I realized that making a statement like I did yesterday could be a lightning rod for criticism. I thought it must annoy those struggling to get by in a tough economy. I prepared myself for the worst, but I didn't get any negative comments. That was refreshing. I hope that people were using it to think and talk about personal finance... specifically about planning ahead.
Planning ahead for retirement is more important now than ever. Study after study, year after year, we are learning that people don't have enough money saved. Even people making a lot of money don’t have enough to retire.
I hope my retirement income plan serves as an example of what happens when you are mindful about your finances. Many will say that I'm lucky, and I won't argue. However, I've found that good luck has a way of following those who have prepared well.
The first thing you can learn from my post yesterday is to marry well. I had a friend that told me I had to point that out. I don't know if she was kidding or not, but she was exactly right. If you choose to marry a significant percentage (perhaps more than 50%) of your financial well-being may be dependent on your spouse.
While there were 5 significant retirement income streams detailed in yesterday's post, my wife's military pension was the largest. I imagine many readers are probably complaining, "But I don't have that and I can't possibly duplicate that." Rather than look at that glass as half empty, I hope you can look at what you do have and what you can do within your set of circumstances.
There's a lot more than the military pension in yesterday's article. If you focused on that, you may have missed out on the following lessons:
Financial Knowledge is Important
Before we met, my wife wasn't contributing as much as she could in her Thrift Savings Plan (the military version of a 401k plan). Even though she was 27 and decades away from retirement, it was in a stable value fund instead of a growth fund. She had some after-tax money tucked away in some mutual funds, but they were funds with high expenses.
She wasn't very interested in optimizing her finances. She felt she earned enough... and she does. However, a few financial moves we made really helped makes a very, very big difference.
To illustrate her financial state, I remember her telling me a story fewer than 10 years ago. She had seen a friend's bank stub and was amazed that it had an unfathomable $15,000 in it. In that time we've come a long, long way.
Frugality is Critical
It may not seem obvious, but living a frugal lifestyle has been critical to putting us in the financial position we are in. For example, if we had large car payments and a huge mortgage, we wouldn't have had the money to buy real estate investment properties. Being frugal allows us to max out our retirement accounts (401Ks, Roth IRAs, etc.) and build a nest egg that we can draw down in retirement.
Without having control of our spending, none of this possible.
You Can't Forget Compound Interest
We started early to create that nest egg and compound interest has really helped it grow. It looks like the income that we'll be able to draw from it could be as much as the military pension... over $50,000 a year in today's dollars. That alone combined with a frugal lifestyle could be enough to fund a decent, maybe not spectacular, retirement.
Taking Advantage of Your Opportunities
When opportunity knocks are you in a position to answer the door? We bought two of our properties after the housing market crashed and interest rates were historically low. This big win might have been worth hundreds of thousands of dollars when compounded over a lifetime.
Diversify Your Income Streams
When you make a retirement plan at age 37, many, many things can go wrong. By diversifying our income with retirement savings, rental income, small business income, and good old Social Security, we'd have a solid foundation even without the military pension. If any one of them goes away for whatever reason, our retirement plan will be able to withstand it.
Planning Ahead and Mindfulness
Much of this boils down to just being mindful of your money and your goals. It's putting down a plan and following it. It's re-evaluating that plan on a consistent basis to make sure that you still heading in the right direction.
Next: Projecting Retirement Expenses