The following article is from Mike, our staff writer.
How will you know when you’re financially ready to retire?
Most people don’t give that question much thought at all, but as readers of RB40 I’m going to assume you’re a little more financially savvy than the average Joe on the street. Perhaps you’ve already sat down and come up with an estimated amount you need to save in order to retire safely using the four percent rule.
If so, that’s great! You’re already way ahead of most people and you’re at least beginning to map out your plans for retirement.
But today I’d like to introduce you to a different way of thinking about your retirement savings. It’s an idea that was popularized by my fellow blogger Todd Tresidder in his book How Much Money Do I Need to Retire? Reading Todd’s book made me rethink my own plans for retirement and it might just do the same for you.
You see, the problem with traditional retirement planning is the sheer number of unknown variables which can wreck havoc on even the best laid plans.
For example, let’s say you use a traditional retirement calculator to figure out how much money you need to retire and it says you need exactly one million dollars. Your plan is to withdraw a certain percentage of your assets each year and according to your calculations that million dollars will last you exactly twenty years (I’m using round numbers here to make the example simple).
But despite your best planning, any number of things can go wrong. The stock market could crash two months after you retire. If your million dollar nest egg is suddenly only worth a half million dollars, you’d have to significantly reduce the amount you can safely withdraw each year. Alternatively, you could live well past the twenty years you had estimated. Outliving your money could mean spending your final years in poverty.
In his book, Todd lays out a blueprint that includes a new way of thinking about retirement, one that focuses on cash flow instead of asset values. Rather than focusing on accumulating the most assets with the intention of slowly selling them off, you focus on creating new revenue streams that can support your retirement without requiring you to sell off any assets at all.
Ideally you’ll be able to develop multiple income streams to protect yourself in case one of them dries up. You’ll also want to build income that will grow over time to keep up with inflation. Here are a few suggestions for income streams you can build to support your own retirement:
Stocks that pay dividends. Look for reliable stocks like the Dividend Aristocrats. These companies have established a long history of not only consistently paying out dividends, but also increasing their dividend payout year after year.
Rental properties. While being a landlord has its challenges, you’ll be able to raise rent to keep up with inflation. Plus, with some luck rising real estate prices will increase the value of your property too.
Business ownership. The key here would be to own a stake in a company that doesn’t require much oversight on your part. Becoming a silent partner or owning a business where most tasks can be outsourced or managed by someone else will provide income without draining you of your precious time.
If you can manage to build enough income streams to live off and also have the ability to increase the payments those streams throw off to keep up with inflation, you’ll never have to worry about outliving your money. You can retire with piece of mind knowing that your income-generating assets will support you indefinitely.
I also think it’s better to focus on the cash flow rather than the lump sum. Personally, I became much more aware of how I spend our money when I track our monthly expenses. Part of that is tracking our various passive income and it’s great to see how much closer to true financial independence every month. However, it can take a very long time to create enough passive income to cover your monthly expenses. That’s why I’d like to add a couple more things to Mike’s list above.
Creative income. This is really important if you plan to retire early. Most of us won’t be satisfied with an idle retirement at such a young age. If you can make a little income doing something you enjoy, then you’ll be able to put off withdrawal. It’s more fun to create something than just lounging around all day anyway. The income generating assets in this case is your creativity.
Royalties. Of course, if your creations are well received, then you might be able to generate some residual income from them. You can write books, make music, shoot great photographs, or create great works of art.
Are you working on your income streams for retirement?