Yesterday we discussed how to calculate your personal net worth, what it means and how it relates to your retirement number. I also mentioned that when you calculate how much (or how little) income your net worth may generate, it could be depressing.
As I said, many people run the numbers only to learn that they need a net worth of $3, $4 or $5 million in order to retire. For most of these people, saving that much (even over 20 or 30) feels like a gargantuan task far beyond their abilities. If that describes you, don’t head down to the pharmacy to up your anti-depressant prescription. The reality is that your net worth isn’t all that important.
That’s right. Retirement is all about cash flow – not net worth. This point was brought home recently when I interviewed a woman with a net worth of over $6 million. You might think that a person worth so much would have no financial problems what-so-ever. But she was really struggling. That’s because she wasn’t earning anything on her investments. Instead, she was spending her assets down. As a result, she was scared.
How could she be earning so little? Easy. A big chunk of her net worth was in real estate that wasn’t earning any income. That’s because she operated her money-losing business in that property. And because she was losing money in her small business, she had to use the remainder of her assets to live on.
If you want to grow your nest egg it’s important to squeeze every bit of interest you can out of the banks. EverBank is one company I think you should consider. They pay more interest (even on checking accounts) than just about anybody else.
You might not share this woman’s problem, but I hope her situation illustrates the fallacy of focusing on net worth. Instead, you should keep your eyes on the prize – which is cash flow. So how do you maximize your retirement cash flow and make net worth a non-issue?
1. Social Security
There are various strategies you can use to squeeze more out of Social Security for you and your spouse. This is very situation-specific of course. Take some time to map out a Social Security benefit plan. You might really cash in by suspending your benefits (depending on your specific situation). The point is you might be able to generate a heck of a lot more money out of Social Security than you think if you investigate and do the right planning.
2. Part Time Work/ Side Business
Just because you stop working full-time, it doesn’t mean you have to stay home and watch Oprah re-reruns. If you run a mini-plan and determine that you’re going to need to supplement your retirement income, why not consider getting a part-time job or starting a side business? There is nothing wrong with doing that. And think about it this way. If you earn $30,000 in side income, that’s like having an extra $1,000,000 in retirement savings. How do I derive that number? Well….if you could earn 3% on your money, you’d have to invest $1,000,000 in order to generate $30,000. This gives you a new appreciation for the value of a side job or business I hope.
If this idea resonates with you, why not start looking into this now before the ax falls?
Of all the elements that make up your financial story, you have most control over your spending. If you could trim $600 a month, that’s $7,200 a year. Do you know how much you’d have to invest at 3% in order to generate $7200? Try $240,000.
What I’m saying is that if you can shave $600 a month from your spending – $20 a day – it’s like saving an additional $240,000 for your retirement. Makes you re-think that latte…..don’t it?
Start tracking your spending now in order to get in front of this issue. If you do so it will be easier for you to make the right decisions and put your spending on a diet now while it’s easier to do.
You may not need to do any of the above if your investment portfolio is large enough – and you invest it appropriately for retirement. The woman referenced above had plenty of money. She only needed to re position her assets in order to make sure they generate the income she needs.
If you are intimidated by a huge “magic number” for retirement, reconsider. You may not need to worry. Think about (and plan) your retirement cash flow. You may find that you are much closer to achieving your goals than you think.
What is your “retirement number”? Does it matter to you? Why or why not?
Neal Frankle is a Certified Financial Planner with more than 25 years of experience, author of the Wealth Pilgrim blog, and a featured contributor here on the “CIF Blog”!