Money Management skills deficiency
Let's talk about money
Money, money, money...
It's a rich man's world... (ABBA)
Let me ask you, man, did your parents teach you how to handle money? No?
You will be surprised that not so many people answer "yes". And this is a problem.
My daughter-in-law used to work as a mortgage loan officer during the real estate boom. Being only 27 years old, she was making $100000+ a year - thanks to good commissions. When it came the time to get married, she barely had $4,000 in her savings account, not to mention 5-digit debt on two credit cards.
Where in the world was her mind when she was spending money on expensive gifts, cars, and vacations and not thinking about her future?
Facing her problem at some point, I had to spend two evenings explaining to her the basics of money management. Her dad has never spent time teaching her. And she could not get any knowledge about money in the school.
No wonder that 40% of baby boomers have saved a dreadful amount of money that is not enough to support their lifestyle during retirement years.
I will give you several tips for money management for soon-to-be retirees.
I will also get to the money issue for younger men in future posts.
The toughest question every retiree is faced on how to not outlive his money.
Instead of calculating your possible expenses, let's start from the beginning and see how much guaranteed money you will get every year from different sources.
The total divided by 12 minus taxes will give you an idea of how much you are allowed to spend every month, and not even one cent more.
There are two main sources of income:
1. Social Security payments
2. Your personal saving and investments.
If you have been wise enough, you may have the annuities or/and some real estate income from renting out your secondary property. Your saving or investments may generate some income, too. I will write later about what kind of investments you may choose to generate more income than you will get from CDs or Money Market account in your bank.
To calculate your guaranteed income from your saving and investments, AARP suggests a simple formula.
Add up a current value of your spendable assets such as bank accounts, mutual funds, stocks, and bonds and subtract from that total a cash cushion to cover near-term expenses. Then take 4% of that remains.
The result will indicate the "safe" amount of your assets that many financial advisers still say that you can afford to spend during your first year of retirement without the risk of running out of savings.
In each subsequent year of retirement, take the same amount of money plus increase got inflation. This way, you might preserve your saving for about 30 years.
Add that 4% amount to your annual guaranteed income, like from Social Security. It is a safe amount of money you can use for living expenses including any taxes.
I have been reading several articles on that issue, and found that some financial gurus disagree with this "4% rule".
I don't want to confuse you but this rule has some flaws and variations depending on your investments.
You may, for instance, begin withdrawing from 4.5 to 5.5% if 60% of your money is invested in stocks and you are willing to cut 10% of it during the market fall.
However, if you are not comfortable with the stocks and prefer more safe investments like bonds and CDs, then even 4% withdrawing could be too high, and the safe amount would be only 3%. This is because the stocks return substantially more than bonds or CDs in the long term.
My take on assets allocation is more contrarian because there are many special types of investments that can generate more income. One can contain the mix of several types of investments - not only stocks and bonds.
If you have 7-10 years before retirement, be wise and diversify your assets. Save as much as possible.
Here is my article about annuities. You should spend time and read about them to get familiar.
Annuities provide guaranteed lifetime income but you have to know how to invest properly. It is critical!
Be wise, man!
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