Can You Afford To Retire?

A refined gentleman in his late 70’s came to see me the other day. After inheriting his father’s clothing business as a young man, Jim worked hard for 40 years until he retired.

He wasn’t wealthy but when he retired he and his wife were very comfortable – or at least led a comfortable life style. You see, during their working career Jim and Mary became used to elegant travel, beautiful clothing and fine dining. When they retired, they saw no reason to change their life style.

Jim retired in his late 60’s with a nest egg of $2.5 million and thought that he and Mary would never have a financial worry. Fast forward 8 years.

After a few years of making bad investments, ignoring the market, failing to consider inflation, loaning money to the kids and not worrying about spending, their $2.5 million became $1.2 million. Jim & Mary withdraw $150,000 every year and they are not willing to reduce their life style. They live in a $1 million condo in Beverly Hills and won’t down size. Jim is starring down the real possibility of running out of money in another 7 years. Had this couple understood the materials I am about to share with you they could have retired in their late 50’s – a full 10 years earlier - and truly never worried about money again.

The first mistake Jim & Mary made of course was failing to have a plan. He and his wife love their lifestyle but are they willing to sacrifice their future to support it? Are they willing to go back to work or move in with the kids when the reach their 80’s?

Most people don’t have a financial plan. Do you know what the retirement plan is for over 50% of Americans today? WORK.

What about you? What impact does your current life style have on your future dreams? Does your current life style make it all but impossible to do the things you dream of doing later on? If you don’t know the answer to these questions - don’t worry. You are like 98% of Americans who work hard all their lives and really have no idea what they’ll have to show for it at the end of the day. But unlike most people, you will have the tools to get this problem under control, if you take action and follow the steps I outline below:

Step 1. Create a balance sheet. Make a list of all your assets. Your home, other real estate, your IRA’s, 401(k)’s, Savings, CD’s, Investments, Mutual Funds etc. Now, make a list of all the money you owe; your mortgage(s), credit card debt, personal loans, equity lines (if you have a balance), etc. Please do this on a spreadsheet on a computer so you can update the figures every year.

Calculate the sum of all your assets and the sum of all your liabilities. Now, find the difference between them – this is your net worth. For example, if your total of all your assets is $2,000,000 and you owe a total of $500,000, your net worth is $1.5 million. CONGRATULATIONS! You know more about your finances than 98% of the population.

Step 2. Create an income statement. Knowing how much you earn and comparing it to how much you spend is the most important ingredient for financial success. I was once referred to a group of auto mechanics who won $12 million in the California State Lottery. These lucky souls each won $1 million – and that’s where the trouble started. They started thinking like millionaires. The handed out Harley Davidson motorcycles to their friends as presents - like it was candy on Halloween. Before 12 months had come and gone…the money was just a fond memory. They failed to match their income to their spending and as a result they frittered away a great opportunity to improve their lives. I have an entire e-course you can download here if you want to really zero in on your budget – and I recommend that you do so. But for those who want to save time, here is a quick and easy tool you can use.

First, determine what your monthly income is. Add up all your sources of monthly income. If you receive income on a quarterly basis, simply add up what you receive for an entire year and then divide by 12. If you spend your principle – don’t count that as income. Only count the interest or dividends.

Now, determine what you spend. One easy way to do this is to simply look at your bank statements. In every statement you’ll see a number that summarizes the total amount of withdrawals made for the month. That’s how much you spent. Look back over the past 24 months. Calculate the average amount you withdrew from your checking account(s) by adding the total withdrawals over the last 24 months and divide by 24. Now you know how much you spend on average every month.

Step 3. Now create your own financial plan. With the numbers you calculated above, you can go to any number of free sites to do a projection. Two of my favorite sites are:

http://cgi.money.cnn.com/tools/retirementplanner/retirementplanner.jsp

or

https://www.quicken.com/retirement/planner/personal/

If you go to these sites, armed with the data you calculated above, you’ll know if your current spending and savings plan will get you to your destination – an easy and stress-free retirement. Both of these sites will tell you if you need to save more NOW in order to reach your goals. You can plan with these calculations. If your plan shows that you won’t reach your goals under the current scenario maybe you can reduce your retirement goals somewhat and spend a little less now to reach some compromise that will lead to retirement success. You can easily make minor adjustments NOW that will save you tremendous heartache down the road. Don't wait until you're 80 years old working at Costco to do this exercise.

Remember, your financial situation changes all the time. Return to this exercise every 6 to 12 months and make sure you stay on track.

If you are self-employed, you receive monthly cash income or you have credit card debt, you may need more help in determining your monthly spending/income. Click here to learn about our e-course on determining what your monthly spending is.

Alternatively, if you’d like more input on a financial plan; click here.

Step 4. Gifts. I've been working with Rob and Tessi for 10 years. I consider them good clients and good friends. In late 2002 Tessi inherited $1 million from her father who just passed away at the ripe old age of 92. Rob and Tessi had worked hard all their lives. Rob's business had slowed down and they considered retirement. That’s when their son Mark went into business for himself. Mark decided to open up a real estate company and build a beautiful office. He asked mom and dad to front the money for the business.

$500,000 later, the office IS beautiful but Rob and Tessi have seen their retirement vanish. Their dreams are gone. Rob will have to go back to work – somewhere – because they gave away too much to their son.

As a father of 3, I know how important your children and grandchildren are – that’s why I want you to stop spending a fortune on them. Your kids will come to you with investment plans, business opportunities, houses they want you to buy for them, etc. If your finances accommodate that, fine. But make sure you can afford it before you write that check. Share with your children what impact any transfer of assets has on your financial situation (the financial plan you created above) before you turn over the money. After all, if you give the kids the money and it means you run out of money, who is going to lose? The kids. They are the ones who are going to have to look out for you – something neither you nor they want. Also, lets look at this another way. When you were a kid, did your parents write you a big check? Probably not. That’s why you’ve become so successful. You learned to be self-sufficient. Give your kids the same opportunity to learn to be self-reliant. It’s the gift that keeps on giving.

If you’d like to know how much you can afford to gift to charities or children, click here.

HINT 1 - Now that you’ve gotten your income/spending balanced; its time to look at your investments. Are you investing in a way that protects your capital and takes advantage of opportunities as they present themselves? Click here to learn more.
 

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