How many times have you heard pre-retirees state that they could live on less when they retire? It is counterintuitive that an individual, or couple, could make that statement. What will change dramatically at age 65 (or after you eventually retire) to make that statement come true? Do the IRS, your mortgage lender, your utility companies, and the like give you a discount because you are a retiree? I’m sure that the majority of those comments by pre-retirees are part of their retirement wish list.
Fortunately, or unfortunately, we are all creatures of habit. Articles upon articles appear daily about losing weight, exercising regularly and eating correctly. People who are successful at accomplishing weight loss, becoming more physically fit, or eating a more balanced diet will tell you that to accomplish any objective, you need to make a life-style change. Wishing and hoping don’t change habits; it takes new knowledge, skills and action to effectively manifest new attitudes and new behaviors.
So initiate a dress rehearsal for retirement now. Rather than speculate on future cash flow needs, start today to identify those cash flow items that may or may not decrease as you transition from your “Earning Years” into your “Golden Years.”
Determining what expenses to eliminate may be the starting point of this exercise, but the second-dimension of cash flow analysis may uncover “free cash” to be reallocated to ongoing wealth-building and asset protection strategies.
Eliminate those items that you have no ability to control, identify those that require your creativity, and compromise on adapting and adjusting. Too often, the “Earning Years” reinforce our new cultural habits of affluence and consumerism. Affluence has its roots in the Ancient Latin word, affluere, which means “flow freely.” Yes, for consumers, money does flows freely when you have a paycheck. What happens in retirement when the majority of your income is now dependent upon the investment return and/or distribution from the assets you accumulated? Let’s not forget that we may be experiencing a longer life expectancy. This phenomenon is putting an even greater onus on being better stewards of our wealth for a longer period of time.
Other than the proverbial miscellaneous expenses, what other categories come to mind where you might be overspending? Is this a good time to refinance your mortgage? Interest rates are low once again. Is it time to review your cash flow to reduce the cost of your mortgage? Refinancing may be the catalyst to reduce mortgage/housing costs to free up cash to purchase wealth building assets and strategies.
If you refinanced your mortgage and the monthly (P & I) payment is lower, should those mortgage savings go to increasing your 401(k) contribution to build up your retirement nest egg or funding your child’s/grandchild’s 529 plan? The 401(k) contribution creates a federal and Ohio state income tax deduction; the other creates a tax-free accumulation account for education.
If you examine your payroll withholding and/or quarterly tax payments, will you receive a refund or will you owe taxes? The ideal is to pay, via estimated payments and your payroll withholding, exactly what you will owe. The balance in excess withholding or quarterly payments should be reallocated to categories to build your wealth on a regular basis. Periodically consulting with your tax advisor can maximize this strategy.
Are you paying too much for life insurance or auto and homeowner’s coverage? Maybe you would like to purchase long-term care insurance, but the premium would challenge your monthly budget. So rather than always spending more money to purchase things, why not review the expense of current items first. For example, by increasing your deductibles on your auto and/or home insurances, you may realize substantial savings. These savings then can be applied to those items warranted by your new financial direction.
When you retire, what monthly obligations will remain? What expenses will go away? 401(k) contributions will drop off; saving/investing/accumulating money for retirement will no longer be an expense. Federal and state income tax withholding (and quarterly estimates) may be lower. So as you work through each line of your expense sheet, you’re approaching the true “bottom line” of what you need to live on in your Golden Years.
Working with your wealth manager and life-planner, can help you fine-tune the projected income needed per month, adjusted for annual inflation. So here is where the “dress rehearsal” comes in. If you’re five years from retirement, begin to live now on that bottom-line number you identified to be your future retirement income needs. Working within your budget and with your advisor will help you focus on what nonessential expenses need to be eliminated or adjusted prior to retirement. Statistics indicate that retirees will need 70 to 100 percent of their pre-retirement income during their retirement years. Rather than guess what that required income need is, let’s identify your future bottom-line monthly number now.
Like anything else, retirement is a life-style decision. Don’t jump in to retirement unprepared. Ease into retirement by practicing fiscal responsibility and accountability. Approach the dress rehearsal technique as the opportunity to continue to live your Golden Years with an attitude of abundance as opposed to living a life controlled by scarcity.
As a fee-only wealth manager and life-planning company, we are ready to make your dress-rehearsal a success.
Robert A. Valente, CFP®, AEP®, is CEO and Managing Member of RAV Financial Services LLC. He can be reached at email@example.com.
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