Counselor and comedian Mark Gungor once described the difference between men’s and women’s brains like this: Men compartmentalize everything and limit their decision-making to only what is relevant to the specific “box” they are currently using. Women’s brains are like a ball of yarn that is tangled up where everything is connected to everything else. Understanding this concept may help you in your personal relationships, but it certainly helps you in understanding your financial life and the “right” way to view it.
Most people, male or female, tend to compartmentalize their financial lives and make decisions only regarding the one area they are considering. This type of thinking is limiting to good decision making and could lead to poor outcomes. It is important to see the big picture and understand how each area of your financial life affects the others.
Consider the question of whether you have enough income and assets to retire. The majority of people I interact with have a basic understanding of accumulating assets by regularly saving a percentage of their income. However, those same people are often intimidated with the concept of retiring and turning the assets they have accumulated into money they can live on.
A popular method of answering the question “Do I have enough to retire?” is to simply take your entire investment portfolio and distribute 4% of the total yearly to live on. While this might work for some, a more nuanced approach, looking at this big picture, is better. It is important during this time that you do not succumb to compartmentalized thinking and pay particular attention to your taxes, both today and into the future. For example, distributing from an IRA up to the top of the 12% marginal bracket is very tax efficient, especially if you are looking ahead to higher future taxes as well as future Required Minimum Distributions at age 73-75.
Considering your Standard of Living is arguably the most critical component when newly retired. Just because you can take 4% out to spend on yourself doesn't mean you should. Perhaps you only need 3% of your assets annually to meet your Standard of Living. Conversely, maybe you need 7%, 8%, or 9% of your assets annually to meet your Standard of Living. That may be feasible in the short term and especially true if you haven’t started taking Social Security. All these decisions have a give and take, and a financial advisor who has developed a financial plan for you can help work through the advantages and disadvantages as you consider what your life after work might look like.
In short, when you are considering retirement multiple variables will affect you simultaneously, and it is critical, like the ball of yarn, to understand how a decision in one area affects other areas. A fiduciary financial advisor can help guide you through that process to see the connections that you may have missed.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
