Without (increased) income, there is no retirement
You have a valuable home and a large retirement portfolio, but cash flow may be the most undervalued tangible asset you have.
Cash flow is the cornerstone of financial security, happiness, and freedom. Burn it out or cut it down, and your world can be turned upside down. For example, the difference between most homeless people and those who are not financially homeless is that a homeless person usually does not have enough money to pay for housing, whereas someone who has housing.
For most of us, cash flow comes from work. This income enables us to acquire assets such as real estate, stock market investments, pension plans and interests in a company. Ultimately, the purpose of these assets is to create a stream of income that can eventually replace your paycheck from a job. It’s called building wealth, and it’s something most of us work towards all our lives. Wealth can mean the freedom to do the things we like, as well as to avoid the things we don’t like. Whether you’re looking to retire early from a career that’s good for your wallet but bad for your physical or emotional well-being, or to maintain your retirement lifestyle, you need to replace your paycheck.
No “magic number” needed to retire?
While some people think they have to hit a certain “number” to retire, it’s really create cash flow you can’t survive. For example, imagine that Bob earns a salary of $100,000 at a large company. Upon retirement, Bob will receive a pension benefit from his employer equal to 80% of this salary. This 80% pension income is enough for Bob to live the life he wanna retired, even though he never invested much of his money in a 401(k) or other retirement plan. What does his income look like after he stops working? His pension pays $80,000 a year with cost-of-living adjustments, he receives a Social Security benefit, and his children are financially independent.
How “stressed” is Bob before and during retirement? Probably not too stressed. Bob, like my grandparents who had a pension, didn’t worry too much about his retirement. In fact, thanks to pensions — which is another way of saying, a stable and guaranteed income for life — they did not need a large amount of investment or assets. They also didn’t need to accumulate a “magic” number to be able to say, “Now I can retire because I have X dollars.” They were secure because they had a guaranteed source of income.
Ultimately, it’s about how much reliable cash flow you’ll have in retirement, not how much you’ve saved, or even what rate of return you’re getting.
What about the rest of us who don’t have a pension?
Pensions, for the most part, are uninterrupted, stable and guaranteed streams of income, but many retirees today do not have one. Instead, today’s retirees should ask themselves how many years of uninterrupted and growing income their assets can produce. The main purpose of portfolios, real estate, retirement plans, financial products and strategies is to create this income. Here’s the proof: you don’t take your statements, assets or equity to the supermarket, you take your earnings. You don’t take your statements or asset balances to the doctor, you take your earnings. You don’t take your credits and statements on vacation. You take your income.
Without a reliable income that keeps up with inflation, you can’t have a secure retirement, especially if you plan to extend your life expectancy. It is much more difficult to understand how to create income for as long as it is to aim for good returns on investment. While we often judge our performance based on these returns, the equations change dramatically once we start tapping into that money for a living. In other words, there’s no point in sitting on a park bench at 75 or 80 saying you beat the other guy or the market if you don’t have a penny to rub.
How one couple made it work
Let’s take a hypothetical example: Suppose a couple in their sixties is planning to retire. They have saved a substantial amount for their retirement, but fear they will run out of money because neither has a pension. They are also concerned about the market and inflation. Even if they think they have enough money, these variables inject uncertainty and worry. What can they do?
They could start by determining how much they will get from Social Security and how they could maximize their benefits. From there, they can calculate the additional monthly income they’ll need to achieve the lifestyle they want in retirement. Then you have to figure out how to fill that gap — that might mean deciding how much to withdraw from an IRA each year or investing in an annuity that would provide regular payments for the rest of their life. Their goal is to figure out how to turn a lump sum of savings into a steady stream of income.
Here are some questions to ask yourself and your advisor the next time you meet:
- “How much continued and growing income can my savings, investment and retirement accounts generate? »
- “What could interrupt, reduce or destroy this stream of income? »
- “What happens when the market goes down? Where will I get the necessary income from while my investment portfolio recovers?
- “What happens if tax rates increase to the point that taxes begin to reduce my disposable income? »
- “What happens if the cost of living increases at a higher rate than I had anticipated? »
The essential question to ask yourself is: “How much monthly income do I need in retirement and how will I generate it?”
When it comes to retirement, especially in today’s inflationary environment, you should ask yourself how you are going to protect your purchasing power and create the life you want for yourself in retirement.
A financial advisor can help you answer these questions and create a plan that’s right for you. It means looking beyond the “numbers” to see how you’ll actually live in retirement, how you’ll address your biggest concerns, and how you’ll achieve the lifestyle you want for as long as you live.
For more information and important disclosures, please visit https://finleyalexander.com/.
President, Finley Alexander Wealth Management
Kyle Winkfield, President of Finley Alexander Wealth Management, is a breath of fresh air for the financial industry, empowering customers and the public through education and simple concepts. Personal finance is a topic that angers many Americans, and the deluge of industry jargon and quick talk leaves most unsure of what’s best for them and their families. A portfolio is not a plan, and what sets Kyle’s clients apart is that they have a written plan for retirement, allowing them to achieve financial freedom and lifestyle security.