Retirement is never urgent until...

If you’re like many people, your retirement savings have not been growing consistently over the years. We’re not referring to the wild fluctuations in the stock market, but rather the fluctuations in our short-term needs. Every once in a while, it just seems like a good idea to yank ALL those retirement savings out and pay for something.

You might need to pay for a down payment. You might need to pay off some credit card debt that’s nagging at you. You might want to ‘bugger off to Europe’ as Rick did some years ago. You know it’s not a good idea financially, but you do it anyway. Retirement savings are not designed to bail us out when we need this kind of short-term cash infusion but if it’s there…

As financial advisors, we have our ideals. Ideally, you should put retirement funds away and ‘leave it there’. Ideally you should never touch it at all, even when you retire! Why? Because it is the ‘earnings’ from the nest egg that you should be using, never the principal. As we heard one person suggest recently, your principal is like your ‘goose’, and you never kill the goose, because then you’re eliminating all those future ‘golden eggs’ (interest/earnings) it will lay.

As financial advisors, one way we try to prevent people from yanking out their retirement savings is by ensuring there are other ‘short-term’ funds available for emergencies. These are meant to act as a buffer zone against the yankers. It helps, but it doesn’t always work.

One problem is that a distant retirement will never be more urgent than the current cash demands you have. It’s impossible. How can long-term demands be more urgent than a current crisis? So what stops you from yanking out those retirement funds? Their convictions? Simple arithmetic? A more viable alternative?

When a client is bent on yanking out their retirement savings to pay off, for example, some credit card debt, telling them how much they’re going to lose in retirement income in 25 years time doesn’t seem to work. Even telling them how much the tax bill is going to be next year can pale in comparison to the relief the person is seeking from the anxiety over their current debt crisis.

So, the question is how can we provide ‘relief’ and still keep the retirement funds intact? Look at a debt consolidation loan? Review the person’s cash flow and create a debt repayment program? Maybe this will work for a minority of people. In the real world, when people are looking for relief, however, they are looking for relief NOW!!! The easiest way is to yank to retirement funds and be done with it.

So, in the moment, when you are in a cash crunch and seemingly have no other place to go, you will yank your retirement savings. Unless you have anticipated the problem and ‘pre-decided’ that under no circumstances will you access your retirement savings. In this way, you will do a pre-emptive strike on bad financial moves. Further, you will be cognizant of putting yourself into situations where you might risk those long term savings.

The alternative is to invest long-term, make progress, encounter a short-term cash crunch, yank out your retirement funds, survive the problem, invest long-term again, make progress, encounter yet another short-term cash crunch, yank out your retirement funds to get relief…

If you’re locked into an investment cycle like this, your retirement savings have not been growing consistently over the years, and it’s not just the market.

Rick Hoogendoorn has been in the financial services business since 1991. Cheri Crause is a certified financial planner in Victoria, BC. .
www.chericrause.com
rick.hoogendoorn@shaw.ca

In the past most people never retired. They died. The average life expectancy was much less than it is these days, and there were no financial planners around to help people save up enough to quit work. As recently as the 1960’s, if you did manage to save up enough money to retire, you’d be lucky to live another 5 or 6 years before you kicked the bucket. This made financial planning for retirement a little easier because you really only needed enough income for a few years.

Nowadays, if you retire, chances are you can live forever. Well, it can seem like forever…especially if you haven’t saved up enough money. It is a daunting task, attempting to set aside enough money to supply an income for 25 or 30 years, in the 15, 10 or 5 years you have before you retire. We say this because most people don’t get really serious about their retirement planning until they hit 50…and realize they had wanted to quit work at 55!

This is the standard model that has been followed since we began living long enough to bother with retirement savings. You set aside enough cash to cover things off at some future distant time. You build the nest egg and then hope it lasts, and the financial planning community is right there to help you. And yet this is not how the most successful people in our community do things at all!

Still, most people are busily trading their time for their money. As an employee, you are limited by how much time you can actually devote to your job, and you are limited by how much time you want to devote to your job. Time you give to your workplace is time you don’t get for yourself. It’s similar for self-employed people such as our selves. The more successful we are as financial advisors, the more ‘in demand’ we become, and the less time we have.

Retirement looks pretty good when you’re an employee, or a self-employed person. You’ll have the money coming in, and the time for yourself. The problem is that it is an awful long way off. Is there another way?

The first time Rick read ‘Rich Dad, Poor Dad’, he just got irritated. After all, this was the book that pointed out how he was locked in the self-employed cycle where success leads to less free time. And he likes his free time. However, author Robert Kiyosaki also proposed ‘an out’. It’s called passive income. Passive income is income you have coming in to the household that you don’t really work for anymore. The key is that it is designed to happen in the near future instead of the distant future.

Since reading his books we have begun to change our financial plan. Instead of continuing to organize our finances around future income for a distant ‘retirement’, we are re-orienting things toward near-future passive income and ‘financial freedom’. We have been doing this by purchasing income-producing real estate and by looking to start internet businesses.

The success of our new ‘passive income’ plan remains to be seen, but it is interesting to note how changing our end result from retirement to financial freedom has completely altered the path we’re taking. These two goals are NOT the same. When you build a retirement nest egg you are looking to draw an income from it at some future time. When you are looking to attain financial freedom, you are looking to purchase or create assets which provide you with ‘passive’ income right away.

Should everybody be changing their financial plan? Of course not. For one thing, many people hate the idea of being landlords, and many others don’t have the stomach for business, let alone the technology business. Retirement planning is still needed. RRSP’s, mutual funds, and other longer term savings programs still have their place. There will always be employees and self-employed people who rather like what they do and are quite okay working until their retirement age.

All the same, if you are wondering if there might be a better way to ensure your future financial wellbeing ‘sooner’, perhaps you should pick up a copy of ‘Rich Dad, Poor Dad’… and get irritated. Either way, it will probably turn out better for you than it did in the past.

In the past most people never retired. They died.

Rick Hoogendoorn has been in the financial services business since 1991. Cheri Crause is a certified financial planner in Victoria, BC. .
www.chericrause.com
rick.hoogendoorn@shaw.ca