When Should You Retire? | Josh McAlister
Retirement is vulnerable, unknown, and quite frankly terrifying. Many of us looking at retirement have looked at an online calculator showing the probability of running out of money during retirement. Maybe you have been exposed to a Monte Carlo analysis – which showed something to the tune of “you have a 71% chance that your money can fund your retirement.”
Hogwash – I never liked working with probabilities. They leave too much to chance.
For this article I want to define retirement, and then explain the framework of how to appropriately navigate the decision of entering retirement. This blog is the first of a 12-part series that expands on the key pitfalls, planning success tools, and strategies aimed at maximizing your dollars through retirement.
Retirement: The process of executing your pre-defined financial independence.
What is financial independence?
Financial Independence: Placing no reliance on a job or anyone else to maintain your chosen lifestyle.
Well how in the world can you determine when you have hit financial independence? Tough to say that there is an exact point in time when this occurs. The problem – this is how we treat retirement. Many of us are setup to fail before we even begin.
Redefining Our Game:
Steelhead, a sea-run rainbow trout, have a fascinating life cycle. They hatch in the freshwater rivers of the Pacific Northwest, migrate out to the Pacific Ocean to mature, and then journey back to freshwater to reproduce. Interesting fact: a steelhead will spawn within 5 cubic feet of the location it hatched from!
The steelhead knows when it should head to the ocean to mature, how long it should stay in the ocean, and when it should make its journey home. Further, it knows its exact destination of its end goal!
Related to retirement, many of us do not have a clue what our purpose is, what our mission is, or what success looks like. We truly do hope that we can somewhat save enough throughout our working lives if when we are burnt or forced out of job we are able to retire. So much is left to chance under that approach.
Can we bring more clarity? Should you expect to retire with confidence? The answer is yes, and how you do this is not sexy or flashy.
The Answer:
A written plan that includes everything you own, minus what you owe, and considers future earnings and your future priorities on an annual basis. This then should derive customized investments that are specific to your life goals throughout retirement.
Translation into financial terms:
You need to know what your household balance sheet and income statement are in order to actually build your investment structure. We are going to dive deeper into your balance sheet and income statement below.
Balance Sheet:
At AWM – we define this as your Net Worth. To further explain your net worth from above, this is everything you own (assets) less everything you owe (liabilities). In addition, we want to know today’s value of dollars you will earn from a job, social security, and possibly a pension, as well as your future priorities. Another term for future priorities is cash outflow.
Assets include the following:
Financial Capital – Money earned from investment accounts (401ks, IRAs, Roth IRAs, Taxable Brokerage Accounts, checking/savings, etc.)
Social Capital – Money earned from Social Security, potential inheritances, and generational wealth.
Human Capital – Money earned from employment or ownership of businesses. This is future money to be earned.
Personal Assets – Primary home, cars, furniture, watercraft, etc.
Liabilities include the following:
Future Cash Outflows – This is the name of the game as it relates to retirement! Planning for future cash outflows is a liability that must be considered.
Mortgage – Most likely largest liability to plan for. Must be optimized for cash flow and length of debt through retirement.
Personal Loans – Avoid these like your life depends on it (auto, credit cards, promissory notes).
Only with knowing the above can we construct your customized retirement plan. This is not difficult, and can be done by looking at your latest monthly statements.
Income Statement:
An income statement must be prepared to appropriately construct a retirement plan - and at a minimum should be prepared on an annual basis. The income statement does not need to be overly complex, rather households need to know their 4 Uses of Money. I encourage you to read through the overview written in the link above for a thorough understanding. In short, the 4 Uses of Money are:
Taxes – Largest Expense and should be effectively and ethically minimized
Giving – Your wealth is impact – wasted wealth is wasted impact
Savings / Depletion – In order to achieve true financial independence – pay yourself first
Lifestyle – Annual cash outflow for this year’s current lifestyle
If, on an annual basis, you know what your 4 Uses of Money are, you can bring greater clarity and confidence into your retirement plan by adjusting your investments accordingly to match your priorities.
Conclusion:
Retirement planning is a puzzle – lifestyle spending needs to be funded from either social capital (social security), human capital (work) or financial capital (savings). If you understand what is needed to be funded, and where those funds are coming from, you have a retirement plan. If you do not, I challenge you to elevate your game. Optimize your finances to bring clarity and confidence to your situation.
Over the next 12 blogs – my goal is to educate and empower your retirement journey through a deeper dive into the risks retirees face, the sources of capital, and tax strategies to maximize your dollars.
Free Resource:
Keep a Look Out for These Upcoming Topics:
Sources of Capital - Define the Game we Are Playing
Social Capital
Human Capital
Financial Capital
Roth Conversions
Tax Deferral or No Tax Deferral?
Required Minimum Distributions
Funded-ness
Retirement Investing
What are my risks?
Estate Planning
Inheritance
