Tuesday, August 6, 2019
My 7 Steps to a Relevant Retirement
I recently completed the audiobook, “Retire Inspired,” by one of my favorite financial gurus, Chris Hogan of the Dave Ramsey team. Within his book, Chris touched on many subjects related to retirement, or personal finance in general, including savings, budgets, insurance, and investments. As the book went on, I kept waiting for the “aha” moment. That moment where Chris dazzles me with some amazing nugget of information that blows me out of the water. That moment never came. Chris pretty much said everything I was thinking was the building blocks for a decent financial status. You might be thinking, “This book sounds pretty boring, was it even good?” My rating out of 5 for the book, is a solid 5. While Chris didn’t tell me anything I didn’t know, he also reinforced the tasks that I knew would lead to financial success. In my industry, advisors and the institutions they work for, make a habit of treating retirement like a Rubix cube. Confusing, deflating, demoralizing. Chris inspired me to put my ideas about retirement on paper, to organize them. You see, retiring prosperous is not about being an investment wizard, or even getting lucky. The process leading to a Relevant Retirement is about as exciting as watching grass grow. What it requires is dedication, persistence, and a little know-how. Mainly what it requires is a plan. I created my 7 Steps to a Relevant Retirement with the goal that all my clients will follow them to their own prosperity. I created it for people of any age, as a checklist to success. Let’s dive into my list, and see how many you can safely check off.
Yes, yes, yes! A Budget. You must, must, must master the monthly budget. MUST. The reason is simple. Everything else I am going to mention in this post requires a balanced monthly budget. Not only that, it requires a surplus every month to be successful. What that means is you must have more money than month. There HAS TO BE extra money at the end of the month, or nothing works. You cannot save, pay off debt, pay off your home early, invest with any significance, and protect your assets if you don’t have extra money every month. What that means for you is quite simple. Stop living paycheque to paycheque. That may require you to make more money. That may require you to spend less than you currently do. Chances are it is a bit of both. Your chequing account is ground zero for your financial success and if you cannot manage money in and money out, you will never succeed. I may sound dramatic, but it is literally Grade 1 math.
Why is this so important? Heads up, as life goes on, things get more expensive. We all know that prices go up every year. Inflation is a nasty, nasty thing, but it’s the reality. Part 2 of the Budget component is knowing what it will take to live a comfortable life when you are retired. Yes, you must know how much you will need to survive on in retirement, inflation-adjusted. Simple calculations can be used to get this number but knowing what you need now is the first step. My system brings this up first for a reason. This number is meant to shock you. This number is the number we will bring up later in the process to make sure we have all the boxes checked. You make think it is tough right now, but it only gets tougher unless you take this first step seriously.
If you have no debt currently, congrats I am proud of you. Do not neglect this step because this step is about more than your current debt level. Debt Freedom NEEDS to be a lifelong priority. It is an essential part of retirement success. The reason is simple: Debt payments take away money from your monthly budget. This money almost always is taken away from one place and one place alone, your retirement savings. We all love compound interest, it’s a sexy thing. Reverse compound interest is its ugly stepsister. This is how your money owed gets compounded, making you poorer and the people you owe richer. Much richer. Let me put it simply: If you have debt throughout your life, you will NEVER retire the way you want. If you currently have debt, getting rid of it must be priority #1, after balancing the monthly budget. This NEEDS to be accomplished in 2-3 years or less or you are wasting too much time.
If you don’t have debt, once again congrats. One thing you have in common with those who do have debt is this, preventing future debts should be a priority. You might be asking, “How do I prevent future debts?” The answer is simple, anticipate them. What could a future debt be? Medium or large-sized emergencies like water heaters, car repairs, housing issues, kids breaking your bankroll, and even injury or illness. How do you handle this? 2 words: EMERGENCY FUND! While you might have no debt, if you have no emergency fund you are hanging on the edge of the abyss of future debts. An adequate emergency fund will be a lifelong goal, as it should be part of your monthly expenses. Debt and accessible savings go together, as one helps prevent the other. In order to have a relevant retirement, you MUST hate debt with a passion and love your emergency fund with all your heart. I will discuss this more in step 4, 5 and 6.
One of the common goals I hear from my clients is the goal to retire early. I will discuss early retirement during this part and give you some truth about that goal. Most people in Canada and the US retire with very little savings. A dramatic amount of those people retire with no savings at all. A startling reality is that most people in our society retire unequipped for the expenses that will occur in retirement. What does this have to do with housing? The answer is simple. Housing will be your largest expense on a monthly basis throughout your working life. It could be rent or your mortgage, but that monthly bill is usually the biggest you have every month. You cannot, and I repeat CANNOT, retire early, or at all for that matter, if you still have mortgage payments. Your goal IF you want to retire early should be to pay off your home early. Your goal IF you want a relevant retirement period should be to pay off your home.
