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Main Street Money: Input vs. Income

When you think about your money, what do you think about?

Do you think about your investments? Do you dwell on asset classes and allocations? Do you think about all the money you’ve made in the market, and all the money you still plan to make? Do you think about risk classes and sectors?

Or do you think about running out? Perhaps you are hoping against hope the market won’t crash again, or that inflation will stay low, or interest rates will rise so you can go back to CDs? Or maybe you’re worried about taxes, or concerned about costs of health care?

The reason this is so important is outcome. If you begin this whole process by thinking about how your money is invested, everything else will flow from that. For example, if you have most of your money in mutual funds and bonds, chances are your thoughts and plans are influenced by the possibility of a market drawdown. You might be hypersensitive to spending money. Not too long ago, I had a client come in and tell me he was taking his whole family, including grandchildren, to Paris for his 50th wedding anniversary. That’s where he had his honeymoon. I love Paris! We got to talking about our favorite things about it. Pretty soon, I realized I was doing most of the talking, so I said to him, “Fred (not his real name), it seems to me I am more excited about this trip than you are. Why is that?”

His reply was, “Steve, you have to understand. To afford this trip, I had to pull a bunch of money out of my 401(k). Now I just feel way poorer. It’s hard to get excited about the trip.”

Do you see what I mean? He is so caught up in the size of his nest egg, he can’t really relax and enjoy something that should be a peak experience for his entire family. And Fred isn’t a poor man. He has more than $3 million in his investments. When I asked him about that, he said he was worried if the market declined substantially at the wrong time, he might seriously have to curtail his lifestyle.

Here’s an idea, something I encourage my clients to do. Think about what you want your money to do for you. Think about how you will use it to take that grand vacation you’ve always wanted. Or perhaps traveling across the country to visit the grandchildren. Or maybe even helping those grand kids through school. Perhaps, you are charity-minded and would like to help some local kids; one of my clients set up a scholarship program for deserving kids in his community. Whatever floats your boat. Start with that.

In the case of Fred, he wants to enjoy his retirement. He’s a robust and healthy 75-year-old with a house on the lake and a home in an upscale neighborhood. He’s involved with Rotary and likes to travel. He has six grandchildren, and he’s started a college fund for each of them. He likes to play racquetball and tennis and has always wanted to hike the Appalachian Trail. He does these things, but he’s always worried.

The reason he’s worried is his investments don’t line up with his lifestyle. We find this is often true of people who begin the planning process thinking about the money, rather than the needs and desires. So, we flipped the picture. We started with the role of his money rather than the

allocations.

Ask yourself, what are the things you want from your money? I can think of three broad categories. The first is liquidity. I want to make sure I have enough for emergencies and big purchases without having to worry about market losses. Nothing is worse than being forced to sell depressed assets to cover an emergency. Make sure you have enough in the bank to take care of things that come up unexpectedly. OK, that’s straightforward enough, but what should that money look like. What are its attributes? Well, liquidity and availability. What about growth? Are you concerned about this money growing? What is a necessary component of growth? What is the bottom-line requirement? Can you just put your money in a safe somewhere and expect it to grow? No. Growth requires risk. Do you want to have your liquid money at risk? I think not.

For that, you have your growth money. This is money that’s invested. Investments, if handled properly, may offer a substantial amount of growth. But they also impose a lot of risk. Risk that is tied to nothing in your control. Risk that is defined simply as the amount of money someone else is willing to pay you for your holdings. It is entirely unpredictable, often unmanageable, and will most certainly not present itself when convenient to you.

The third thing you want from your money is income. What do you want from your income? I want it to be predictable. I want it to be steady. I would like it to be enough to cover my expenses. I would like it to be regenerative, in other words, new money each month, rather than spending down my nest egg. I want it to be regular, steady, and reliable. And I want it to be durable. I want it to last the rest of my life.

Most people who come in to see us have taken care of the first two. Most understand the need for liquidity and have money in the bank. For the vast majority of the people we see, the rest of their money is in mutual funds or bond funds. Question, which part of steady, predictable, reliable, and durable can you get from the market or the bank?

So, we need something else. We need a retirement income generator. One that pays out a robust amount of income on a regular basis no matter what the economic conditions are. An income stream that will never let us down. Renewable while we and our spouses are alive.

Do you see how that works? When you focus on inputs, they will rule the outcome. When you focus on the outcome, the inputs will become obvious.

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, he services Greater Boston and the New England areas. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com.