An excerpt from Taking Care of Your Future: Your Simple System for a Big Retirement.
Whose plan? Is it yours or someone else’s?
Your financial plan is too important to be someone else’s. It must be yours. This book will help make it so.
It all starts with your vision.
Ever notice that when you get a new car, you suddenly see the same model all over the road and in about every parking lot you enter. Do you think there are really that many new cars? Unlikely. You get what you look for. Your new car is on your mind, and you therefore see it everywhere. You bring these cars into your life.
The same is true for intangible goals. Write them down, put a time frame and dollar value on them, and your focus will slowly but surely make them a reality. Your vision need not be grandiose by Hollywood standards. It just must be yours.
One nurse we worked with wanted to have enough money to retire so when the nor’easters hit, she could sip hot tea at home instead of plowing her way to the hospital.
This simple goal motivated her tremendously. Our team helped affix a number to it, develop and execute a plan to pile up the necessary money. We relied on employer-provided resources we have documented in this book, and today that is exactly what she does.
Vision and decision
We often tell our clients that their main job is to develop vision and to make decisions. Once we know your vision, we use the tools we will detail throughout this book to provide you with options on which you will make decisions.
The title of the book focuses on retirement: The day after your last shift, when you, not your employer, are responsible for supplying your paycheck.
Financial independence is the number one reason why people engage financial planners, our team included, or devote their own time to developing expertise in personal finance, investments, insurance, and estate planning.
There are many others. We often help nurses and other health professionals just starting out, for example, figure out how to purchase a house. They must provide their initial vision, such as location, house or condo, number of rooms, and so on. We help refine it, determine how much it will cost, situate it into their overall financial situation, and then make it happen.
We help with the boring but important refinements, for example, how much to put down, what type of mortgage to acquire, and how to accurately budget for, and therefore expect, the unexpected expenses.
Nurses are often mothers and fathers. Children require education. Again, we help formulate visions, but it is the client’s vision, not ours. Public school, parochial, or private? How do you want to handle college? Prefund it? How much?
These are not easy questions. They are often interrelated. Your choice of a house, for example, impacts your children’s education and what is left over to invest for retirement.
But they are not tremendously difficult either. The key is to ask them, work on answers, and then put plans in place and execute those plans to make your vision your reality.
Back to your last shift
Before we close this chapter, we want to return to some basics of retirement, since for each of us, regardless of life stage, preparing for the end of employment is a must do. Here is a key concept, a process we deploy, to put a dollar price on your financial independence.
Throughout your working life, it is your income that drives your financial life. In retirement, it is your expenses that drive your financial life.
Let us explain. During your earning years, like now, your income pulls all the levers in your financial life. It determines your tax bracket, for example, and how much you can spend on life’s “must haves,” like a house, clothes, food, and transportation. This is true as well for life’s “nice to haves,” such as vacations, luxury items, and upgraded necessities. Your income determines to a significant extent how much you can invest for your future.
Once you are retired, it is your expenses that drive your financial life. It is your expenses that determine how much income you must produce from investments. It is your expenses that determine the necessary size of your investment pile. It is your expenses that determine how much taxes you will pay.
Income drives your working life.
Expenses drive your retired life.
Put another way, two families earning one hundred fifty thousand dollars a year will pay roughly the same taxes, give or take a few variables, such as retirement plan contributions and perhaps mortgage interest deductions.
In retirement, two families with one million dollars saved may be in vastly different situations. One, with modest expenses, may be financially independent and able to retire and pay few, if any, income taxes. The other family, with double the expenses, may not be able to retire at all. If they can, they will pay far greater income taxes as they will need to realize more income to fund their desired life.
Our point here is not that lower expenses are better. Life is to be lived. Live it the way that makes you happy. Michael is fond of saying, “Either you take vacations or your children will.”
Our point is to develop your plan based on your needs, desires, and values. It is not good or bad. It is what it is. The key is to develop your vision and understand your needs.
Time and money
Here is another core concept. All financial plans work on two elements: time and money. The more time you have, the less money you need to devote to each goal. This is the magic of compounding. The more money you have, the less time you need.
This concept will play big in a coming chapter when we discuss the importance of insurance. But for now, it is more philosophical.
The best time to start your journey to financial independence may have been yesterday. But the next best, which, in fact, is the best since yesterday is gone, is today. We congratulate you for investing your time with this short, helpful book.
Take a minute now to use the blank page at the end of this chapter to jot down some manifestations of your vision. For example, “I want to be financially independent by age sixty-five.”
If you are so inspired, put some context to it, for example, “I want to clock out for the last time at sixty-five and enjoy my life in Connecticut most of the year, snowbird in Florida, and take two vacations a year until I am eighty.” This is, of course, just one possibility. It might be mine. You need yours.
Michael Lynch and Alisa Olsen are certified financial planners.