When we talk about financial planning, people have so many different ideas of what that is. Some people think it’s this giant binder with 200 pages that’s going to show you your cash flow in every category of your life for the rest of your life.
Other people just want something really simple. Perhaps you need three or four pages that demonstrate whether your income will be sufficient and if not, financial planning can help. Although, for those who are well-versed in the topic, a detailed plan isn’t always necessary; instead, they should learn to think of the big picture.
What Should a Financial Plan Show You?
Let’s discuss the relevance of a financial plan. It should illustrate how much you need to save for retirement, as well as display what your cash flow will be in retirement based on how much you are willing and able to set aside. Visualize it as a cash flow plan to maximize your retirement budget.
Ultimately, the most essential aspect of every financial plan is its cash flow strategy—because if you don’t have sufficient income to sustain your lifestyle, all other considerations become moot. It won’t matter how much tax you save or whether you own a home; what matters is that your income can cover the expenses now and in the future.
Consequently, our highest priority must be meeting the financial requirement of having a steady income. Many people make their financial plan when they’re younger and they build on it as they go through life.
While some individuals decide to construct and adjust their financial plan in their 40s, many of Johnson Brunetti’s customers come to us at around age 60 when they want an intricate retirement strategy. No matter where you are on your journey, it is essential to begin by looking carefully at income. With the right knowledge and resources, creating a reliable and secure future for yourself can be achieved!
Again, start with that income projection. If I’m no longer working, how much income am I going to have? If I am working, what do I need to save to produce that income? A financial plan also covers things like estate taxes, what you pass on at death, taxation, emergency needs, and more.
Have an emergency fund; it would cover what we call a sinking fund or call it a separate fund for possibly buying a second home or doing something special. Financial plans can be really detailed, and they need to address your future income needs. It should be something that suits you.
Work With an Advisor that Gets You
Working with a financial advisor that you feel really gets you is so important. I can’t tell you how many times we’ve had somebody come into our office who’s been working with a different financial advisor firm, and they walk in with this big thick binder. It literally looks like one of those fancy leather binders with 200 pages in it and they don’t even know what to do because it’s completely overwhelming.
So, you should have a financial plan that gives you just some basic steps. Maybe it’s one through seven steps on how to organize your financial life with the foundation of how much income you’ll have in retirement and what rate of return you need on your retirement income so that you will be okay.
Create a Bucket List
If you haven’t made a financial plan yet or if you’re going to redo one, I want you to start with a dream list. If you can leave money off to the side and forget about it for a minute, it will help you be much more creative with your retirement planning. What you want to do is just go somewhere and write with a pencil and paper, not type, all the things that in an ideal world, if money didn’t matter, if you had all the money that you needed, what would you want to do in retirement?
Perhaps it’s travel, or perhaps it’s several different things, but just what is that bucket list? What is that dream list? It could have to do with your traveling, extra expenses to give back or do charitable work, supporting other people, and so on.
A friend of mine has done an amazing job of serving many people throughout his life. He’s now about 10 years from retirement and I’m thinking that there’s no way he’s prepared for retirement. However, he’s lived this wonderful life, pouring himself out to other people and serving them. He’s had an amazing effect on my kids as they were growing up and has been a real mentor to them.
Wouldn’t it be neat if I could create an anonymous fund that would give him $5,000 a month in retirement? That’d be a great thing and that’s the kind of thing I’m talking about. What is that bucket list, what are those things that you can add, what are those extra expenses that you would love to do?
Then, again, going back to maximizing your retirement income, we can build that into a plan. It’s just a dream list; there’s no right or wrong, there’s no good or bad. It’s just, “If I could do anything I want to, what would I like to do?” and then back into that financial plan that way, as opposed to approaching things in a way where you’ve already limited yourself because you’re thinking about money right away.
We want retirement to be something you enjoy, where you do all the things that you care about. You’re exercising your values in life and money is just a tool. That’s the ideal situation. So, create that bucket list. Think about those extra travel expenses, extra expenses that could be showering money on your kids, hobbies, all kinds of things that are important to you. Whether it’s golf, sailing, traveling, exploring, climbing mountains. Maybe you want to climb Everest. I don’t advise that, especially if you’re in your 60s, but maybe you want to do that. It could be a few different things, so you want to write down that dream list and figure out what those extra expenses are.
Spending vs. Saving
To the people that are in their 40s and 50s, it’s important that you understand the difference between spending and savings. What I tell my kids and our clients is to save 15% of your income. If you have an employer that has a 401(K) and they’re putting in 3 or 4%, you’re already 3 and 4% ahead of the game.
