Received an email the other day from a nice young lady about wanting to make sure she’s on track for retirement. She’s thinking of maybe staying home to raise her little tax credits when/if they ever have any. But she’s not sure she can ‘afford” it.
These folks are doing fine, financially, and will continue to do so even if she were to stop working. How do I know this? Because the only debt they have is a relatively small mortgage. That’s it. That mortgage will still be easily affordable if she were to quit work and rely solely on her husbands income, even though HER income is more than this currently.
There’s a certainly mentality, mindset if you will, that dictates financial success. That mindset is frugality. Not being miserly, like Scrooge McDuck. But rather living WITHIN your means. For a couple in their 30s to have no debt other than a mortgage shows the mindset of living within one’s means, and thus we can predict financial success.
But here’s the problem. How do you extrapolate from that being “on track” when it comes to retirement?
Well, you can’t. Retirement planning is contingent on 1 thing and 1 thing only, how much income you’ll NEED. Without that number locked down it’s ALL speculation. Purely speculation. Nothing more, nothing less.
And yet, the financial press and professionals have been telling us for years that we need to have a “Number”, or we need to save X times salary, or we need Y% of income in retirement. But they have no clue why that’s the case…for YOU!
Does this lady need Y% of income when she has a job making good money. Or will she need Y% of income when she sacrifices her career to raise the tax credits? A stuffed-shirt financial planner will say something like this…
“Katie and Dan(not their real names) you will need 80% of your current income in order to retirement successfully 25 yrs from now.”
Katie asks smartly, “Okay, but if I quit my job to raise my kids, how much income will I need in retirement then?”
Stuffed shirt repeats himself “You’ll need 80% of your income to successfully retire.”
Katie asks somewhat exasperated. “80% of what though? Our current income. Or our income when it’s only Dan working?”
Stuff shirt. “80% of your pre-retirement income.”
Katie bites her tongue to say. “I get that! But which income do we use to build a plan??? Our income is going to drop by more than 50% when I quit my job to raise the kids!”
Stuffed shirt. “ummm..ummm…just save as much as you can.”
Katie…””But that’s not really a plan, is it?”
Katie and Dan realizing they just wasted their valuable time, leave the office, give each other bloody noses and proceed to jump into a pool infested with starving sharks.
For the record, let me point out that retirement planning is quite simple; When you’re about to retire. By then we hope to have a pretty doggone good gauge of how much you’ll need live on. Once we have that number we can figure out how to make it happen with your various resources.
But what do you do when you’re in your 30s and 40s? Well,
#1 you take advantage of your company 401k/TSP/403B match, if they offer one. You put the rest into Roth IRAs, one for you and one for your spouse and then you pay off debt . In that order.
# 2 You make sure you have term life insurance to cover your surviving spouse if a catastrophe happens.
# 3 You make sure you have an UPDATED Will to identify guardians for your kids, again, if a catastrophe happens.
#4 you watch your spending to make sure your debt levels don’t start to creep back up.
Do this each and every year. And one day, it’ll come much sooner than you think (trust me on that. I can’t believe my oldest is already in college as I still feel like I’m in my 20’s!) you’ll look up and say okay, NOW let’s do some retirement planning. It makes sense then.
So, my message to Katie and Dan is this. Don’t get too caught up in the silliness of retirement planning. Certainly don’t rob yourself of the wonderful years you have to stay home with your kids under the fear instilled in you by financial professionals of needing millions upon millions to retire.
Your MINDSET is how you know you can retire. And unless you starting lighting cigars with $100 bills your mindset will lead you to financial success, now and in the future.