Have You Overlooked This?
Over the last few weeks, we’ve outlined the first few steps in The Relaxing Retirement Formula™ and you’ve gotten crystal clear on just how dependent you are on your Retirement Bucket™ today.
If you’ve come this far, and you’ve diligently discovered this critical number for yourself, you’re in the teeny tiny minority because the overwhelming majority of American retirees are too lazy and unfocused to perform this critical task.
However, as much as I’d like to applaud your actions up until now, there’s a key missing factor to your number.
That missing factor is what your level of Retirement Bucket Dependence will be next year!
And, the year after…
In 5 years…
In 10 years…
In 20 years…
Why will it be different?
Our Rising Cost World
Is there one single item on the list of what you spent money on in the last 30 days that is not more expensive than it was 30 years ago?
I know that question sounds ludicrous because it’s so obvious.
The easiest example is something we all know and spend money on every month: a first class postage stamp.
Paying a bill using a first class envelope in 1980 cost 15 cents.
If you fast forward 35 years to today, paying that same bill by sending an envelope in the mail costs 49 cents.
That’s more than a three-fold increase.
This is IT!
Stop and think about what investing is for a moment, and why you do it.
When we invest, we simply forgo consuming a dollar today so that we can have it to spend at a later point in time.
Why would we want to do that?
Well, the biggest reason is one that is near and dear to our hearts: we have a desire for financial independence, i.e. to reach a point where you no longer NEED to work to support your desired lifestyle.
You’d like to have enough built up in your Retirement Bucket™ to support you instead of having to work in order to do so.
So we set aside “part” of what we earn today to be there in the future when we no longer work to support our desired lifestyle.
Half Way There
Now, if you did just that, you’d be half way home.
In other words, you’d accumulate money with which to spend at a later point in time. However, the value of the dollar you set aside under your mattress today will be worth less to you when you want to spend it.
The reason for this is that the price of everything you want and need to purchase continues to go up over time, thus the value of the dollar hidden under our mattress goes down, i.e. it can pay for less!
If we knew that the price of everything we wished to purchase would remain the same, there would only be a need to save, not necessarily invest.
So, at its core, investing is about owning carefully selected assets that you believe will be able to help you maintain your purchasing power at a future point in time (i.e. keep pace with rising costs).
“What” we choose to invest in is largely driven by the historical fact that prices on everything we consume rise over time.
This simple principle is why it’s so critically important to establish investing principles and guidelines for yourself.
The reason you invest, and why you’re investing in what you’ve chosen, will remain clear in your mind so you maintain investment discipline in ever-changing markets.
Cost of Living Adjustments on Income
With that clarification on inflation and its detrimental effect on your Relaxing Retirement fresh in our minds, let’s get back to your 3 potential fixed income sources that we evaluated last week and see how they stand up to inflation:
- Social Security has a cost of living factor (COLA) built in, so, in theory, it keeps pace with inflation. If your benefit is $2,000 per month right now, it will likely be approximately $2,700 per month in 10 years. (In 2015, you’re receiving a 1.7% COLA increase)
- Most pensions do not have a cost of living adjustment. So, if your monthly pension is $4,000 per month, your check in 10 years will still be $4,000 per month while the price of everything you spend money on has gone up!
- Rental property income should, in theory, keep pace with inflation. However, local rental market forces, and most people’s lack of tenacity in “raising the rent” each year, may have an impact on what income increases you can count on in the future. Be careful and conservative with what you expect.
Now that you know all of this, take a look out at what your fixed income sources will look like, not just today, but in 10 years, 20 years, and 30 years.
Create your own personal timeline.
How does it match up with your desired lifestyle costs that you’ve calculated?
Is there a deficit right now? How about in 10 years (due to inflation)?
If there is, don’t sweat just yet. That’s why you’ve saved all of that money all your life…to supplement your fixed income and fill in the gaps when you stop working.