Recently, I’ve had a few opportunities to talk with young couples and individuals who are financially “starting from scratch.” Much of what we do for our current clients is more advanced: properly balancing portfolio risk, looking for efficiency in how income is taxed, and – of course – aligning resources with deeply-desired shared values.
It is wise to occasionally go back to basics. To remind yourself of the foundational concepts that drive success in life. This review is not only helpful to you, but it’s also necessary prior to offering advice to your kids or others who are starting at the beginning.
The core concept I want to examine comes from a financial truth that we all fundamentally understand. There are only two things you can control – what you earn and what you spend. And in most cases, we have more immediate control over what we spend.
Because $50,000 raises don’t grow on trees, employed people who wish to reduce financial stress usually do it by spending less so they can save more or pay off debt. There is a temptation, however, to believe this rule no longer applies in retirement.
The truth is retirees can remain “debt free” and still find themselves in hot water. We see this happen when people start taking more “one time” or “special circumstance” distributions than originally planned for. But extra distributions are loans – they’re loans against your future income and are often never paid back.
Your investment portfolio can only produce so much income safely. So if you want a raise to accommodate higher spending, know it doesn’t come for free. There is no way I know to increase returns without also increasing risk.
Inflation has done a number on our expenses over the last few years. We all feel it. It can be really easy with good markets to increase our distributions to offset this additional cost. And because returns are typically not steady, it’s difficult (especially in a good market) to see the long-term damage extra distributions can cause. But just like when you were working, it’s harder (and potentially riskier) to increase income than it is to adjust expenses. Living within your means as a retiree means living and spending within the constraints of your portfolio.
If it’s been a while since you really looked at how you have aligned your spending with your resources AND your values, let us help!