A lot of people say, “Well, wait a minute, I’ve got all these things going on in life right now. Why don’t I do that in five years?” The five years will never come. Bite the bullet. We’ve seen most people save the 15% and suddenly, it hurts for about six months and then, they don’t really feel it; they get used to it and it becomes automatic.
There’s this fundamental final shift that goes from when we’re saving money for retirement and to when we’re spending money. Believe it or not, that’s sometimes hard for people. We have clients that have been great savers throughout their lives, and they’re so used to saving and sacrificing that when they get to retirement, they’ve got more money than they’ll ever need. It’s hard for them to make the switch to start spending some of the money. They’re just as frugal as they were when they were saving money. So, you’ve got to make this shift between saving money and spending money in retirement.
Just to recap, when you’re younger, save 10 to 15% of your income. Ideally, it would be 15%. That employer match gets you to a certain level automatically. It’s like ripping off a Band-Aid; just go ahead and do it. It’s going to hurt for a little while, but soon you won’t notice the money gone. Then, when you get to retirement, you’ve got to do a mindset shift.
My grandfather emigrated over here and came over on a boat when he was 16 from Norway. He then met my grandma who had grown up on a farm in Wisconsin, and they just saved and saved all their life. That generation they were born in, like the early 1900s, was all about how they can create a better life for their kids and their grandkids. They got to retirement, and they wouldn’t spend any money or take a trip. I remember them driving with us from California where we were living at the time. I was a little kid, and we went back to Minnesota in the middle of the summertime and we’re driving through the Arizona desert, and they wouldn’t turn on the air conditioning in the car because they didn’t want to waste the extra gas. Yet they had more money than they ever needed, so it’s hard sometimes to make that shift between saving and spending. However, you want to make sure that if you are going to maximize your retirement income, you must get out of the mode and spend some money on yourself.
Should I Sell My Home?
Should you sell your home and rent instead? If I had told my grandparents that they should rent and not own their home in retirement, they couldn’t have even grasped that concept. Yet, more and more these days, we see people analyzing what it costs them to own their home in retirement, all the expenses like taxes, and they go, “Gee, if I just sold my home, I would have this pile of money. I can invest that pile of money, and my annual expenses paying rent would be about the same as I’m paying just to upkeep my house. Yet, I have this pile of money and I can close the door, lock the door, go on vacation, come back, and not have to worry about it.” You can go to Florida in the wintertime, come back up to the Northeast and not have to worry about pipes breaking or anything like that because it’s somebody else’s problem.
So, that’s a question that you should be open-minded to asking yourself. I know when I tell some of you that maybe you should think about selling your home, that’s blasphemy. You can’t even imagine doing that. And that’s okay if that’s how you feel; my parents felt the same way. They would never want to rent anywhere. However, I can tell you that if you really put pen to paper and figure out what it’s costing you to own your home, some of you would consider selling your home and renting, and maybe it even frees you up to do some other things.
Timing of Retirement
The timing of retirement is important. Sometimes one of the ways to maximize retirement income is working one extra year. I’m not advocating working one extra year; it all depends on your situation. Maybe you should, maybe you shouldn’t.
Other people have decided to retire early to maximize their retirement lifestyle. Especially after Covid, people have done a reset of how they approach work in their lives. So, should you work an extra year or two? Should you retire an extra year or two early to have more time when you’re younger and healthier? That’s an important factor and an important question to ask yourself.
We have some clients that are in their 60s who are in better health than they were in their 40s. There’s an old saying: “When you’re younger, you trade your health for money. When you’re older, you would do anything to trade your money for your health back.” We don’t want to make that mistake as we’re getting towards retirement. We want to make sure we stay healthy.
If you’ve done a good job saving money, now you’re spending money. You can get involved in some of these concierge medical services or you can go to Mayo Clinic or Cleveland Clinic and go through this amazing executive nutrition and physical program that is a little bit less money than you think it is and get top-tier health care. That could also be part of maximizing your retirement.
Importance of a Financial Plan
There are a lot of components to it, but we want to make sure we’ve got the right financial plan; not too complex and not too simple. We want to write up that list to create a dream retirement and forget about money for a minute. You’ll never create the dream retirement if you’re locked into how much money you can really spend. You do the retirement dream first and then see if you have the money.
Understand that when you go to retirement, you make this fundamental shift between saving money and spending money, and some people have a really hard time making that shift.