Do you have an overall strategy to triple your income during your retirement?

by JD Miller on May 28, 2011

JD Miller CPA
The Trusted Financial Planner

Before you start reading this post, you should have a copy of your Federal income tax return for last year in front of you.

You should also have a pencil and a piece of paper to take notes and to write down your questions as they come up. I guarantee you’ll want to take notes. I guarantee you’ll be writing down questions to ask me.

Do you have an overall strategy to triple your income during your retirement?

This is the first of The 5 Great Goals of Life questions.

I’ll bet that no one has ever asked you this question.

If anyone has asked you a question about your retirement income strategy, I’ll bet they weren’t this direct.

Right now, your response to this question may just be another question or a number of questions, such as,

Why do you ask it that way? or

What do you mean by that?

Are you kind of sitting there with a look in your eyes like a deer caught in the headlights?

To help you understand what this question means to you, let’s start with an assumption. That assumption is:

When you retire, you want to continue to enjoy the lifestyle that you enjoy today.

How much income would you need to continue to enjoy the lifestyle you now enjoy?

Look at your tax return for last year, the one you should have in front of you right now.

How much was your income on the first page? Let’s use the last number at the bottom of the first page, described as “Adjusted gross income”.

Write that number down on the piece of paper you have in front of you.

Let’s assume that was enough for your lifestyle today. You may want more, but you have to start somewhere. So, for the purpose of this discussion right now, let’s assume that this is enough.

What this means is that if you could stop working right now, today, and if you could receive this amount of income every year for the rest of your life, you could continue to enjoy living as you do today.

But is that true?

Don’t things cost you more today than they did years ago?

Stop for a moment and write down one thing that you pay twice as much for today as you did 20 years ago. What is that one thing?

Are there other things that cost you twice as much today? Sure there are.

Will things stop going up in price just because you retired?

Not likely, right?

Doesn’t that then bring up a mind-bobbling, potentially life-changing question in your mind?

How much income you would need 24 years from now to enjoy the lifestyle you enjoy today?

The answer to your question is probably obvious to you, isn’t it.

Your retirement income must double, it must be twice as much 24 years from now for you to enjoy your same lifestyle then as you do today.

Multiply the number you wrote down on your paper by two. That’s how much income you must have 24 years from today for you to enjoy the same lifestyle you enjoy today.

That’s a much larger number, isn’t it?

And your income must continue growing. It must continue doubling every 24 years for you to enjoy today’s lifestyle.

How long must your retirement income continue to grow like this?

Doesn’t that depend on how long you’re going to live?

Obviously, you can’t predict the answer to this question. However, one question you could get an answer to is how long could you expect to live.

Let’s start with the following question.

What is the average joint life expectancy for married Baby Boomers at age 62? Joint life expectancy means the life expectancy of the second one to die.

If you were 62 right now, your average joint life expectancy is 30 years. The second to die, either you or your spouse, would be 92 years old at his or her death.

But that’s average joint life expectancy. What if you’re above average? Wouldn’t that mean that one of you could live to be older than 92?

Let’s say that you don’t know if you’re average or not. Wouldn’t it be wise for you to try to beat average, at least when it comes to having money to spend after you’re 92?

And, if your income must double in 24 years for you to continue to enjoy your current lifestyle, actually any lifestyle, can you see that it would be safer for you to plan to triple your income in retirement to protect your lifestyle because you could have more than 30 years of retirement?

Where to I get this “doubling of income every 24 years”?

You confirmed above that many of the things you spend money on have doubled in the last 20 years. If we were to assume that the cost of living, inflation, averaged 3 percent every year, the cost of things you buy would double in 24 years. If the rate of inflation were higher than 3 percent a year, average, the cost you things you buy would double more rapidly, in less than 24 years.

With history as our guide, and it’s the only guide I have, the average cost of living since the end of World War II, your lifetime if you’re a Baby Boomer, was about 3 percent. Your cost of living doubled every 24 years of your life to this day. Why not use this as a reasonalbe assumption for the rest of your life.

If you accept this assumption, then you can see that after you retire, you must have a plan that will double your income every 24 months just for you to continue enjoying your current lifestyle.

And, because you could live longer than 24 years after you retire, wouldn’t you be safer if your strategy were to triple your income during your retirement.

So, let me ask you that question again.

Do you have an overall strategy to triple your income during your retirement, since it’s so painfully clear that your cost of living is going to triple during your retirement?

It seems like everyone still thinks of retirement as a fixed income investment environment. That could have been true 30 years ago when the average man retired at 65 and died at 73.

Today, at 62, the average joint life expectancy of a married couple is 92. That’s at least 30 years of retirement.

If your answer is not a fixed income strategy, if a fixed income strategy won’t triple your income during 30 years of retirement, what will?

Let me give you a glimpse.

Look at what you wrote down when I asked you what you buy today that you pay twice as much for compared to what you paid 20 years ago.

During your lifetime as a Baby Boomer, your cost of living went up at least 6.8 times. Your cost of living is 6.8 times greater than it was when you were born.

During that same time period, the value of the companies included in the S&P 500 index increased in value by 490 times. These companies are worth 490 times more than they were when you were born.

So, if the income you need to maintain your lifestyle must double every 24 years, doesn’t it seem that you could create a portfolio that more than tripled your income during your retirement?

If you could create an income the more than tripled during your retirement years, wouldn’t that be an income that you can’t outlive?

Shouldn’t your overall strategy triple your income during your retirement?

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