KNOW THE NUMBERS

There are many people who hate numbers and planning generally. It brings a sour look to their face when it comes to anticipating future events and taking steps to prepare for whatever will be needed or required.

Others love planning or even the numbers behind a plan but don’t know the specific targets they should be aiming at with their goals.

Stephen Covey, a famed personal development guru and author of The Seven Habits of Highly Effective People, utilized an apt analogy, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.”

In order to live well in retirement, you must make sure your ladder is leaning up against the right wall and then make sure that each rung pulls you toward your desired retirement outcome.

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How Long Will You Live?

A core facet of this newsletter is the belief that intentional steps taken now may impact our wealth and healthful longevity. No one can predict exactly how long their life will be. It is better to plan for a long life and hope for the best.  

In recent years, it seems that life expectancy has plateaued. Fortunately, research is showing that conscious and purposeful actions can reduce the risk of heart disease, cancer, or other life-shortening ailments.With purposeful actions, quality medical care, and a bit of luck, you may live well into your 90s and beyond. This is the first variable in a function to determine a number of important values in retirement. How much will you need to retire? How much will you spend each year in retirement?

Clearly, these values will be impacted simply by how long you will live. There are other details and variables, but this is a good place to start.

What is Your Retirement Age?

In popular culture, there are a few ages that people naturally associate with retirement. There will be an age that you have been targeting or thinking about as the official transition from working life to retired life.This is the second variable in the formula to determine the answer to an important question, how many years will be spent in retirement?

How Long You Live - Age You Retire = Number of Years in Retirement

This is only an estimate but will be a determining factor in other decisions and calculations.

If you live past age 90 (the reference point for many of our conversations) and retire at one of the typical ages, you could easily have 30+ years of retirement. In the past, this would be considered an exceptionally long time.The makeup of your investment portfolio, monthly expenses, and many other important values will take cues from your retirement age and number of years in retirement.

What is Your Home’s Value?

Hopefully, diligent saving and investing has allowed you to grow your asset base to the point where you will be able to live comfortably in retirement. Your invested assets will be your main source of support and income throughout retirement.

Although a home is not an investment vehicle and does not provide monthly cash flows, it is often one of the largest assets in someone’s net worth. Its value must be included in a financial plan, especially for retirees.

The list of possible outcomes can quickly become complex, from a personal and a financial perspective.

Should you sell your home, invest the proceeds, and move into a 55+ community or with family? Should you stay in your home as long as possible and use its eventual sale as the closing act of your estate plan? There are countless other questions and items to consider.

There is no easy answer or obviously correct choice. Many of these decisions will be determined by personal preference.

In the end, what you do with your home will be a six-figure decision. Whenever it is sold, it will likely be one of the largest single cash transactions ever experienced. Managing these funds wisely and effectively will be key.

What are Your Monthly Cash Inflows?

Your desired monthly income will be a key figure in retirement and a determining factor in other decisions. 

Your income in retirement will be derived from a number of different sources. Social Security benefits may not be the largest sources of income but are an important starting point. Your personal savings, IRA savings, and 401k savings are the more standard income producing accounts. It may be wise to coordinate the drawdown of these accounts with a financial advisor to take advantage of certain tax benefits.

In addition to the more typical sources of retirement income, you may also own rental properties or continue working in a very part-time capacity. Although these activities will require time and effort, there are a number of benefits: schedule-oriented activities, residual income, and a sense of purpose from working can be instrumental components of retirement.

Your income will determine how each week, month, and year will feel. Retirement does not need to be lavish, but it should be enjoyed. Whatever cash flows to your checking account each month will be the fuel to live the life you have looked forward to for many years.

What is the Value of Your Estate?

Although you may not have established an estate plan before retiring, now is the time to put one in place. It will become an increasingly important element of your financial life.

The desired outcome of your estate plan will determine how much you need today and how much will be left when you are gone. Do you want to leave a significant sum to heirs or a (5) charitable organization? Or, do you want to balance spending down your savings and supporting those people/causes in the present moment? 

To efficiently execute either of these strategies, you should know that there is a gift tax annual exclusion (there is also a gift/estate tax lifetime exclusion). The annual exclusion is updated every so often and is the maximum you can give away to a single person in a calendar year without having to file a special tax document.   Whether incrementally drawing down your assets or allowing your estate plan to distribute assets when you are gone, you will need a plan specific to you. Both of these outcomes are admirable desires but require a different focus in retirement. When executing strategies using either one of these estate strategies, it is wise to consult with a tax expert.

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You do not have to be aware of every single detailed component of your financial life in retirement, but there are key values and determining factors that only you can control.

Make sure your ladder is leaning against the right wall and each rung/step takes you closer to your ultimate destination. Empower yourself by “Knowing the Numbers” and plan to live a fulfilling, enjoyable life in retirement.

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What did I miss? What other numbers do you feel are essential or determining factors in retirement? Hit “Reply” and tell me what else I should know and where I should look next!