Money and More© January 19, 2019


Financial planners like myself often encounter clients wanting to know how to financially retire.   While retirement is about much more than just money, that is why folks frequently seek out financial planning.   These people just want to know “How much do I need to retire” to avoid living under a bridge?  This can become a kind of “Catch 22” question.

Living Expenses

Frequently my countering question is how much do they expect to spend or what are their current expenses.  The answers to these are usually unknown by the clients.   As a planner, the level of living expenses is an important question.   I want my clients to be able to live their desired lifestyle rather than adjust their lifestyle to their income.  That is true Financial Independence.

Fundamentally, knowing the level of expenses is best known when the client can paint a self-portrait of what they want to do and enjoy later in the life.   This might include travel, helping with grandchildren, getting more involved in their religious institution or volunteering with favorite charities to name a few.

Once the spending level is known, it possible to determine the amount of money need to sustain the desired lifestyle.

Grow Your Wealth the Best Way

In my CFP professional training I was taught to think about growing money as if there are three ways to adjust the “pile” of money.  First, is to allow the money to grow longer or time.  Second, adjust the growth rate on the money.  Third, start with a larger pile of money.   Frequently when I talk with folks, they want to retire sooner and have a largely unchangeable size of a money pile.  This means the first and third adjustments are not available to them.  They then think that the way to get to financial independence soonest is by increase their rate of growth.  This means increasing the risk the money faces in order to grow it larger.  This translates to mean a greater risk of loss in exchange for a higher growth rate.

This pile of money is usually way too important to risk great loss. Though it seems the only path for a client as the stock market “always” goes up.  Historically, it is true with a 10 year or greater horizon the market goes up.  Those walking through the door often want to retire soon.  A retiree’s greatest danger in financial independence is what’s called in industry jargon “sequence of returns risk.”  In lay terms, this means that if a down market occurs in the first few years of retirement, the whole retirement plan is at great risk of failure.  Think about those people that retired in early 2008 and later had to pull money out to living on at greatly reduced values because of the great recession.  Their portfolio’s are significantly and permanently smaller as result.

What Is the Pre-Retiree To Do?

Sometimes, the best financial answer is to wait or delay.  Working is trading off of time for money over one’s work life.   Stopping work is trading money for time right immediately.  Waiting allows the first and third adjustments of the money to come into play.   This allows the money to grow longer and to start retirement with a larger pile.   It will also make financial independence a few years shorter for drawing from the money pile.   The delay may favor larger social security and pension payments. Additionally, waiting means delaying tapping into the “pile” of money which has gained additional time to grow.   All this means that the amount of risk of this precious pile of money can be decreased by using a lower growth rate.  This hard strategy can help reduce the risk if the stock market/economy has trouble times in the first few years of retirement.

Do you know what to do in your individual situation?  A Financial Review is a low-cost way to help determine if you are on track for retirement.   Click here to learn more about the Financial Review.

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