Gails Blog

How worried are you about retirement? I’ve been getting quite a few questions recently from people who are at or approaching retirement and I think there are more than a few things wrong with how people are going about this.

First there are the people who plan to go into retirement with debt. Really? You couldn’t get your consumer debt, your car loan, your mortgage paid off while you were working, so you think you’ll be able to do so when you’re not? Hmmm.

It used to be a Golden Rule to have all your debt paid off by the time you moved into retirement. That included your mortgage. Then people started saying, “Well, I have to live somewhere, so if I have a bit left on my mortgage, what’s the big deal?” I don’t have a big problem with this, assuming you have the retirement income that isn’t gobbled up by your housing costs. But many people don’t. And yet I get letters from people who, instead of trimming their housing costs for retirement, are planning to increase the debt on their homes just when their incomes are falling drastically. They write me because they’re not sure how to manage this. Well, you CAN’T! It simply makes no sense to increase your overhead when your cash flow is shrinking.

Then there are the people who plan to come to a grinding halt on the work-front at some previously chosen date, be it 65 or earlier, simply because they want to stop working. Early retirement is a huge dream for many people. And yet they’ve done very little in the way of asset accumulation or income projection.

Y’all do realize that we’re living longer, right? At the beginning of this year, the Stats Man reported that life expectancy had hit 80.4 years, with chicks eeeking out four years more than dudes. Of course, since you weren’t born in 2005, which is the birth year this report is based on, you may croak a little earlier (or later, depending on your fam’s history). The point I’m trying to make here is that if you retire at 65, you still have 15+ years to feed, clothe and house yourself. If you retire earlier, you put even more of a strain on your savings. So you better do some income projections to see just how long the money will last. And don’t forget to figure in the impact of inflation.

Next there are the people who haven’t, even for a second, considered setting aside some money for the future. They are so busy having a great time right now, that the future… well… it’ll be fine, just fine. Heads up people. While government pensions may be enough for those people in the lowest income bracket, for many others it just will NOT be enough. If you haven’t looked at how much you’ll receive from social security, then you should. And if that doesn’t scaring you into setting aside a little something for the future, I don’t know what will.

Here’s the thing: the earlier you start saving for the future, the less money you have to take out of your cashflow because the longer you put the Magic of Compounding on your side. Start in the 20’s and you can get away with saving as little as 6% of your income. Wait until your 40’s and you’re going to have to sock away 18-20% . Yah, time does make that much of a difference.

You can go into retirement with your eyes closed and your fingers crossed behind your back and hope for the best. Hey, if that’s how you’ve done life so far, you’re probably pretty good at it by now. But if you get there and find you’re subsisting, don’t whine.

Another alternative — some would say a better alternative — would be to take a realistic look at what you may need for retirement, how much you think you’ll have, and what you can do to close the gap if there is one.

And for heaven’s sake, make sure you’re debt free before you get there. Spending your limited resources paying for crap you bought on credit should be the last thing you do.

So, are YOU worried about retirement? Do you even think about it? And what do you think when the idea of coming to the end of work pops into your head? If there are things about retirement you’d like more information on, post your questions on this blog and I’ll get to work on some answers for you.

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I was listening to my make-up artist, Natasha, and DOP, Adam, talking about how to manage their variable incomes. Adam is a freelancer and always has to be sure he’s got a cushion in case the bottom falls out of the camera-guy-world. Tasha is starting her own business – she a terrific clothing designer. They both have to deal with unreliable incomes and all the stress that goes with.

Whether you’re a contract employee, a freelancer, working for yourself, or working on commission, one of the biggest challenges you face is Feast-Today-Fast-Tomorrow Syndrome.  One month you do really well, have enough to plan a holiday, build a deck, buy some new clothes. The next, you’ve barely got enough to make it to the 30th without racking your cards to the max.

Working with a variable income isn’t as hard as people think it is. You can still make a budget and stick to it. You can still have the things you NEED and the things you WANT. You have to have a PLAN.

First, you need to set your salary and live on it. If your work efforts bring in $2,000 one month and $6,000 the next, and you think of all that money as spendable, you’re going to run into trouble, it’s only a matter of time.

Smooth out your cash flow by deciding what your minimum monthly income needs to be to keep body and soul together. This is your Salary. No matter how much money you bring in, you’ll only transfer this amount into your Household Account for spending. The rest stays in your Biz Account. Then, in a month when you haven’t billed as much as normal, you’ll still have a whack of cash in the Biz Account so you can transfer your Salary to your Household Account.

To figure out your Salary, do up a budget that covers all your basic monthly costs: food, housing, transportation, medical, and the like. The we-can-live-without-it items like clothes, toys, and partying don’t make it to this list. However, savings and debt repayment do. And don’t forget taxes. Your second-tier budget needs like home maintenance, clothes, entertainment should also be part of your Salary, but with the proviso that if the going gets tough, these spending categories get going!

Now you could have a big fat monthly total if you’ve weighed yourself down with big fixed expenses - like that $800 a month car payment or a home that’s way too much for your wallet. Ditto if you’re carrying tons of debt. But I’m going to assume for the purposes of this discussion that if you have those things you can pay for them. (If you can’t, this may be the time to reassess your priorities.)

Next, you need to build up your just-in-case fund. The standard recommendation for an emergency fund is to have three months’ income or six months’ worth of essential expenses covered. Aside from the typical reasons to tap into your emergency fund — to pay for a car breakdown, unexpected home repairs or a root canal — you also may need to dip into it in when you’ve gone a few months with no work and have run out of money in your Biz Account.

I use the term “run out of money” advisedly. You should never have NO MONEY in your Biz Account, since the business itself has overheads you must cover: telephone costs, car payments, equipment lease costs, and the like. You should always maintain a minimum of six months’ worth of business expenses -– your Business Buffer — in your Biz Account. When you drop to that amount, you stop pulling your Salary so the business can stay afloat. That’s when your personal emergency fund will really pay off.

Remember you also have to save for the future. Since you’re self-employed, if you’re not socking away retirement savings, you’ll have a pittance when the time comes to stop working. Estimate that you’ll need 70-80% of your current income each year in retirement to set your retirement nest-egg goal.

When business isn’t booming, resist the urge to cut back on savings. Cut back on spending, but keep your savings intact since you will need them later. And stash the amount you’ve decided to save in a retirement account monthly using an automatic deduction.

Make sure you also fill the gaps in your safety net. As a self-employed person, you need to have both disability and (if you have dependents) life insurance. Base the amount of insurance you buy on what it’ll take to cover your basic expenses, keeping in mind that some disability policies replace only up to 60% or 70% of your earnings per year.

Use gravy for other goals. Whatever you have in your Biz Account — your Business Buffer and earnings beyond your Salary – should be invested in a high-yield account.  If you’re doing very well financially, you can now decide what other goals you want to accomplish (like the deck, a vacation, or a shopping spree.) Build or replenish your emergency fund if you’ve dipped in, and pay down your debt.  But you should also have some fun.

Being self-employed brings loads of terrific benefits along with some very interesting challenges. I’ve been self-employed for about 30 years – some lean, some luxurious. And I wouldn’t swap for one minute the flexibility self-employment offers, no matter how hard I had to work when things were busy. There was one period where I worked 17 hours a day, 7 days a week for about six months. I literally rolled out of bed and to my computer, rolling back in to sleep. I had no life. I made a LOT of money. And a good thing too. Because when it came time to have my kids, because I was self-employed I wasn’t entitled to any mat leave benefits. But I had a whack of cash set aside. See what you can do with a plan?

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