How I Am Going To Pay For This?
In last week’s Strategy, we talked about you clearly identifying what your ideal lifestyle costs.
That was the first step in the Relaxing Retirement Equation™.
Now, the next step is figuring out how you’re going to pay for it all without having to depend on the income from work to do it.
And that’s what we’re all after. Finding out that you’ve built up enough money to support your lifestyle without “having to work” is one of the most liberating days of your life.
It changes everything! It flips the entire equation in your favor.
That’s why at the beginning of every year, I urge you to lay the foundation for all of your planning and strategizing by first figuring out where you stand in relation to this goal of total financial independence.
Too often, people want to skip right over into more advanced strategies.
However, before you can begin to delve into tax strategies, investment strategies, or estate planning strategies, etc., you have to be crystal clear on where you stand in relation to your biggest goals.
And, the biggest goal I’ve heard the most over the last 21 years is “to be able to live the way we want without running out of money.”
The Second Step in the Relaxing Retirement Equation™
As we’ve outlined over the last few weeks, it’s critical that you determine your level of dependence on your Retirement Bucket™, i.e. your retirement savings.
Do you need $1,000 per month over and above social security and a pension? Or do you need $10,000 per month?
As you might expect, there’s a huge difference.
Last week, we determined what your lifestyle costs.
Now, to determine your level of dependence on your Retirement Bucket™, we need to figure out how you’re going to pay for it.
How much income will automatically come in?
When it will come in?
And, will it automatically keep pace with inflation?
Typically, income in retirement falls into three main categories: social security, pensions, rental property income, so let’s take a closer look at each of them.
Let’s start with Social Security. If you and your spouse are already receiving social security retirement income, then you already know what your income is.
However, if you haven’t begun receiving your benefits, you want to determine the amount you’ll both receive as early as age 62 up to your “full” retirement age (typically age 66 if you’re reading this).
You should receive a social security benefits statement every year around your birthday which reveals your anticipated benefits under all options.
The second source of income is pensions. Under pensions, there are two main ways to receive a pension payout:
- a lump sum check, or
- a monthly annuity (a monthly check).
If you can receive your pension in a lump sum, it is typically transferred directly to an IRA tax free and you’re in charge of “creating” income from this lump sum of money in your IRA. It doesn’t happen automatically.
Assuming for a moment that you are receiving, or will receive, your pension in the form of a monthly annuity, you may select the single life annuity version (which ends at your death and does not continue to your spouse).
Or, you can select one of a variety of joint and survivor options to insure that your spouse receives some pension benefits when you pass away. If you’ve already retired, you may have already seen these: 100% joint and survivor, 50%, 66 2/3%, 10 year period certain, etc.
The key is to maximize your benefits while protecting your spouse in the most cost efficient manner. (I’ve explored the pros and cons of this in past Retirement Coach Strategies of the Week, and will do so again soon)
Rental Property Income
Fixed income source #3 is rental property income. This is a place which requires you to do some real honest homework. And, that’s because what we’re looking to determine is “net” rental income, not gross.
Many people focus on the rent check(s) they receive each month. That’s a good start, but from that gross check each month there are numerous potential expenses that have to be taken into consideration: real estate taxes, mortgages (if you still have one), utilities (if you’re paying them), and most importantly, maintenance and repair.
Properties require upkeep. And, if you’re not the one doing the work, this can be quite costly. So, an honest, rational projection of future maintenance costs should be factored in to determine your “net” rental income that you can expect.
Once you have a clear picture of all 3 of these potential monthly income sources, now we have to take a look at what they look like in the future. This is a key step for one big reason:
Many so-called financial “experts” have been lulled to sleep over the years with Inflation’s enormous negative long-term impact. I continue to read articles and see websites of large financial institutions suggesting that you use 2.5% to 3% as an inflation rate in your forecasting.
This has been a big pet peeve of mine as I believe that it’s a grave mistake to assume that the low inflation rates we’ve experienced over the last 20 years will continue forever. That would be like assuming that the double digit inflation we experienced from 1979 to 1982 would continue forever.
If you take a real objective view of what has transpired over the last 2 years on a national level with the cataclysmic level of federal debt financing going on (i.e. Quantitative Easing), it would be difficult not to conclude that inflation is going to enter into our picture in a major way.
Let’s get back to your 3 income sources 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 $1,300 per month right now, it will likely be approximately $1,750 per month in 10 years. (While 2009 saw a 5.80% COLA increase, in 2010 and 2011, there were no increases)
- Most pensions do not have a cost of living adjustment. So, if your monthly pension is $3,000 per month, your check in 10 years will still be $3,000 per month while the price of everything 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 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 lifestyle costs that you determined last week?
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.
Next week we’re going to move on to the next step in the Relaxing Retirement Equation™ which is to explore the most important question you need to answer now that you’ve done this all important groundwork.
It will completely change and simplify the way you view investing for the rest of your life.
Committed To Your Relaxing Retirement,
The Retirement Coach
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