Unfortunately, some of you are experiencing the precise opposite of the Sweet Spot Solution. For many people approaching retirement age, particularly baby boomers, their plans for the next stage of their life have hit a roadblock they never anticipated. Suddenly they realize they are not on their own after all. They’re providing emotional and financial support for their aging parents (and maybe their kids living in the basement), and their retirement dreams seem to be fading further and further into the future. It’s the perfect storm.
Even after the best-laid plans are put into place, surprises will jump out at you. Just as you are about to leap into the new adventure you’ve been dreaming about for years, suddenly Mom or Dad needs your help, your son or daughter hits a rough patch, and you have to put your own plans on hold.
Life is expensive. Raising a family costs a bundle. Tuition, healthcare, and insurance costs are exorbitant, and the prices of food, oil, and gas have gone through the roof. (And the roof probably needs replacing.) That’s not even counting the endless outflow for all the cool clothing, sports equipment, and electronics every kid seems to need. Most parents are so involved in supporting their families and making ends meet that they find it difficult, if not impossible, to save for retirement. And it never gets easier.
Retirement seems so distant, daunting, and complex. Planning means dealing with lawyers, accountants, insurance agents, and financial advisors, which is neither fun nor free. Most people are intimidated and don’t know where to start, so they concentrate on the immediate—getting through their busy lives and allowing time to pass without any serious planning—forgetting that the future is not that far off. In 2019, of the 71.6 million baby boomers, 45 percent had no retirement savings and only 20 percent had set aside $500,000 or more. They don’t know where to turn, so they do nothing, allowing the problem to magnify. Or they make costly mistakes and exacerbate the situation.
You’ve worked for thirty, forty, or fifty years and suddenly now you’re faced with, “What am I retiring to?” It’s like a blank piece of paper, which, for some people, can make them feel very, very nervous; they don’t want to make mistakes. At least when they’re earning a salary, if they blow the paycheck, there’s another one coming right behind it. In retirement, if you make a few irrevocably wrong decisions, it could cost you the retirement you’ve worked all those years to achieve.
One of the questions I am frequently asked is, “How much money do I need to retire?” You need to find out for yourself.
When Jim and Ellen came to see me, they were beyond frustrated. One book they read told them that in order to retire comfortably, they’d need to live on 80 percent of their pre-retirement salary. Then a talking head on television announced they should have 90 percent of their pre-retirement salary because in today’s world, people tend to spend more money after they stop working. Then the following week, good friends who had already retired told them they lived comfortably on only half of what they had while they were working. Exasperated, Jim and Ellen paid me a visit. Their first question was the most obvious one: “Derrick, how much income do we need to have in retirement?”
I gave them some simple, but perhaps not so obvious, advice. I recommended that they live on a “practice retirement budget” for three months. I told them what they already knew; there are many different guidelines suggested by the experts. But I also told them the reason there was such widespread disagreement was that money, particularly how you spend it, is personal. How you choose to spend it is solely up to you, but there is one common denominator. For your plan to be effective, and for you to believe it will be effective, it has to be tailored for you and you alone.
I suggested to Jim and Ellen that for the next ninety days, they keep a log of all they spent, after which we’d review their experience, and together, we’d fine-tune their strategy. They were excited about the idea and highly motivated. To be certain they strictly abided by their monthly spending goals, they direct-deposited their current paychecks into a new, separate account that we set up and asked me each month to send them the amount they thought they’d need in retirement. They wanted to leave nothing to chance to verify what would be necessary when their “practice retirement” became real.
After the first month, we made some adjustments, but once the three months had passed, they had nailed it. They reported how liberating it was to know they could actually retire earlier than they thought because they had tested precisely the amount they’d need. The beauty of this strategy was that they did all this while they were still working. All it took was the time and focus to track what they were spending and to test it before making major life decisions.
This will work for you too. A year or two before retirement, take a test drive to see if you’ll be able to live on the amount of money you’ve allocated. Your first step will be to develop a practice budget to identify your current expenses and those that will diminish during retirement, as well as those that may increase. Then determine how much you’ll need for your monthly living expenses. Use a spreadsheet to track your progress. If you can live within your retirement budget, it will give you confidence because you may even find you have more wiggle room than you thought. Maybe you really can take that long-delayed trip to Hawaii.
For some, this process might be a wake-up call; for others, it will confirm what they thought they were spending and what they’ll need. But regardless, the three months don’t lie; the numbers reveal the truth. For Jim and Ellen, it gave them the peace of mind that they could retire earlier than they had anticipated. For others, it might mean delaying retirement for a year or two while savings and monthly Social Security benefits increase.
I want to remove any doubt you have that this can work for you. Like using an eraser on a whiteboard, remove that old money mentality and let me help you create your ideal retirement scenario so you know you’re retiring to something fabulous and that you’re not going to run out of money.
Now I’m going to walk you through each of the seven worst retirement mistakes people make and tell you exactly how to avoid them.
1. Not calculating your magic number.
The magic number is the amount of money you need so you can retire and not worry about running out of money. Is it $500,000, a million dollars, or $250,000? Whatever that number is, it’s going to be based on your specific situation, including the income you’ll be getting from Social Security or a pension. No one can tell you, “Here’s what you need.” Some people say you need 90 percent of your pre-retirement income. Some people say 75 percent or 60 percent. All those numbers mean nothing because all that matters is how it impacts you and your personal economy.
On a sheet of paper or in the notes app on your phone, list your retirement income on the left side. This will include Social Security, a company pension, and any other money you will be receiving in retirement that is consistent every month. Maybe you have rental property income; include that too. Some income, like any sort of royalties, may have to be estimated.
On the right side, list your investments, totaling how much you have in cash, stocks, in accounts such as your 401(k) or IRA, and any other savings.
Once you’ve used your practice retirement budget to determine how much you’ll need each month, take your income and your fixed income and calculate the gap. Assume a monthly withdrawal of 2 to 3 percent from your portfolio. Some people used to suggest 4 percent, but with inflation creeping up, it’s best to be conservative. As I like to say, plan conservatively but invest aggressively. That way you’re more likely not to run out of money in retirement.
2. Not setting financial goals for yourself.
So many people I speak with say, “Derrick, if I can just make it to Friday, or if I can just make it through this year, if I can just retire, then my life will be better.”
Marty was tired. He shared with me how he felt trapped in a dead-end job. While his steady sales position gave him the opportunity to earn more, it seemed like life emergencies always had their hands out first. “Derrick, I don’t feel like I have goals. I don’t know where I’m going.” Marty was working fifty to sixty hours a week, and when he got home, the last thing he wanted to worry about was how he was going to finance his retirement. I suggested he write down the answers to three simple questions related to his financial goals:
When do you want to retire? How much money do you want to have in retirement? When you close your eyes, what does life in retirement look like to you?
“Put the answers on a sticky note,” I told him, “and place it on your mirror, by your nightstand, in the kitchen, or on your car dashboard.”
Your goal is to stay focused in your busy life with its many distractions. If you’re not looking at your goals on a regular basis, you can easily get so far off target that you can’t make it back in time. So take some time now to write down three financial goals important to you. Look at them every day, and you’re going to be far more likely to make progress toward what you really want.
(To be continued...)
This excerpt is taken from “Good Money Revolution: How to Make More Money to Do More Good” by Derrick Kinney. To read other articles of this book, click here. To buy this book, click here.
The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
