Improving Your Financial Wellness Series – Part 3
What Is Your Number?
In the last two blogs, you’ve learned more about your relationship to money, you’ve determined your ultimate vacation destination (aka retirement), and now you’re ready to set out on your journey. But have you set your budget? I’m commonly asked: “Does it take a couple of million to retire?” The answer is, as always: “It depends.” A couple million dollars may fund a successful retirement for one, and might not be enough for another. So, why does it depend? It depends on your number; it’s unique to you.
Let’s look at what elements make up your number.
Your Spending Plan (aka Budget) now and in retirement
Your current expenses are a great place to start when determining your number. Go through your expenses today, list everything out, and then consider what you will no longer need to pay once you retire. Maybe you’ll pay off your house, for example. You might no longer have child or education expenses. Now, consider how you want to spend your time during retirement. What do you want to do that will cost money? Try to get a clear picture of what required and desired expenses you envision and prioritize them to ease your planning process.
Your Current Balance
How much do you have now for this goal? How much are you saving every month or every paycheck?
Your timeline has the most significant impact on how much to save. How long will you have until you need to use these funds? If you have 10 years, you’ll need to plan to save at a faster pace than someone who is just starting their career with 30-plus years left before they retire. The sooner you put a savings plan together and take action, the easier it is to reach your number. The earlier you start, the easier it is to save $1 million.
We all know things cost more than they did 20 years ago, and will likely cost more in the future. Be sure to plan for the inevitable and bake inflation into your calculations so you’re able to afford the retirement you envision.
Your Risk Profile
Consider your risk tolerance level when you plan for your retirement, so your journey suits your needs. If you’re risk-averse, some investment opportunities may feel like you’re white knuckle driving toward your destination. Know what works for you and make consistent progress toward your goal to avoid derailing your journey or making emotional, financial decisions that can set you back.
Your Blind Spot
Now you have gotten all these down, you may feel all prepped for your ultimate vacation, but you’re making one big assumption. You have assumed that you can wake up, go to work, and save for the future years. But what if — God forbid — something happens to your ability to continue earning income at that same level? As you’ll see in the Economic Wealth model below, your total wealth is the culmination of your Human Capital, ability to earn an income, and your Financial Capital, assets you’ve accrued over your life through conversion of your Human Capital to Financial Capital. That’s where protection for death, disability, long-term care, etc., comes in. There are various programs and products out there, and an advisor can help you determine which is best for you.
For most of your career, your most prominent asset is your ability to earn more money. I encourage you to learn your options to protect your biggest asset, yourself, and your ability to earn income.
Assuming everything goes as planned, you’re having a great time on the journey and are saving for your ultimate vacation, there may come a time where you decide you don’t need to push as hard. Maybe you make a shift in your career to follow your passion or reduce your hours. Because you’ve been building your Financial Capital, you’ll get to a point where your Financial Capital is working for you and can replace the income you’re earning.
This magical point is what we like to call “Financial Freedom.” At this point, you can choose how you want to spend your days. You have options, which is the most powerful thing in life. You can decide to start your retirement, continue working, or maybe start that side business you’ve been dreaming of creating, whatever you want. The choice is entirely yours, and the freedom you feel when you reach this point is akin to the first sunset you witness as you gaze over the ocean, toes in the sand, mai tai in hand on that luxurious tropical vacation.
Rest assured, it’s worth it!