? Create a plan.

And you know, the funny thing about that is, those items are usually not as high as you might think. Your house may be paid for. You know, sometimes social security will actually fund your real-life needs. The problem is, everybody says, well, I want what I used to make, and you lump those all, everything’s a need. Well, you go up from the foundation, the needs, you go up into wants.

CONSUELO MACK: So let’s start with the needs, and those, as you said, the nonnegotiables. Food and shelter I get, utility bill, whatever it is. But health insurance. Now, of course once you hit 60, whatever it is, 62, 65, you get Medicare. But you’re saying that a health insurance is one of those nonnegotiable needs, and you need to plan for that. So what kind of health insurance should we be planning for that we think the government’s going to take care of?

ERIN BOTSFORD: There’s not a one-size-fits-all answer, unfortunately. But clearly, if you lose your health, and what typically happens is there are two spouses; one of the spouses gets an illness, right? And if you don’t have proper health insurance, or, and I want to talk about long-term care insurance later on, too, sometimes the entire family, all of their net worth and all of their resources are exhausted taking care of the first spouse, and yet they die anyway. And it leaves the surviving spouse with nothing. So as we get older, it’s just a fact of life, our bodies just wear out, and so I think health insurance has to be right up there. It’s a nonnegotiable item. If you can get it for free, great. But otherwise you need to pay for it. It’s a need, yes.

CONSUELO MACK: So you were taking us up- so that’s kind of the basement level, right? That’s the foundation.

ERIN BOTSFORD: And so I want to go back a little bit and say with the needs, the nonnegotiable items, the whole point of lifestyle-driven investing is you fund those with income sources that are also safe, predictable or guaranteed. Right? And so that you fund those, you want to make sure those come in, no matter what. As you go up the hierarchy, now the wants. Generally speaking, dining out, Internet, cable TV and those kind of things, we always have the discussion about our manicures and pedicures needs or wants.  And those can be funded with other items. Things that are maybe a little more risky, but not super-risky.

Then you go up the hierarchy to likes. And likes are how we define them; you can define them any way you want to. And on our website, we have some worksheets that people can print out. In fact, I had a couple that went to Colorado over the holidays, and since there was no snow, they came back and told me they spent nine hours going through these worksheets and arguing about what a need and a want was.

CONSUELO MACK: Or certainly the wants and the likes can really be, so why did you separate those, the wants and the likes?

ERIN BOTSFORD: Well, the likes are- let’s say you’ve got your needs and your wants, that’s basically your lifestyle. Okay? You’ve got that covered. A like is taking all the grandkids on the Disney cruise. It’s buying a second home. It’s buying the boat, the RV. So sometimes a like will be things like the down payment on the condo at Park City. So the down payment may come out. Sometimes it’s lump sums. Now, once you have that condo in Park City, then you probably want to make sure you can afford the expenses, and so you would put the expenses down here. So really, all it is, is a framework for having a discussion that not all expenses are created equal. I think the traditional planning says, oh what do you want, how much do you want? And then they put it all into a big pie chart and they allocate it among a bunch of stuff, and they take a four percent withdrawal, and either you get it all or you don’t get anything. And I just think things need to go back down to basics. Let’s rethink things a little bit because not all expenses are created equal.

CONSUELO MACK: The fourth level, you know, the top floor, is defined your wishes. So what are wishes? I mean, are those complete fantasies?

ERIN BOTSFORD: No. I define wishes in the book as those are legacy desires, really. And so on Maslow’s hierarchy, those are sort of how would you like your family, how would you like to leave, if there’s leftovers. The other thing, too, is it’s extra cash flow. I mean, there are a lot of people out there that can fund their needs, their wants, their likes. So their wishes are: if I have extra money, how would I want to spend it? And you know, how would I want to invest it? So you can be very risky on those things because it’s not something that you’re going to need to pay your day-to-day expenses.

CONSUELO MACK: And what actually fascinating, that number one, this foundation, this financial foundation that you’re building in your book, I mean, is a very useful way to approach this, and it’s very manageable and it does create really terrific discussion points among families, that’s for sure. But also what I really appreciate is the fact that you match your investments to these different levels, which I think is so interesting. And that really is different. Let’s talk about the needs, the nonnegotiables. I mean, you mentioned one thing is that, for instance, you could apply your social security benefits to your needs.

ERIN BOTSFORD: Sure, sure.

CONSUELO MACK: That’s the one guarantee that we have. That all of us have, who have worked, who are married to someone who’s worked. So what are the other investments that could fund, that we should look at as funding our needs?

ERIN BOTSFORD: Well, it just varies from time to time and place to place, and that’s why in the book, I try not to talk a lot about the specifics of the investments. Because what I want you to do is look for behavioral characteristics. Okay?

CONSUELO MACK: Behavioral characteristics.

ERIN BOTSFORD: Of the investments.

CONSUELO MACK: Of the investments, right.

ERIN BOTSFORD: So here’s the behavioral characteristic. To fund a need, it must produce an income, either now or in the future. I want that income to have one of these words: it must be either safe, predictable or guaranteed. Now there’s only two things that you can use guaranteed: you can use Treasuries or annuities. Some are good, some are bad. There are things that are predictable- how about there are people out there and they’re planning for their retirement and they’ve built a portfolio of dividend-paying stocks. You can find dividend-paying stocks that have paid a consistent dividend every single quarter for the last ten years, and who raise the dividend every single year for the last ten years. There’s really good quality companies. And it’s a good time to be buying that. Now, again, as long as those dividends are predictable, you can put that in there.

