“How much money do I need to retire?”….is an often asked question. If you google the question, you will find ten+ pages of references to websites, articles and retirement calculators that attempt to answer the question. While, many of these references can be helpful if your situation matches the criteria or situation discussed, I believe that your finances are personal and so are the answers to your financial planning questions. Therefore, in my opinion, you need to start by discovering the answers to specific questions about you.
Question #1 & 2: How old will you be when you retire and how long do you plan to be retired? Most people plan to be retired until they die…..so when is that going to be? Now we are discussing family longevity. How long did mom and dad live? Are you healthier than they are / were? How many years will you be retired? If you have a partner / spouse, how long will they live?
Question #3: How will you spend your money? On what? When? Are some items a priority? And others you can live without if you had to? Make a list….yes, write every item down, assign a dollar amount (in today’s dollars), and assign a priority from 1 to 10 (10 is most important). One of these items includes all “normal living expenses” such as groceries, utilities, rent / mortgage, taxes, insurance, etc. But then list everything separately. Health care? Travel? Replacement vehicles? Stuff happens (new roof, water leak etc.)? End of life care? Weddings? Grandkid’s education? Motor home? Gifts to family / charities? Most “retirement calculators” talk only about your annual expenditures and neglect to discuss the future costs of specific goals like travel, weddings etc.
The next step is to determine the cost of each item in “future dollars.” Now comes the discussion of inflation and how it may affect future expenses. This will require the use of a or the future value calculator. (1) While many expenditures occur a limited number of times (travel, cars, etc.) others like basic living expenses or health care happen every year. For today’s discussion, allow me to jump forward past all the math and assume you will spend $1.5M in retirement.
Question #4: Where is the money going to come from to pay for all this? Some possible options are:
What will be your Social Security or pension income? Does this amount change if your spouse dies? Will this amount be greater if you wait a few years to begin collecting or get smaller if you start earlier? How much? Does this benefit have cost of living increases? How much? Are they guaranteed?
Do you have an annuity that pays you an income or some kind of structured settlement income? Annuities can be purchased by you from an insurance company or received as a form of settlement for an injury or accident? If you have either, how much income? For how long? Does it have cost-of-living increases? Is it guaranteed?
Do you have income from a trust deed (mortgage) loan you have made or perhaps rental income? How solid is this income? Do the trust deeds have a balloon payment? When? Is there a chance your borrower will default? Is your rental income consistent? What is the tenant turnover? What are your costs to re-rent the property? Depending upon your answers, you may want to count all of trust deed or rental income or maybe only half.
If your investment portfolio includes “fixed-income” investments like bonds and CDs, this interest income in many cases can be considered to be reliable and be included.
Investments in common and preferred stocks may pay a dividend. While some may say that dividend income is not as reliable as interest on bonds, many investors consider the dividends as part of their dependable retirement income.
If the combination of Social Security, pension, rent, interest and dividends cover all of your current living expenses you are fortunate. Then the only question is if the income will increase by enough to keep pace with your inflated future expenses.
However, this is often not the case for many retirees. In some situations, they have (1) valuable appreciated rental property that is not providing enough rental income when compared to the equity that could be reinvested for more income. Others, as an example, may have a “total return” (2) on their investment portfolio of six to eight percent per year historically but dividends / interest of three percent. (3) This means the portfolio is getting bigger. #1 above placement????? Not sure where the (1) should be.
Some households have lived in their home for decades. Some have no debt. Lots of equity. Great for the kids that will inherit. Not so great for mom and dad who may need income.
Growing real estate equity and portfolio value look great on a balance sheet but often do not supply sufficient income to cover the cash flow necessary for the fun part of retirement or the increasing costs of health care late in life. This may mean you need to sell some of your investments. What to sell? When to sell? How much to sell? How much is too much to sell? Just getting by and doing without, in my opinion, is inappropriate if you have the assets to make your life better or more fun….”if you have the assets.”
Financial planning is an ongoing process that requires: 1) That conversation about goals and priorities. 2) Discovery about where your wealth is located; 3) Consultation with tax and legal advisors regarding income tax and legacy planning; 4) An analysis of current investments and how they fit into the financial situation today as opposed to why any one investment was initially purchased. 5) Mapping out a cash flow plan for life.
This is the personal part of financial planning. Wollman Wealth Designs, Inc, is a financial planning firm in Escondido, Ca and does business in San Diego County and around the United States. We believe that your finances are personal and planning for them should also be personal. No cookie cutter answers. Call or email us to set a time for an introductory conversation.
- Total return = dividend or interest income plus changes in value.income plus changes in value.
- The returns sited are only examples of the return some investors have attained and are not guaranteed nor an example of potential future results. Your results may be very different.
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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.