Ralph Waldo Emerson stated, “It requires a great deal of boldness and a great deal of caution to make a great fortune and when you have it, it requires ten times as much skill to keep it.” Well, this post is about the boldness and caution required to obtain a great fortune. I’ll discuss skills needed to keep it later even though some of these tips are useful for that purpose also. Hint, hint, that means you will see this quote again!
Now I am not going to dwell on any of these tips as I know you have limited time to read through all of these. Here are the highlights:
Plan B:
With respect to employment, always, always have a plan B no matter your age if you are relying on that income to not only afford your current lifestyle but also to grow your savings for retirement. I’ll be honest – I did not have a Plan B when I quit my prior job of almost 15 years. My skills and background were not suited for the area I was residing which made it hard for me to find a new job. Not having a Plan B left me with years of agony over what my new profession would be. Don’t worry – I am on the right track now, doing what I love! But let’s get real here. What if you lost or had to quit your job? What would be your next steps? Always be prepared for next steps, even if you are perfectly content with your current job. You never know when change will happen, and change can happen quickly without notice. I have several clients who are making more money than they ever could have dreamed of making, and they are not taking the right preventive steps to ensure they are protected if they suddenly lose that income. Which leads me to my next point…
Spending Plan:
Yep, you knew this one was coming…. My clients seem content to continue their spending habits because at the end of the month, there is excess cash in their bank accounts. I want to change that thinking. I cannot tell you how many times I have stated in a financial planning implementation meeting, if only that excess cash existed so I could sure up their retirement a few years before my clients even retire! And typically, the first follow up meeting with my clients is reconciling the difference in excess cash between the financial plan and what their bank accounts are showing as excess cash so we can make decisions that will ensure them a healthy retirement. In addition to having more funds to invest, it is also an opportunity to build up an emergency fund in case it takes time to come up with a Plan B. Awareness of spending, especially during those high-income years, is a simple step to improve your retirement situation why still enjoying life today! Within boundaries, of course!!..
Invest:
Where should some of your monthly excess cash go? Well, I have already mentioned an emergency fund. Oh, and to invest in the market or in alternative investments! But how much should you invest? That’s why there is financial planning. Figuring out how to live within your means today while still investing for your future so you can ensure a healthy lifestyle now and in retirement. You have heard it so many times – invest early. How much you need to invest is dependent on how early you invest. The later you wait to invest, the more funds needed to ensure your healthy retirement.
Liquidity:
If your retirement is locked up in a small business and/or even rental properties, make sure you have a plan for liquidity prior to retirement. I have seen it happen a few times – not enough passive income from rentals to cover living expenses in retirement. And then having to sell a rental property for cash flow…. If real estate is appreciating at a high rate as it has done in the past few years, no problem, right? But don’t forget. Right now, inflation is soaring, and interest rates are rising to offset high inflation. Which makes it harder for people to afford homes and therefore for you to sell your home, if needed. You don’t want to lose a property to a bankruptcy or short sell due to lack of liquidity. Not a good real estate return, and you probably would have gotten a better overall return in the market.
Optimization:
Optimization really applies to any type of investment, but let’s consider a rental property. What is your intention for a rental property? Is it rental income or appreciation in value? Is it rental income now or when you are in retirement? No matter the consideration, what is the return you are projecting for that rental property? Keep track on how your rental property is cash flowing and update your financial plan with projected returns for your rental property. For quality of life, it may make sense to hire a property management company to manage the property. But, from a cash flow perspective, it may not make sense. Be sure to compare the returns on your rental property with the average returns the market is generating. The point of owning a rental property is to earn a return higher than what the market can return and hopefully generate enough rental income to cover living expenses in retirement.
Diversify Taxes:
Be sure to have retirement accounts in all three tax buckets:
Tax deferred accounts, such as 401(k)s and Traditional IRAs, which are 100% taxable when distributed. Yep, you do want money in this bucket in retirement!
Tax-free accounts, such as Roth IRAs and 401(k)s, which are 0% taxable when distributed, as long as setup in accordance with IRS guidelines.
Brokerage accounts, where taxes are paid on the amount invested and taxes paid annually on income and/or capital gains earned.
Don’t immediately jump to converting your tax deferred accounts to a tax-free account. It is not right for everyone. Consult with your CPA and financial planner to determine if it makes sense for you to convert. Too much to say on this topic here.
Bad Debt:
I’ll keep it short and simple. Stay away from bad debt…. There are times where bad debt is your only choice. But have an action plan setup to ensure the quick payoff of bad debt. Bad debt compounds just like investments in the market. But I guarantee you that the rate bad debt compounds will be much, much higher than the rate your investments compound, especially in the current volatile market. If you allow the bad debt to compound too long, it will seem like that never ending bowl of pasta where you feel like you cannot make a dent in it no matter how much you eat. Again, be mindful of your spending and have an emergency fund to ensure you don’t need to acquire bad debt.
Retirement Income:
Historically it has been proven that seniors are at their happiest in retirement when they have secured retirement income. Think about it, you receive a paycheck each month in your working years. Why should it be any different in retirement? You have choices! And if you have enough retirement income to cover living expenses, then you don’t need to be worried about market volatility in retirement. Or running out of money in retirement…
DISCLAIMERS:
All information provided by Hartmann CFO, LLC and Healthy in Retirement is intended for informational purposes only. The views expressed are personal opinions and should not be construed as financial or tax advice for your specific situation. Please make sure to do your own research or find a trusted financial professional, tax adviser or attorney before making any financial decision on your own.
Neither Hartmann CFO, LLC, Healthy in Retirement nor its owners make any representations as to the accuracy or suitability of the claims made here. Nor does Hartmann CFO, LLC, Healthy in Retirement, or its owners assume any liability regarding financial results based on the use of information provided here.