CONSUELO MACK: So let me just stop you here, because what’s so interesting about that is, again, your focus is not on the dollar amount of the stocks that you’ve invested in. It’s about the predictability of the income, and it’s the income stream. Which makes you look at that investment class, because people now say stocks are very risky. They can go down. But in fact, if your Johnson & Johnson stock, or your Proctor & Gamble, which have paid dividends for 30 years and they’ve increased their dividends every year, that you’re still getting the income. So that’s what you’re saying, that’s a really important emphasis.

ERIN BOTSFORD: Very big distinction, yes, yes. It’s just a different way to frame and look at things. And if you’re constantly looking at your balance sheet, because that’s what the magic number, that’s what people have been looking at, what’s your net worth? And I say that’s really secondary to is that income consistent, stable and predictable.

CONSUELO MACK: All right, so your wants, what kind of investment characteristics do you want to fund your wants?

ERIN BOTSFORD: The type of investment that we talk about in the book, we call them ‘hybrid investments.’ And they have characteristics- some of the characteristics of a need, but not all. So for instance, a hybrid investment, it may produce an income, but you could never say that income was safe, predictable or guaranteed. So things like master limited partnerships, non-traded real estate investment trusts, equipment leasing programs, business development companies. There are things out there that are probably not down the mainstream highway, but they’re out there, and they do produce income. The big key on those hybrids is that you put small amounts of money. You put $50,000 in ten of these different programs instead of $500,000 in one.

CONSUELO MACK: So you’re spreading your risk.

ERIN BOTSFORD: Because they’re not safe, predictable or guaranteed, but they do tend to pay much larger income than the lifestyle, for the needs.

CONSUELO MACK: Right, so next category, in the financial house that we’re building, is your likes. So what kind of investments are appropriate for funding your likes?

ERIN BOTSFORD: Well, you know, and again, we try and just look at characteristics. And likes are things that, if it happens, it’s great. So that’s where, to me, it’s like that’s where you take your risk. And then that’s your ETFs, your mutual funds, your privately owned real estate. And so if those things pay off, and again, stay diversified on those things, if you can have a home run and you double your money, then you get to take the kids on that vacation, or the Disney cruise or whatever you choose to take them on.

CONSUELO MACK: So this is so interesting. Because you’re saying ETFs, mutual funds. Now, when you use those categories, most other financial planners would say that is the core of your investment portfolio.

ERIN BOTSFORD: Yes, that’s what’s wrong.

CONSUELO MACK: And you’re saying no.

ERIN BOTSFORD: No. Because think about it. Which of those things didn’t go down 40% in value? And the problem is not the ETFs. Because think about it, you could have a bond ETF. And if you can say that bond ETF pays off predictable income, okay, then you could use it for one of the other categories. But just as a general overview, to just get a big bucketful of ETFs, and the problem is not the ETF, it’s trying to create your future taking a four or five percent withdrawal from this basketful of stuff that doesn’t have any defined income that comes off of it, I think is a recipe for disaster. And I think the big problem is, you could have a money manager, you could have an advisor who consistently beats the market. And you can still run out of money.

So think about it: if the market went down 40% but your ETF portfolio only went down 30%, well, your advisor did a good job, right? They beat the market. I always tell people, how many 30% declines in the market back-to-back does it take to run out of money?  I mean, not so many.

CONSUELO MACK: One Investment for a long-term diversified portfolio, what should we all have as part of our financial plan?

ERIN BOTSFORD: I would say long-term care. And it’s really overlooked, because nobody likes buying insurance of any kind. People that don’t have a lot of money, they need long-term care, because if they do have an illness that requires them to be in a nursing home, or skilled nursing at their house, guess where that funding’s going to come from?  Their investment account. So you can pay $5,000 a year, or you can pay $65,000 a year out of your portfolio. I mean, it’s just good leverage.

CONSUELO MACK: So long-term care insurance is something that we all should have.

ERIN BOTSFORD: Yes, and I always tell people, quit fighting it. Because nobody wants it until they can’t have it, of course, so. Until they can’t qualify.

CONSUELO MACK: So, Erin Botsford, thank you so much for joining us on WEALTHTRACK, and your book, The Big Retirement Risk, Running Out Of Money Before You Run Out Of Money, is a terrific resource. And we really appreciate your coming on and talking about it, and your life’s work.

ERIN BOTSFORD: Well, thank you very much for having me.

CONSUELO MACK: At the conclusion of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: read Erin Botsford’s book, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time.

There have been literally thousands of books written about retirement planning- what’s different and refreshing about Botsford’s approach, what she calls lifestyle driven investing, is that it helps you redefine retirement planning and personalize the solutions. As she learned the hard way, from a very early age, money buys you choices. Her book helps you control the choices you make in order of their necessity and priority in your life and then helps you match different investments to pay for them. A novel, common sense approach for this new normal and volatile age we are living in.

I hope you can join us next week. We are going to revisit our interview with thought-provoking British historian Niall Ferguson about his latest book, Civilization: The West and the Rest. What does the seismic shift in world power mean for us as people and investors? If you want to see previous shows and find past One Investment and Action Point recommendations, go to our website, wealthtrack.com. And that concludes this edition of WEALTHTRACK. Thank you for watching and make the week ahead a profitable and a productive one.

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