I cannot express the importance of this point enough. A whole industry has developed that separates people from the dream of true homeownership. Home Equity Line’s of Credit, Mortgage Re-finances and reverse mortgages are meant to make you poor and the lender rich. YOUR HOME IS NOT A PIGGY BANK! I repeat, YOUR HOME IS NOT A PIGGY BANK! We need to get out of the idea that a home is an investment. Now don’t get me wrong, your home is valuable. It is the largest Tax-Free Savings Account out there. There are 2 problems with the home as an investment ideal, however. Firstly, you only ever realize the value of that investment if you sell your home and then you must live somewhere. What will you do then? Live under a bridge with 300K in the bank? Housing is a lifelong expense, so a home must be understood as part of that. Secondly, you never fully realize the true power of your “investment” unless you ACTUALLY OWN YOUR HOME! What that means is you don’t own it unless you pay it off. Stop looking at equity as some magical money you now have. The real estate and mortgage industries are designed to get you into this mind-frame. It is faulty, flawed and straight-up dangerous.
My Relevant Retirement System will address early home pay down and future housing needs. I mentioned that most people don’t retire early, let alone comfortably period. What this means is that if you retire early, you have done something out of the ordinary. Most people also do not pay off their home early. Doing so would be out of the ordinary as well. Those 2 items go together like peanut butter and jam, so it is imperative that you look at housing for what it is, the largest debt you have that needs to be eliminated as soon as possible.
Boring!!! Yes, this part has to do with insurance. Everyone raise your hand that enjoys paying insurance premiums. I thought so. I sell a lot of insurance. I believe in insurance. I LOVE insurance. YOU must get over the idea that insurance sucks because although it is not fun or sexy like investing your money, it is more important BY FAR and I will explain why. A Relevant Retirement requires several things. One of them, and probably the most important one, is actually living and working until you retire. Fairly simple right? “Well if I die before retirement, what does it matter anyway?” I‘m sure your wife and kids care a little about you not being here. Even worse, what if you live, but can’t work? The stark reality of the situation is this; 1 in 3 people will have a significant illness or injury throughout their lifetime. The #1 reason people retire in poverty is because of health reasons. The #1 cause of bankruptcies is health reasons. We cannot prevent health problems, for the most part, but we can transfer the risk of them to someone else, the insurance company.
If you have $100 surplus every month and you are wondering whether it should go to insurance or investing, choose insurance. Step 4 of the Relevant Retirement System requires you to have as much insurance as needed/possible for the lowest price possible. What this means is buying term life insurance to cover any debts and your mortgage as well as income replacement, disability coverage to cover any loss of income if you get hurt or sick, health coverage to cover medical costs, and adequate auto/home insurance to cover any liabilities that may arise. Again, we need to find as much coverage as possible for the least amount of cost as possible. For term life insurance, look to about 12-15 times your income as a benchmark. For disability, look to cover up to the legal limit of coverage available in your area, often 80% of your gross earnings. For health, home and auto, look to cover as much as possible with a higher deductible that will help lower premiums.
Why this is importable is simple. What is more crucial, having a comfortable retirement, or not becoming homeless in the process? What is more important? Surviving until age 65 with a reasonable standard of living or eating cat food your whole life because of injury or illness stopped your paycheck. What is more important? Having a great investment account that gets depleted because you die and the family needs income, or the pennies a day you spend protecting your life in case of death. Insurance is the base of any financial planning pyramid and basic coverage can and should be as cheap as possible. We will investigate more dynamic insurance coverage later in the process. 2 key words my friends: Build, Protect. Build, Protect. Build Protect!
Step 5 is where this post dives into what the post is actually about. Kind of weird it took this long right? Nope, it makes complete sense. You see we are building a house and step 1 through 4 was the foundation. Let’s start adding some floors to this puppy. I mentioned how important a monthly surplus was/is. The reason for that is you will need to save and invest money every month. I mentioned how important debt freedom is. The reason is that is debt takes away from your savings goals. I mentioned how important a paid-off home is. The reason for that is you will need that extra money to ramp up your savings. I mentioned how important insurance is. The reason for that is that nothing can get in the way of your future goals, ie. injury, illness or death.
In step one I discussed your future budget needs, inflation-adjusted. Here is where we utilize that number. Let’s say you determined that in retirement you will need 50K a year to live comfortably. If your retirement lasts 30 years, age 60-90, you will need 1.5 Million dollars at retirement to fulfill that goal. The math isn’t that difficult, to be honest. The number of years in retirement times the number of dollars needed per year. This is your “Magic Retirement Number.” Depending on the age you plan on retiring, your monthly savings rate will change. For instance, if you plan on retiring at age 55 instead of 60 or 65, you will need to save more money per month. Here is an example using the 50K per year number:
30-Year-Old, 50K a year in retirement, Long-Term Interest rate of 7%
Retiring at age 55 = $2,024/monthly savings
Retiring at age 60 = $1,539/monthly savings
Retiring at age 65 = $1,194/monthly savings
These are some wild numbers, aren’t they? Do you remember when I said most people don’t retire comfortably, let alone adequately? You may be thinking, “There is no way I can save 2K a month!” What if you didn’t have a $1200 mortgage payment every month? What if your employer gave you a 100% retirement savings match every pay? What if you didn’t have any debt payments? What if you focused on frugality and retirement as a priority instead of the accumulation of stuff? You see, this part is number 5 for a reason. It’s the sticker shock, it’s the scary number. 1 million dollars! 1.5 million dollars! 2 million dollars!!!! Seems impossible, doesn’t it? Wrong, it is very doable. When the foundation is in place, time becomes your greatest ally. When the foundation is in place, anything is possible.
