Hello my fellow investors, this article is not for those who believe social security will cover all their needs during their golden years. You guys can put your heads back in the sand while we talk preparing for retirement.
The first thing I want to talk to you about is the future value of money, or in layman’s terms, what is my 100 grand gonna be worth if fifteen years? Is it enough to buy a car or will I have to settle for a moped?
In my opinion this is one of the most important aspects of financial planning and one you need to go over with your financial planner and your financial Advisor. To prepare for that meeting you need to get together some things. You should have the latest statement from any of your bank accounts, brokerage accounts, etc… The idea here is to get a clear picture of your assets, particularly your liquid assets. What you want to do is find out how much money you have to live off of. You’re going to want to see what this money will likely grow to and what is it valued at now?
In other words, my million dollars I have today in my annuity will likely grow to one point seven million in ten years, but how much purchasing power will it have then. That one point seven million ten years from now is not going to buy you near as much as it would today. It is important to establish how much a year does it cost you to live comfortably today and how much you will need to have in ten years to live the same way as you do now. You may live nicely today at one hundred ten thousand a year, but you’re gonna need one hundred eighty-seven thousand a year when you retire. Inflation has seriously eroded your purchasing power. You need to ask your financial planner or advisor to crunch the numbers for you as even though there are calculations on the net, they can be confusing and at this point you want to be as exact as possible.
Once your financial guys have done the math, you will have a pretty clear picture where you are today. While you may have a million dollars today, and it may grow to one point seven, you may see that you need two point three million to live the same lifestyle you enjoy today. Now you have a clear picture where you are at, and perhaps that picture is telling you that there is going to be a shortfall of three hundred fifty thousand dollars if you retire at sixty like you are planning. Now you need to go to your stockbroker/financial advisor and figure out how to make up that three fifty in the next ten years. If after some judicious number crunching you find you are still going to be significantly behind the curve, maybe you should see how much difference in monthly payment your social security check will be if you work until 65 instead of seventy. Who knows, maybe the extra grand it adds to your monthly check is enough to make up the shortfall.
You may also decide you really do not want to work that extra five years. Maybe you have health issues and it would be best to remove yourself from the workforce as soon as you can afford to. You certainly do not want to be working you fingers to the bone till you are eighty-five. Can you be happy by living a bit less lavishly during your retirement? Maybe that continuous road trip in the new motor home will have to be a little less that continuous. Maybe you can travel 9 months out of every year and that may be enough to do the trick.
Something else that may have already entered your mind, and something that will need a lot of consideration, is changing your investment strategy. Maybe you find that if you stay in those aggressive growth funds five more years than planned, it will do the trick. Maybe you will need to rebalance the portfolio to move money out of conservative investments and in to aggressive growth funds. This is where you’re gonna really need your advisor to make sure you are not taking of too much risk by rebalancing your portfolio. You can’t afford to take a big hit from the market as you may not have enough working years to make that amount back.
READY, GET SET, HERE COME THE GOLDEN YEARS
Investing today for tomorrow, part two
When we left off above we were looking at changing our investment portfolio. Let’s revisit that and think also of the risks involved. Take a look at your cash reserves, both what is in the bank, and what you have, if any, in the money markets. Do you have cash you can safely pull from there to put into your equity growth funds?
If you have moved around like many people when it comes to jobs, maybe you have a long lost and forgotten 401k sitting and collecting dust. If it is like many such retirement accounts it will be stuffed with company stock and little else. How is that account performing? If it is under performing your selfH directed accounts then you should look at rolling it over to an IRA. The difference this makes could be huge. Most 401k plans let you borrow from them. With interest rates being so low you may want to consider that as an option. You should be pretty conservative with this as you will be hit by the IRS if you don’t put back in every dollar you borrowed.
Have you got a time share wasting away somewhere you never want to visit? What about a second home? If you have one are you renting it? What if you do rent it, will it help enough? What about selling it and investing the proceeds. You may live in an area where homes are barely appreciating if at all, yet the market has been doing very good. Maybe your two percent a year can suddenly become eight percent a year. You were making six thousand a year through appreciation and now by investing that in equities it has become a cool twenty-four thousand a year and that’s not even compounding interest.
Another option you could look at it becoming a hard money lender. There are people lining up to pay tent to fifteen percent for the privilege of borrowing from you. This route should be approached with great caution.
Well there you have it. I believe we have covered every possibility for making up a shortfall when planning for retirement. That is, every way short of holding up the local bank. You may find that you can accomplish your goal by changing every option just a little bit rather than a radical change in your investment strategy.
I hope that from reading this, if you do nothing else you will find out where you stand regarding upcoming retirement. Talk to your financial planner or financial advisor and have them crunch the numbers so you know if there is a shortfall, and you find out in time to do something about it.
In the mean time happy investing and happy retiring.
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