Just How Dependent Are You?

Tuesday, January 16th, 2018

Good Morning Relaxing Retirement Member,

As we discussed over the last two weeks, my strongest recommendation, as we begin this new year together, is to get right back to the Fundamentals of The Relaxing Retirement Formula™.

This is the most definable difference I have witnessed among our most successful Relaxing Retirement members.  They take the necessary time to adhere to the fundamentals so they can make calm, rational decisions and remain confident during all market conditions.

And, the first step is to get a really good grasp on your specific level of Retirement Bucket Dependence.

Let’s walk through a quick example…

In the last edition of The Retirement Coach Strategy of the Week, we discussed two couples, both age 65.  As a refresher, here’s what we know about them:

To keep it simple using round numbers, assume each couple has:

  • $2,500,000 in total investment holdings,
  • the same pensions, and
  • the same social security retirement income

Beyond that, here’s what else we know about them:

Mike and Mary have no mortgage or home equity line of credit, and they have recently completed many major upgrades to their home, i.e. a new roof, indoor and outdoor paint, a new furnace, new kitchen countertops and cabinets, and new bathrooms. They purchased new cars with cash in the last two years which they plan to drive for ten years since they put very little mileage on their cars.

Ron and Rose still have $300,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions and weddings, and a condo down in Florida they bought a few years back. They both drive high end cars which they replace every three years. And, while their home is very nice, after 26 years, it is starting to look “tired” and will need significant upgrades in the next two years.

The obvious difference between these two couples is the COST of their lifestyle.

Ron and Rose’s lifestyle is much more expensive than Mike and Mary’s.  The key, however, is knowing just how expensive so we can determine your level of Retirement Bucket Dependence™.

How Much Does Your Lifestyle Cost?

As unexciting as the task appears, the first step toward you realizing your Relaxing Retirement is for you to have a clear handle on what it costs you to live exactly the way you want!

After my 29 years of experience working hands-on with so many of our members, I can guarantee that if you don’t know, you will have unnecessary anxiety for the rest of your life, and you will “pull your punches” by restricting your spending because you don’t know if you have enough.

You will buy into cliched phrases like, “I’m on a fixed income now” even though they have zero basis in reality.

Or, you will continue to work because you think you “have” to, when in fact you may not “have” to.

So, the first step toward a relaxing retirement is to have a clear handle on what it costs you to support your desired lifestyle.

As I mentioned, I recognize that this may not be the most exhilarating exercise you’ve ever been through.  However, it’s the key to reducing your anxiety level.

Do I Now Have to Live On a Budget?

Before we delve into the best way to calculate your level of Retirement Bucket Dependence, I want you to know that this is not about living on a “budget” and restricting your spending.

This is about having an “accounting” of what it costs you to live the way you want so that you can have a measuring stick to make decisions.

There’s a big difference.

Carve Up Your Spending into Bite-Sized Chunks

There are two major categories of ways that you spend your money.  The first category is the typically bigger, one-time expense, like renovating your kitchen or bathroom, landscaping projects, paying for your kids’ weddings (hopefully only once), or purchasing a car, etc.

Think about the next five years.  Is there anything you’d really like to do that would fall into this category?  Write down your wish list right now, and then rank them in order of priority.

You want to know right now what you’re going to need to spend money on, not five years from now when you “suddenly” need the money.

There’s power in certainty!

Fixed and Discretionary Expenses Which Repeat

Once you’ve done this, you can jump to the other category of spending; those which repeat themselves year after year.  And, under this category, there are some which are “fixed” or mandatory, and some which are “discretionary” (your choice based on your priorities).

Typical “fixed” expenses include utilities, insurances, groceries, clothing (at least most clothing falls under this category), mortgages, real estate taxes, etc.  These are expenses that must be paid, and typically they’re paid every month.

“Discretionary” spending, on the other hand, is where we’d like to spend all of our money!  However, when planning, most people don’t account for them as much as they should.  Things like vacations, presents for your grandkids, meals out, and entertaining, etc.

Remember, this is all about living exactly the way you want, so you want to be generous with your estimates.  If you guess too low, you’re only shortchanging yourself.

Looking Forward

Once you’ve identified precisely what it costs you to support the lifestyle you want, we now want to see what your spending looks like, not just today, but many years into the future.

And, when we talk about the future, we have to talk about INFLATION because what costs a dollar today certainly won’t cost a dollar ten years from now.

When you project your spending into the future, you have to build in a conservative inflation figure (the amount by which your expenses will go up each and every year on the same goods and services you currently purchase right now).

For example, if inflation averages a mere 3%, that $200 worth of groceries you just picked up at the store will cost you $270 in ten years!  That adds up to $3,640 per year more just in groceries alone. And, this only assumes a 3% inflation rate.

To be more realistic and conservative in your planning, I recommend that you build in a higher inflation figure.  That’s not being negative.  It’s being realistic.

The Next Step

Once you have this information in your hands and you have your own unique set of numbers, you’re well on your way to enjoying the relaxing retirement you deserve where you are not only no longer dependent on the income from work to support your lifestyle, but you’re able to confidently spend without fear.

Next week, we’re going to delve into Step 2 of The Relaxing Retirement Formula™, and determine where your income is going to come from so you can identify how much you can confidently spend.

And, that’s what it’s all about.  You want to be able to confidently live exactly the way you want without any anxiety about running out of money some day.

Stay tuned!

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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I appreciate the trust you place in us. Thank you!

(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)