Your retirement savings progress will require annual monitoring. It also will require investments that actually perform. I recommend long-term growth mutual funds that continually outperform the market. It will require a dissecting of several scenarios. Your savings rate should include worst-case scenarios, meaning an interest rate that could be lower than anticipated. Remember, we cannot predict the market, but if you are patient and on top of your goals, you will win. You must treat your retirement like a bill. It is a monthly bill and the bill collector is your future self. This is number 5 because if everything else isn’t in place, this part is meaningless. My system will show you the projections, the needed rate of savings and the scenarios you could face as time goes on. You provide the discipline and enthusiasm.
Remarkable Retirement Planning: Steps 6 and 7 (Let’s get Wealthy!)
We spoke about insurance 2 steps ago. We are going to speak about it again. This portion is more than insurance though, it’s about proactive thinking instead of reactive thinking. You see, your basic insurance coverage will get you to where you need to be. Your Basic insurance coverage is not about becoming rich, it’s about not becoming poor. When we have step 5 in order, retirement, it is time to make our money work for us at the ultimate level. While you are on steps 1 through 5, you must be extra vigilant about the monthly costs you incur. This includes expensive insurance coverage. Many insurance brokers, and I know many of them, will try to strap you with high premium coverage. You see insurance is like buying a car. You can get the base-model, or you can upgrade to the premium model. Leather seats, sunroof, surround sound, and seat warmers, all come with the upgraded model. While you are growing, we are sticking with the base model. When your retirement ship is in order however, we can look at ways to make your coverage actually work for you. Adding those features that give you more, like the return of premium option, future earnings protector, and various others are now in the budget. They also increase your net worth and shelter money tax-efficiently.
Furthermore, protecting 100% of your income is now a priority. What this means, because of current laws stating you cannot have more than 80% of your income replaced with disability coverage, is that you need your emergency fund to kick it up a notch. Instead of 3-6 months of emergency savings, focus on having 1-2 years. The reason for this is simple as well. Let’s say you are 58 years old and plan on retiring at 60. At that time your company decides you are no longer needed. Would you then go work at Wal-Mart for the next 2 years to realize your retirement goal? What we are doing is being proactive instead of reactive. What about during retirement. Will your need for a car disappear? You will probably need 2-3 cars during your retirement years. How about if the roof needs to be replaced or you must take care of a sick parent? This step is us putting our money in several pots that will allow us to live a Remarkable Retirement instead of just a Relevant Retirement. This is where we kick our net-worth into overdrive. It is our focus on liquidity for life, taking advantage of opportunities and possibly creating a lasting legacy. We are compounding our potential. We are turning losses into break-evens and break-evens into wins.
Speaking of legacy, let’s get serious about the future. This is our final step for a reason. It is the icing on the cake, the most fun part of everything we have discussed. This is where you start thinking about leaving your mark on the world, or at least the people you love. Where this is even more awesome than just simply legacy, by taking the final steps in wealth building you are actually making your life better as well. At this point, tax-efficiency is your greatest foe. This is where develop strategies to safely and effectively wind-down your investments while you live comfortably on them. This is also a place where we take the steps to mitigate the effects of estate tax upon death. In this point, the keyword becomes EFFICIENCY. You have given the government enough of your money during your lifetime, we legally find ways to not give them any more than we should. You may also have a portion of your money that you want to go to loved ones. This could include investment income or even property or businesses. We must make this desire a life-changing gift to them, instead of a life-draining burden. Products we look at and refine here are wills, trusts, permanent life insurance, and probate-bypassing investment vehicles. The great part about this step is we are not worried about retirement anymore. We are strictly worried about keeping as much of our money as possible. You have made it, so now let’s make it remarkable!
Putting it all together
This system encompasses all the steps needed to make a relevant and remarkable retirement. Not once during it, did I delve into complex strategies or difficult to understand topics. The reason for that is because those type of programs are not needed to get what you want in life and retirement. The foundation is vital to success, and nowhere during that period should you be wasting money on expensive, confusing and often ineffective wealth-generating processes. Your actions will determine your success, not the person helping you out. This is a program literally anyone can follow, anyone. That is why I made it as simple as possible, yet supremely effective. I have always said, either you choose the retirement you want, or you will have no choice. Here is our chance to retire on our terms.
“Retirement’s the most wonderful thing. I get to enjoy all the things I never stopped to notice on the way up. After an extraordinary life, it’s time to enjoy my retirement.” – Patrick Macnee
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