Originally published in the News Star and the Shreveport Times on Sunday, October 30, 2016.
Question: My wife and I are approaching our 40s. What is the most important thing for us to be thinking about to get ready for our retirement?
Answer: Tonight, neighborhood children will transform into sheet wearing ghosts and miniature pirates toting plastic swords. They’ll ring your doorbell and squeal, “Trick or treat!”
Most of these little ones will be unconscious of their extortive demands. They are unaware of uttering the threat of a trick if you don’t produce adequate treats. All of them, that is, but that teenager that drove himself and came to your front door with a large garbage bag for you to fill. Keep an eye on him.
Trick or treat. If you leave your front porch light on tomorrow night, you’re announcing to the neighborhood you don’t mind being faced with that choice. But that is a choice you don’t want to face in retirement. You want the “treats” without the possibility of any “tricks.”
So how do you avoid such a “trick or treat” dilemma in retirement?
Begin with the purpose in mind.
Too many people fail to take their thinking about retirement far enough. They imagine retirement planning is just saving up a lot of money. As much money as possible.
This orientation is understandable, given the messages sent to us by the financial industry. Since much of the industry functions on earning fees based on the amount of money invested, creating larger and larger piles of money is a natural focus for them.
But it is an inadequate focus for us. A pile of money is simply one means to an end – it’s not an end in itself.
For most people, financial needs in retirement fall into three broad categories: income, liquidity and legacy. The more of any one you want, generally the less of the other two can you have.
Income. Income is income. It’s the check that comes each month that pays the bills, buys groceries, pays for the fun stuff you do and, in general, funds your life. Today you go to work in exchange for a paycheck. In retirement, you’ll need to have one of these come from a source other than your work.
Liquidity. This is the most overlooked retirement category. Liquidity is where you go to get the money you’ll need to spend on items above and beyond your regular monthly expenses. Just like the rest of us, retirees need access to cash in the event of an emergency, a large expense or maybe even an opportunity.
For too many retirees, a failure to plan for liquidity needs results in unhealthy levels of debt in retirement. How will you pay for a new roof, a new car, a house remodel or an uninsured expense?
In the extreme (but not necessarily uncommon), long-term healthcare expenses can not only take all your income, but all your liquidity, too. That’s one of the big financial “tricks” you want to avoid. If you don’t, you may not have anything left for…
Legacy. This is the money you want to leave behind. And don’t be too quick to overlook this. I talk to a lot of 30 and 40 somethings who dismiss legacy, saying, “I don’t really care what I leave my kids. Nobody left me anything and I’m fine. They can take care of themselves.” That’s how 40-somethings talk. But just listen to the language of someone in their 70s or 80s.
“It’s very, very important to me that I leave as much as possible to my children,” I recently had a man in his 80s, with tears in his eyes, say to me. Understand that a lot of things change as you age, including your perspective on legacy.
What is the purpose of the saving you are doing now for retirement later? It can’t be enough to simply accumulate a pile of money. That pile of money has a purpose, and it is to provide you with income, liquidity and legacy.
Begin now to accumulate assets sufficient for your retirement. But don’t just accumulate assets. Position those assets to accomplish the goals you set for income, liquidity and legacy.
Begin with the purpose in mind.
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