A Financial Adviser on Splitting Bills With Exes, Retirement, and Paying in Credit
Our Financial Adviser (let’s disguise him under the name Tony Samson) has agreed to provide his expertise on matters of wealth to those in need of guidance. We do not guarantee that his counsel is meant to be taken seriously.
I’m thinking of retiring soon, but now I’m starting to worry if I really have enough to live comfortably for the next few years. Is there a rule of thumb that I can use?
You did not indicate your age, so I have no idea of how many more unproductive years you have ahead of you which need to be financially supported. Not all who retire nowadays are necessarily entitled to a senior citizen’s card as even indiscriminate “loss of confidence” or “headcount reduction” in the corporate world can strike both young and old alike.
Anyway, assuming you are at the cul-de-sac of your career path, there is indeed a rule of thumb to follow which applies to any age. This entails determining your lifestyle and how much it costs to keep it up. I always prefer to assume no change in the way you live, therefore no downscaling of the amenities you are used to. This is a more painless (though risky) approach as there is no diminution of life’s perks that you need to worry about. If you are used to wearing bespoke jeans, then that’s how we proceed. If it is your habit to travel thrice a year in different time zones, this will be factored into the cost of your lifestyle. It is not good to feel deprived just because you are jobless and no longer productive.
The retirement formula is simple. Assuming you got some lump sum amount from your separation, whether early or mandatory, you use this number as your starting point. You take this amount and then divide it by the annual cost of your lifestyle, which includes electric bills, cable TV, food, clubs, your bespoke jeans, and travel. The numerator (your retirement pay) is hopefully bigger than your denominator (your living expenses) and then you will come out with a number. The resulting dividend (in the arithmetic sense) represents the number of years you have to enjoy the lifestyle you now enjoy.
You can also play with different scenarios, depending on your “mooching index”—the propensity to rely on relatives and friends for freebies, like a free place to stay in San Francisco. Clearly, the higher your mooching index is, the longer your retirement pay can be stretched.
The mooching index, however, relies on your counter-party’s propensity to be hospitable. In the absence of such a propensity, you are back to the first scenario of paying your way through the rest of your life.
Our simple formula is flexible too. Your nest egg may be earning money from investments in fixed-income securities or loan-sharking to small bakeries to cover daily expenses. Then it is only the uncovered residue that has to be recomputed. All these calculations are premised on the amount of retirement and savings you have at the start of your golden years.
What do you do when your life span is longer than the number of years funded by your residual fund? You can try hiring yourself out as a consultant or bringing down your lifestyle cost, or both. This may be wishful thinking for most people, but why worry about the long-term? This concept of the future disappears after retirement. The future is already the present. Besides, as John Maynard Keynes, my favorite economist, puts it—in the long run, we are all dead.
My husband and I separated recently. The thing is, we have kids in schools abroad. It was my choice to make them study there—should I have to be the one to shoulder their tuition?
Part of your problem is legal and probably covered by the terms of your separation. I can only address the economic side of this question. Nowhere in conjugal economics was there ever a rule that says, "If it was your idea, you should pay for it." Ideas, whether they be a trip to St. Petersburg or a Birkin bag, are always turned into reality by the breadwinner. Even as feminists have pushed for equal rights in the workplace or in broadcasting, they get fuzzy when it comes to who pays the bill. True, sometimes in restaurants, the female offers to split the bill—if this is to be the last date. Again, you have not divulged your present situation, only that you are separated but not if you have remarried or have a significant other who can answer for tuition fees in another denomination aside from the peso.
Since I presume that the kids in question are the issues of your former partner, he should definitely shoulder part, if not all if he's capable, of the schooling cost. This is either covered by your terms of separation or not. If this particular cost is not, it also depends on the emotional terms of the separation. Do you and your ex still share a cup of coffee without throwing the hot stuff in each other’s faces?
Maybe the most equitable approach is to split the cost of the tuition. However, if the ability to pay is asymmetrical, the one with the higher net worth may take up more of the burden. You also have the choice of bringing the kids home to study in local schools. That can be traumatic to them but not any more than being displaced for nonpayment of school fees.
I recommend a progressive approach. First, ask your ex to pay for everything. Then, you can offer to split the bill. Finally, you can agree to bring the kids home. And then it’s the same iteration again, this time in pesos.
As a parting shot, I advise you not to involve the new partners of either in this particular discussion.
I recently got married—I’m used to paying for things in cash, while my wife likes credit. Now that we’re thinking of getting a new car, we can’t agree on how to pay for it. What’s better in your opinion: a straight-up cash payment or smaller payments with interest over a number of years?
Presumably, you have enough savings or investments to make cash payments for a car or house a feasible option. I can understand paying for sushi, gasoline or a blouse with cash, but I’m not sure if this approach works as well for all types of purchases.
Again, there is an economic concept that may help you. The theory of “opportunity cost” tries to help in making choices by comparing a real cost (paying in cash) with the theoretical cost of the discarded alternative (paying by credit). If you have available cash to buy a car, say costing 1.6 million pesos, you can compare the earnings you can make from that amount (placed in equities or fixed income) against the real cost of interest for credit available to you. You have to factor in as well any discount from a cash payment.
This is merely a mathematical approach. Behavioral economists now also consider such issues as peace of mind or avoidance of conflict between partners with different philosophies.
My advice, though, is to pay the down payment (say 25 percent) and borrow the rest. In our example, this means that the couple will have available cash of 1.2 million. A hefty cash balance allows you to take advantage of opportunities too, where the only choice is a cash payment as no credit is available. I can give two desirable purchases that fit this
I truly believe that cash is king. It is always good to have a nice cash balance in the bank, even if it is only to look at and provide you self-confidence.
Besides, there is no stigma in borrowing money for big acquisitions like homes. It is the nonpayment of the amortization that leaves a bad taste, not to mention a poor credit rating.
The cash should always be working, though. Sometimes we forget that cash, too, is an investment with zero returns. Cash also burns a hole in the pocket. It is like a prisoner aching to be let out.