This is a guest blog post from Howard Polansky of Cash Flow Coach.
I consume podcasts more than any other media. I am subscribed to WAYYYY too many and have to listen to them at 1.6x speed to not get too far behind. One podcast I truly respect is Radical Personal Finance by Joshua Sheats.
Joshua is a husband, father of four, in his mid-30s who walked away from the traditional financial world and has taken his family all around the world to be a global citizen. He is highly intelligent, sometimes way too verbose, but has done something so elegantly simple. He has explained financial planning in 10 words.
What are those 10 words?
- Maximize Income
- Minimize Expenses
- Protect the investments
- Optimize Lifestyle
Now there are a tremendous amount of nuances within these 10 words and five steps, but you can’t make financial planning any simpler. Most people focus on #1 and #3, maximizing income and investing. I focus on #2 and #4, minimizing expenses and protecting investments, but especially #2. Let’s run through why.
Financial advisors focus on the 4% rule. Of your assets that do not provide consistent cash flow, it is reasonable to assume that you can remove 4% of that money every year and the money will not run out during your retirement years. So, if someone has $1,500,000 saved for retirement, with a high degree of probability, one can take $60,000 a year from those assets and the assets will not run out.
The way I like to phrase it is financial advisors like to play offense. What assets do you have? Let’s try and grow the assets bigger!
But Bear Bryant, the famous Alabama football coach, stated, “Offense sells tickets, but defense wins championships.” If one only focuses on offense, then you’ll never win the game.
But how does one play defense in the financial world? It’s about looking at expenses. Like I mentioned in my previous article regarding auditing expenses in business, you can look at expenses in your personal life too and see what is not necessary. But what if you could make a really big shift on your expenses, like some of my clients do? If that’s the case, retirement becomes much more attainable.
Let’s put some numbers to this. Since I was a dentist, I have heard some dental-specific financial advisors say the average dentist in their client base spends $17,000/month to live. That’s $200,000 per year for living their lifestyle.
We go back to the 4% rule. For that dentist to live a $200,000 per year lifestyle, that dentist would need to amass $200,000/4% = $5,000,000 in assets [dividing by 4% is like multiplying by 25] to keep the same lifestyle in play for retirement. However, that 4% rule was done in the 1980s when interest rates were much higher. So I’ll tell people you should multiply by 30 to be safe. So our dentist should really have $6,000,000 in assets to feel comfortable.
Remember, this is only looking at playing offense. What if we played defense? What if we could live the same lifestyle, but we figured out a way for it to cost us less? If our $17,000/mo lifestyle could and should really only cost us
$12,000/mo x 12 months = $144,000 yearly
$144,000 annual budget x 30 = $4,320,000 in assets to live the same lifestyle in retirement
By living the same lifestyle, but rearranging the expenses so our life costs less, we could be $1.68 million dollars closer to the goal of retirement. I haven’t found a financial advisor yet that can guarantee they can get you that far ahead financially by focusing on just investing. But it can happen when you focus on managing expenses.
Your one action step is to figure out what are your annual expenses. Multiply that number by 30 and that lets you know if you are on track for retirement or have to make a change, maybe a serious change, to how retirement is going to look.