The ultimate goal of most financial planning is to make work optional.
For some, that means retirement ASAP. For others, that means retaining the freedom to work as long as they choose, with a large safety net in place in case they ever wake up one morning and say, “That’s it. I’m done.”
I find five “wants” common for those who desire this kind of financial freedom at some point in the future.
The first is income. This one is pretty obvious. You go to work every day so you can earn an income. When the work stops, the earned income stops as well. So task #1 is to replace your earned income with some combination of Social Security, pensions, and withdrawals from retirement plans and other assets. I refer to this as monthly mailbox money.
Number two is liquidity. Monthly mailbox money will not sufficient to meet all your income needs in retirement. Just as when you were working, your retired self is going to need to buy things that cost more than one month’s income can cover: cars, vacations, roof replacement, major dental work, home remodeling, those sorts of things.
Number three is safety nets. Nothing can shrink your pile of money faster than an unexpected catastrophe with no safety net in place. You need insurance protection against automobile accidents, house fires, lawsuits, major medical expenses, long-term care expenses, rehabilitation expenses…just to name a few. Safety nets pick up where liquidity leaves off.
Number four is longevity. How long do you want your money to last? As long as you do? As long as both you and your spouse do? Most people are going to answer in the affirmative to those questions. But if you want your money to last, doesn’t that limit the amount you can take out now? Obviously, it does. Which then leads to the million-dollar question: how much can I safely take out of my little nest egg each month and be sure I will never run out?
The answer? A lot less than you might think. Somehow 4% has emerged as the go to rule of thumb. But recent studies have argued that you might actually need to limit yourself to withdrawals of less than 3% per year. That means that the guy with a million dollars can safely withdraw about $30,000 per year ($2,500 a month) without a fear of running out of money during their lifetimes.
Lastly is legacy. How much of what you have built in this life do you want to leave behind for those you care about? One popular answer for swaggering males under the age of 40 is, “I want the last check I write to the undertaker to bounce!” This is the guy with no adult children who have bestowed on him the true treasures of life – grandchildren. I’ve yet to meet the grandparent who wanted to leave his progeny nothing.
These five financial retirement goals - income, liquidity, safety nets, longevity and legacy are north stars, lighting the way forward on your journey.
The key to all five is balance. If you max out in one area, to the neglect of another, could really cost you.
So, get the help to do the work necessary to put a plan in place to balance these five priorities.