The first thing to determine is how much money is needed annually to pay
for your lifestyle. In other words, how much does it cost to live in the
manner you wish to live? Let’s say, for example, that you spend $100,000 per
year today to live comfortably. How much do you need in assets to provide
this $100,000 in income? At a generous 5% rate of return per year, you would
need a lump sum of at least $2,000,000.
And that doesn’t even take into consideration the effects of inflation.
How much will inflation be over the next 20 years? Who knows? But don’t
delude yourself into believing that it will be the artificially low amount
of about 3% per year we experienced from 1990-2009. No, it will be more like
1970-1990—5% or more. With all of the government and banking manipulation of
the markets, I don’t see how it can be any other way.
So, let’s say that we have 15 years until we wish to retire. At a 5% rate
of inflation, we will need twice the income at that time to buy the same
stuff we buy today. At $200,000 a year, that means that we will need AT
LEAST $4,000,000 in 2025 to be able to replace that $100,000 that you would
spend today to live. Now based on what you’ve got invested today, is that
possible?
Don’t freak out. Instead of needing $4,000,000 in cash, you will need
$4,000,000 in wealth equivalents. A wealth equivalent is the value of
investments that, if those investments yield 5% per year, would provide the
needed income to pay for your lifestyle. That’s $200,000 in income that will
have to be created through work or investment income or a combination of
both.
Retirement planning is about time management -- when you have the choice
of earning money or using it to give you time. The better you plan, the more
time you have. Now, if you earn $100,000 per year today, then your job has a
wealth equivalent value to you of $2,000,000. That’s why most professionals
will want to stay involved in their practices rather than selling outright –
no one will pay that amount of money for the practice. The key is to figure
out a way to generate as much income as possible from the practice with as
little time commitment and risk as possible when you want to draw back, or
retire, from the practice. A good financial plan will assist you in that
objective.
Well, if you want to have some time in the future to pay your bills and
you don’t want to go to work every day, then you will have to have some
money set aside to create that income. One way I know how to do that is to
save and invest it—taking at least 10-20% of your income off the top every
paycheck. The other way is to be an excellent business administrator who can
generate a six-figure income working one day or so a week. Both can be
accomplished if planned.
www.wealthadvisoryassociates.com
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Karla Jo Helms
