Retirement Planning

Retirement Income Planning

As a card carrying member of the “Sandwich Generation” I know more about retirement financing than I really expected to know at this time in my life. Your life and your finances require a completely different approach at this point.

Your Income has to come from different sources than work because most folks don’t want to work in their retirement and a lot just can’t due to health reasons. Your spending should be less because you don’t have the responsibilities that you had in mid life. The kids are out living on their own. You don’t need the big house and you do not drive as much. You are not as active and you can’t stay awake anyways. The only expense going the other way (as in up) is medical expenses.

When you first retire you have the opportunity to do all those things that you imagined. You can engage in your favorite pastime such as golf or sailing. If you have a bunch of travel rewards saved up on your Reward Card credit cards, this is the time to go to the places you always dreamed of or go on cruises. Will you work until the day you die? Play the retirement game Fire this cannon while you have it. Your capacity to go do these things does not last for forever. You either get too cautious with your money or your health starts giving out. By the time most folks are in their late 70s the fun has gone out of adventure. It is too painful or physical ailments reduce or prevent doing such activities pleasurably. There are folks who are exceptions but for the most part life gets much simpler by that time in life. Every day above ground is a good day.

There are two ways to look at retirement finances. The first is how you produce income through your golden years. The second is what you do with all those assets you accumulated while you were so busy in mid life.

Streams of Income

This is a term adopted by those who make a living on the internet. The idea is that you create income producing assets on the internet that stream income into your budget with a little maintenance each month to keep them going. If one stream dries up the other hopefully continue and you build a replacement stream of income. Retirement income is something similar. In most countries there is some form of national pension plan. In America there is social security. In Australia there is Superannuation. In Canada there is the Old Age Pension plus the Canada Pension.

From this base you build other potential streams of income to help you have cash flow through retirement. Many companies have a pension plan organized for employees of long and faithful service. You may receive a military or a disability pension. In most countries there is some form of tax protected retirement savings plan. You can save the money on your own and then there is usually some vehicle for an orderly withdrawal of these funds so that the asset retains its tax protected status. You can have investments that provide cash flow both inside and outside of your tax protected plan. It is a good strategy to get familiar with such investments as you approach retirement. They are actually very good while you are building your nest egg. The cash in the form of interest or dividends can be plowed back into your retirement plan until you want to live off of that stream of income.

Downsizing or Liquidating Assets

You probably don’t need that big house at some point. The family is raised and if you have paid off the mortgage this is a lot of asset. It is a lot of work to keep clean and keep maintained. One option is that you can downsize. By that I mean buy a smaller house. The smaller house or condo should be less to buy than what you would realize from the sale of a full sized family home. There should be some money left over that you can invest in some cash flow investment that will add to your income each month. You will create an additional stream of income. It might even make more sense to sell the house, invest the money in a diverse portfolio that will create more than enough money to pay the rent and add to disposable income.

At some point it is an option to turn some investments into cash and use those for a stream of income. If done in an orderly fashion, this piecemeal asset sale plus the stream of income from the investment interest should last for a very long time. One form of this is the Reverse Mortgage. In this you can stay in your family home and negotiate a lump sum payout for up to 40% of the value of the home. This you can use or invest. Follow the link if you find this an interesting alternative.

There is a club for retirees call the “SKI” club…the Spend Your Kids’ Inheritance Club. The idea is to spend all of the cash flow and in a piecemeal fashion spend all of the equity you have accumulated through your life so that you spend the last dollar of your net worth on the day you die. For those who don’t have kids and don’t have a chosen charity this might be a long term financial and life goal. It’s a bit morbid and a bit unrealistic. So much in this plan is based on knowing when you will leave this earthly existence. You can’t know how well or how sick you will be so you have no idea what medical and care costs you may need in your final years when you may be nearly helpless. Plan your life so that there is someone or something about this life that you care about enough to leave them what is left of your nest egg.

Conclusion

By looking into the future to see what you will need to finance your retirement you can see that you need to build your net worth sooner rather than later in life. You need to get involved in life and commit to something bigger than your self so that you are eligible to receive pension benefits. You need to run a surplus budget so that you can save and build a nest egg. Build equity in your home. Pay off that mortgage so that you own that house.

Engage in Financial Therapy so that your golden years are peaceful and without financial worry.