As you near or enter into retirement, you are faced with a multitude of financial decisions: Do I stay in the stock market? Should I purchase an annuity? What is the best thing to do with my 401(k)?
Consider for a moment what your thought process is when deciding whether or not to purchase an investment. When it comes to retirement planning, there are a lot of people out there telling us what we should be doing with our money, but not a lot of people give solid advice about how to think about your money.
Where You Have Been
What you think about money changes what you do with your money. Click To TweetDuring retirement, you need to look at your money in a whole new way. Most people neglect this shift and continue making money decisions the way they used to, during their working years. They invest under the mindset of the old paradigm and what often results is financial devastation that could have easily been avoided.
I define money as a tool designed to serve. During your working years, the job of your money is accumulation. You choose investments structured for maximum growth. You take advantage of tax-deferred investments, the Rule of 72 and compound interest. Your money decisions are based on the goal of saving and growing as much as you can in order to meet your long term goals. Now consider this: during retirement, the goal of your money changes.
Where You Are Going
During retirement, your money’s job is to support you. Its goal is to last as long as you do so you can continue to pay the bills, travel and do all the things you’ve been dreaming about doing during retirement. If the job of your money changes, shouldn’t, too, the investments?
As the saying goes, if you want different results, then you have to do something different. To avoid risk to the longevity of your retirement income, you need to look at your money in terms of what it can do for you. What I advise is a shift to a whole new way of looking at your money.
Making the Shift: Accumulation vs. Utilization
As we get closer to the retirement or even closer to the achievement of our long term goals, we need to shift our thinking completely from the old paradigm focused on accumulating money to the new paradigm focused on its utilization. This supports my earlier definition: money is a tool designed to serve. It should never be given more importance than the people it was designed to help, but it should be carefully evaluated in terms of how it can help.
Money during retirement has to do a lot of things:
- It has to pay the bills
- Take care of your health
- Provide your lifestyle
- Support your goals and dreams
- Take care of your grandkids
- Take care of your spouse
- Leave behind a legacy
With all of these important jobs to do, making the wrong decision now could mean something important gets neglected. Now, when you make your investment decisions, start out with knowing the following:
- How much do I need to pay the bills?
- How much will support my current lifestyle?
- How can I provide for my spouse?
- What are my plans for long-term care expenses?
Once you have identify the numbers you need, your next step is to look at your investment decisions not in terms of how much money you can accumulate, but it terms of how well it meets these currents goals.
For example, if an investment earning 6 percent with a guaranteed principal will allow you to meet your monthly obligations, then you would get out of the investment with the potential to earn you 12 percent and lose you 30 to 40 percent.
Doing this is what I call making the shift from accumulation to utilization. It’s the foundation for macroeconomics – looking at money in terms of the big picture – and it’s the foundation of sound money decisions that can lead to your RichLife.
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