I meet a lot of people in my job and as a small business owner in the financial services field I am very curious as to what folks do and how they do it and am amazed at the creativity of many small business owners and entrepreneurs.
Every now and then I get asked what I do and since I’m both a financial advisor and a CPA I often get a different response depending on which one I lead with.
If I say I’m a CPA that usually draws interest because almost everyone has to file a tax return and most people don’t like to do it or they think they pay too much in tax and want to ask questions how they can get more deductions.
When I lead with I’m a financial advisor, quite often I can see the walls come up and defenses settle in and they will often say they don’t need anything before I even get a chance to explain I do both.
Unfortunately, due to some bad apples in the industry, its often viewed as a salesperson pushing a product role and sometimes that’s what some in the industry do.
I see it and I recognize it when I’m approached by those folks, usually a rep of a company that’s mostly a one or two trick pony with only a limited offering that will supposedly solve all their financial needs.
Or, I am told that they have a 401K, or a pension or some other plan in place and don’t need any help because they have it covered.
My follow-on question if I get the opportunity to ask though is first, congratulations on having access to a plan, and second, will that plan likely solve your anticipated needs?
Having a plan you contribute to or planning on getting a pension payment is nice, but do you know how much it will be? Will it be enough to provide for expected expenses you will have?
In my past corporate life before I did what I do now, I was at a company that offered a traditional pension plan. Nice, but that plan was nowhere near going to provide for my expected retirement income I expected to need.
So did I have a plan, yes. Was it going to fulfil my retirement income needs – absolutely not. My retirement goals needed extra assistance.
If you have a traditional pension plan, often not much you can do to change that eventual outcome except get promoted and make more money by the time you retire since its often based on factors like years of service and compensation.
If you have a defined contribution type plan (think 401K type plan) you can increase your contributions.
But by how much?
On my tax return side of the business I often see veterans as clients.
For those that didn’t know, I’m fortunate to have served it’s something I am proud to have done. I was a bubblehead nuke MM/ELT on fast attacks out of Pearl.
If you know, you know. If that sounds like a foreign language to you, when you book an appointment I’ll explain it.
But back to the message, even retired military with their pensions often need additional retirement income to live the life they want to live. So just stopping at “I have a plan I’m ok”, may not be as ok as you think.
Same goes for those who still work for older companies that still have pension plans or unions, yes you have an income stream in retirement but will it be enough to support the lifestyle you want to live?
We cannot predict the future. I cannot, you cannot, but we can make educated assumptions and those assumptions lead to a need of income to pay those expenses and that income stream comes from a variety of sources, or very few sources for those that didn’t plan well.
You can start by looking at your current expenses, largest first. Housing expense probably. If you rent, will you rent until your last breath? If you have a mortgage, when is it paid off?
Then large lifetime expenses, things that you will pay for as long as you are alive. Food, utilities, transportation, income taxes, charitable contributions for some. Those expenses that may vary but you will probably be spending something on for as long as you live.
You can use simple inflation factors to extrapolate expected costs into the future. Used to be 2-4% inflation was a reasonable assumption. Last couple of years have shown us that is not a reasonable assumption at least in the near term. So things that cost you $1,000 now, could very well cost you double that if your retirement is a few decades away.
Another thing I see is that often the assumptions is what do I need to have saved when I retire at 65? My question when I talk to people is what do you need for a longer period? Age 65 may be a starting point, but what do you need when you are 75, 85 or even 95?
With better healthcare tools, healthier lifestyles and better technology, you might live 30 years, three decades in retirement. That’s potentially 1/3 of your life and have you prepared your financial resources to provide for income past the point where you can no longer go out and get a part time job even if you wanted to get one?
I’ve met a few folks who have $200,000 to $300,000 in an IRA and they think they are set for life. Sometimes that all you can do and it is what it is, but sometimes it’s because they really haven’t done the math if it’s likely to be enough and they think they have accumulated all they need.
Maybe they are, but if their retirement lifestyle, for example living expenses, new car so they have reliable transportation, travel now that they don’t have to work or they refinanced a few years ago when rates are low and now they will be paying for a mortgage for another 15 or more years in retirement (and tax, don’t forget income taxes owed) adds up to say around $40,000 a year.
Even with a reasonable rate of return on their investments, its simple math to see that the IRA may not last until they no longer need money at that drawdown rate
So back to the title - are you satisfied with your plan?
If you are on track and you’ve done the forecasts to the best of your ability and you look to be on track, I sincerely congratulate you, you are in the minority.
If you’re not sure or you haven’t really forecast that far into the future let’s schedule a call to get the process going.
The information in this and other articles is intended to be educational in nature only. Not tax, legal or investment guidance for you specifically. Each person’s situation is unique and you must seek appropriate professional guidance that can address your unique situation.