Humpty Dumpty Sat On a Wall
Four years ago your stock market investments were humming along and you could get 5% in principal guaranteed CD's and fixed annuities. Four years ago you had a serious chunk of equity in your house. If you were working four years ago, your 401(k) was growing and you weren't worried about your job.
In early 2008 the rough retirement income calculations you had in your head were looking good.
Humpty Dumpty Had A Great Fall
Then in 2008 and early 2009 the Humpty Dumpty thing happened to your retirement dream. Your stocks, your 401(k) and your house value all took a Great Fall. You lost as much as 40% across the board. If you are retired, the Great Fall made you seriously reassess your longer term retirement income prospects. If you are working, the Great Fall pushed your retirement date out 5 years or more. To add insult to your injuries from your Great Fall, any money you left in the stock market took another 15% hit in the past 60 days. Oh yeah, and the banks and insurance companies are paying historically low rates on CD's and fixed annuities.
Today, your retirement dreams are in pieces on the floor. You are worried more than before about outliving your money in retirement. You need to revisit your retirement income calculations.
All the King's Horses
You may derive some comfort from following facts:
a) you are not alone; millions of your baby boomer peers are in the same fix and
b) the national and global economic mess you face is the worst in living memory and
c) even financial planning professionals are dazed and confused by the current conditions
While those may be the ABC's of it, you are still confronted with the need to put your retirement dreams back together again.
And All the King's Men
Two key allies in your retirement rebuilding effort are patience and education. Patience is required because there is a lot of damage to repair and that takes time. Education is required because the more you understand what you are doing and why you are doing it the better you will feel about your prospects for a decent retirement.
Even the best financial advisors can't give you patience. A Financial Coach can give you the necessary education and coaching.
Can Put Humpty Dumpty Back Together Again
In this short piece it is impossible to give you the all the education and coaching you need to rebuild your " retirement money machine ". That process takes many hours with a caring and competent financial coach and you immersed in your current circumstances and future prospects and dreams.
Humpty Dumpty Reverse Engineered
Reverse engineering is starting with the outcome you desire and building back from that a system to produce the desired outcome. So, reverse engineering your retirement starts with your best estimate of the absolute basic living expenses you must pay for in retirement: food, housing, transportation, medical care, home and auto insurance, gas/electric/sewer/garbage/water, personal necessities, taxes, home maintenance, major appliance replacement, etc. The number you arrive at should cover all of the very basic "just living" expenses. Of course, these numbers are estimates only and most likely will change over time. Nonetheless, a good estimate of your "just living" expenses is where you start the reverse engineering of your Retirement Money Machine.
Once you have figured out your "just living" expenses you can now start to design your own personal "Retirement Money Machine". The first component(s) engineered into your Retirement Money Machine need to be, as much as possible, a fixed income stream that covers your fixed "just living" expenses. The very first fixed income components of your money machine would be your Social Security Income. Guaranteed pension income (lucky you) also should be engineered into the mix. Once you have tagged your current fixed income to your projected fixed expenses you will either have a surplus or a shortfall. The surplus is the beginning of your "for fun" money component. A shortfall needs further engineering using other available assets to, as much as possible, cover all "just living" fixed expenses with fixed income.
Having your fixed "just living" expenses covered by your fixed income stream should provide you with a great deal of comfort and start to restore your retirement dream. Then we continue the reverse engineering process by figuring our how much "fun money" you want for your retirement. Engineering the "fun money" component of your Retirement Money Machine is about risk and return and thus the topic for a future article.
Knowing your "just living" expenses goes a long way towards answering the question of "How Much Money Do I Need in Retirement?" and the Outliving Your Money horror.
Glenn M. Kenney is a Sacramento Financial Advisor with 38 years of industry experience who has helped thousands of clients plan for their retirement. He is currently laser focused on the national crisis of helping baby boomers not outlive their money in retirement by building sound retirement money machines. His website is http://www.modernportfolio.com.
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