You are likely in one of two groups; retired or still working. If you are still working, hopefully you feel reasonably confident in the stability of your paycheck. A stable paycheck allows you to continue living your current lifestyle, save and invest for the future, handle uncertainty better, sleep better and generally feel better about life and your future than if you didn’t have your paycheck!
When you read this, it may seem obvious. Imagine for a moment, that you were told your paycheck was stopping this week. How would this change your view about everyday expenses, going out to dinner, taking a vacation, or the risk level in your investment portfolio? You would likely change your view of nearly everything, even small decisions like getting a drink at Starbucks!
It is important to recognize that a lifestyle is driven directly by cash flow, not by total savings and investments. Of course, having a bigger pile of money provides greater resources to provide cash flow. However, my financial industry (and most consumers) will tend to focus on building a large pile of money (Accumulation) instead of building a healthy retirement paycheck (Cash Flow)! If you are already retired, you know exactly what your monthly income is.
This brings me to my key point. Whether working or retired, you know what your income is, and your lifestyle is built around this number. This is your lifestyle paycheck! As a retired person, you will want to be confident in your lifestyle paycheck. If you are confident in your cash flow, then inevitable stock market fluctuation is less scary.
At PCA, our retirement income planning process is sophisticated. I use a metric called your “Income Stability Ratio” (ISR) which measures how much of your retirement income, desired over your lifetime, is guaranteed versus being dependent on stock market ups and downs. Your money psychology in retirement will be very similar to when you are/were working. As a guideline, we target at least a 75% ISR in retirement. Therefore, clients can feel comfortable and confident in their lifestyle and then use their pile of money for large purchases, special vacations and unexpected events, etc.
Quality financial planning for retirement begins with what matters most to people who are retired. A steady lifestyle paycheck without having to go to work!
Steady paycheck = better sleep. When wasn’t this true in your life? This will be true until you leave this earth. Lastly, I’ll leave this question here for you to consider…….when you do leave this earth, who gets to spend your pile of money not spent on lifestyle?
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