By Ronnie Thompson
For a few years my family and I rented a small ranch in a community where I lived. The homes were built in the S0’s and 60’s and many of the people that lived there were the original home buyers. Most of our neighbors were retired or getting ready to retire and many of them had grown children older than my wife and me. We got to know many of our neighbors and enjoyed the friendships built and the stories they told.
One neighbor in particular “John” lived next door with his wife. His kids were grown and had families of their own. John had worked for Ford Motor Company in the “finance and accounting department” for 30+ years. One day during one of our meetings at the bottom of the driveway we often had he told me that he was getting ready to retire. I asked him how he felt about retirement, and he looked at me after a few seconds of thought, grinned and simply said “unsure.” A few months went by and John retired.
I will never forget that first winter we got absolutely annihilated with snow, broke several records that had stood for decades. After the first major snowfall that year I woke up like always did to go to work. When I walked out, I noticed the snow had been removed from my driveway and sidewalk. I then noticed all the driveways and sidewalks, which typically would not have the snow removed that early in the morning, had been removed. It didn’t take long to realize that it was the newly retired neighbor John who had removed all that snow. For the rest of that miserable winter and the next several years that followed John shoveled many of the neighbor’s driveways and sidewalks. From that day forward, whenever I saw John I referred to him as “the association.”
The truth is when it comes to retirement many of us are like John, “unsure,” and even if we can one day retire like John is our plan really to spend that time “staying busy” by shoveling everyone’s driveway around us?
The idea of retirement for most is an exciting one. No matter how much we love what we do for a living we dream of a day we can “walk into the sunset” and live our “golden years” doing the things we love like spending more time with family, fishing or traveling.
Planning for retirement and retirement itself is both a game of numbers a psychology. Both areas serve to create the most successful planning for retirement and ironically a focus on each of these areas individually serve the other.
The numbers are the foundation and lifeblood of any retirement plan. Most people, even the ones actively saving for retirement, do not have a clear and specific idea of what their investments will be and what they can expect from their investments when they go to retire. There are several significant factors you should consider when looking at the numbers.
Budgeting for Retirement
First it is important to know how much you are going to need and the best way to know that is through a BUDGET. Creating and maintaining a budget will assist in helping you clearly identify what it costs you to live your current lifestyle and in turn what you will need in retirement. It will also at the same time create discipline in saving. A good place to start is the 50/30/20 rule to budgeting. 50% of your income is dedicated to fixed expenses like utilities and your mortgage or rent, 30% of your income is dedicated to personal expenses like shopping or going out to eat and 20% of your income is dedicated to savings like an emergency fund in the bank or retirement savings.
Establishing Expectations for Retirement
Next it is important to establish expectations for retirement. What specific age do you want to retire? The answer will provide you with a timeline for the plan. Then decide what can you expect in income from your savings when you reach that age. Identify fixed income resources, like pensions or social security and what you can expect to receive from those a month. The difference between your fixed income resources and what you need to live a month, assuming the fixed income is less than the need is called the “income gap.” That is the number you will need your savings and investments to produce for you each month when you retire.
You can then take your investments and create some expectations with projections. Take the amount you have saved along with the amount you are contributing and apply a rate of return over the period until you reach age retirement. Once you have that “anticipated” retirement investment value you can figure out income by taking 4% of that investment. 4% represents a conservative distribution rate you can take each year from your investments without fear of outliving the investment long term.
The psychological side of retirement is as important as the numbers. It is important to define what retirement means to you and visualize what it looks like. Retirement for most people comes with a lot of emotions; excitement, anxiety, confusion, and fear to name a few. Many of these emotions are residue of a lack of planning and expectations. Things like the fear of outliving my money or if retirement is even a reality are created by a lack of expectations.
We all have had moments as children and as adults in a dark space, the basement as an example, where we are afraid in the dark. The truth is the dark is not a tangible or physical thing to be afraid of so what is behind the fear of the dark? In the dark we cannot see, we have no expectations of what lurks in the shadows, so we are left to assume and as humans we protect ourselves by always assuming the worst. Retirement is no different.
It is important to visualize retirement. What will be your goals? Do you want to travel more, if so, to where? Do you want to volunteer your time? What will you do to “stay busy” and maintain a “purpose” when you are no longer working? Do you want help your children or grandchildren financially? What kind of legacy do you want to leave and what is the plan to do so?
Retirement is a game of psychology and numbers. Often the two and a clear understanding of the two support one another. The more you know the numbers the better your mental and emotional attitude will be. When you are confident in the reality of retirement supported by the numbers the more encouraged you are to make plans.
Being aware of the numbers and the psychology of your own retirement planning will help you avoid being like my old neighbor “John” unsure and searching for purpose early in the morning shoveling your neighbor’s snow.
Ronnie Thompson and Steve Wilbourn are investment advisory representatives of and provides advisory services through CoreCap Advisors, LLC. True North Advisors and CoreCap Advisors are separate and unaffiliated entities. Securities trades are not accepted through email, voicemail or fax. Please contact your representative at the number listed above to place any securities trades. This e-mail message and any attachments are solely for the confidential use of the intended recipient. If you are not the intended recipient, notify us immediately by return e-mail and promptly delete this message and any attachments from your computer. These independent views and opinions expressed are those of Ronnie Thompson and Steve Wilbourn and are not necessarily the opinions of CoreCap Advisors. Investing involves risk and investors may incur a profit or a loss. Any information should not be deemed a recommendation to buy, hold or sell any security. You should consult with a licensed professional for advice concerning your specific situation. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.
