Comprehensive financial retirement planning is an important task that too few people start and monitor. Inflation, capital market adjustments-prices of stocks, bonds, Treasury bills, and more-and financial need quickly increase or decrease the value of a retirement nest egg. Diversity of investments and monitoring progress toward your financial goal helps avoid catastrophic downturns in your retirement portfolio.
Know Your Minimum Benchmark
The first step in good financial retirement planning is knowing when you have met the minimum amount required to maintain the lifestyle you want. To determine that financial mark, use the following formula to determine your initial retirement income ratio:
(Annual Passive Income) divided by (Annual Expense) equals X.
If X is less than 1, you are not financially ready to retire at the level you’d prefer. Experts recommend additional and continued investment.
If the answer that X represents equals 1, then you have reached your minimum retirement funds threshold. You have exactly the minimum required to maintain the retirement you want-no more, no less. The drawback to an exact ratio is that you have no room for underestimation, inflation, unexpected expenses, or loss of income. To allow a cushion, experts recommend additional capital investment.
If X is greater than 1, you can currently afford to retire. Experts avow that additional or continued retirement planning is optional, so long as the retirement income ratio stays above 1. They advise that you conduct periodic checks to ensure the ratio is level or improving.
Types of Income
When planning for retirement, understand the difference between a linear income and a passive income. A linear income trades time, effort, and expertise for money. When you work, you get paid. A passive income provides funds without the trade. You aren’t actively pursuing a linear income, and income, if any, comes via interest, dividends, and real estate leases, rentals, or sales.
The benefits of passive income are five-fold:
Builds net worth: Income that is generated on behalf of no one else means all income is yours to claim. Unlike linear income, passive income means that very little or no additional effort is required of you. You have already ‘paid your dues’ and are now reaping its benefits.
Financial independence: So long as your portfolio’s net worth stays above or at your retirement income ratio of 1, you are no longer required to lower your standard of living or actively work unless you choose to do so.
Deadline freedom: The alarm clock can retire, too, if you wish it. You don’t have to allow for traffic jams, time cards, or employment-related deadlines. Only travel deadlines might apply; after all, you would still have to get to the airport on time for that flight to the Caribbean you’ve always wanted.
Multiple Income Streams: With passive income, you can pursue other income streams; linear income is limited by the number of hours you are able or allowed to work. Then you have to stop. Passive income is yours to direct, save or spend-not someone Else’s.
Residual Income Stream: Unlike standard passive income, residual income continues to pay you. Dividends pay once without a guarantee that it will be repeated. Residual income returns again and again; it is literally the renewable, green income of financial retirement planning. Some types of residual income include royalties and patents income, network referrals, and network marketing, membership fees, affiliate programs and advertising income.
Financial retirement planning involves long term investment goals and the dedication and determination to reach them. Diversify your assets and your investments to avoid losing everything should one investment vehicle falter or fail. Pursue different types of income and watch your nest egg grow.