Congratulations! The fact you are thinking about or asking questions about retirement is a significant step that many people are never able to get to let alone put a plan in place to enjoy.
One of the biggest questions that people have is: Will I run out of money? and how can I stress test this. Over the past few years, I have done a lot of reading and learning about what needs to be true for retirement so I thought I would share some of the resources and or learning I have gained over this time.
To retire, you need to understand how much you plan to spend each year. This will help you understand how much of a nest egg you need to have saved up to fund your lifestyle. As you go through many of the categories, for a 6-12 month period, you will also be able to identify areas of spend that will not be as high in retirement for example, clothing, commuting costs, lunches etc. There may also be some areas that increase vs. your working days for example travel, entertainment etc. To track Expenses, I use Mint where I link up all of my accounts and credit cards that with a little help learns categories over time. This will help you trend your spending and understand variance year over year in a very easy way.
Fees: if returns are 6% per year and your advisor or the funds you invest in are 2%, then you are giving away 1/3 of your earnings. ETFs can be put together by a computer and cost significantly less while still providing exposure to the equity markets. If you are investing this way, it is not likely that you need a highly paid money manager.
Wealthica (Canada) or Personal Capital (US) are great tools you can use to evaluate your net worth over time and understand the fee structure associated with your investments.
Many people work in companies and devote 60+ hours / week to those companies. We are often responsible for growing sales and profit, driving volume and coming up with ideas that will meet targets for the year. An important element in every public company is the forecast relative to the target or commitment that management has made to the street. This can have implications on profitability, inventory and total shareholder return which managers take very seriously and implement many processes to ensure their success:
Innovation: Companies will perform consumer research to understand unmet consumer needs, match those opportunities up with the production capabilities to develop an innovation pipeline that can be 3-5 years out. These projects are tested with consumers and shoppers in relative environments so companies can gather information to narrow the error range of the estimated volume associated with the innovation.
Trade investments: Companies will invest significantly to entice retailers to support their products with listings in more stores, feature frequency, display space outside of the shelf, pricing strategies to drive incrementality and shelf space to reduce out of stocks and stimulate triggers to purchase in store. Companies will also determine the specific target of each innovation or product segment and develop shopper marketing plans to drive trial, penetration. All of these investments drive estimated volumes with expected investment payouts that justify the spend; these estimates often roll up and translate to financial guidance that gets to the street. Post game analysis is usually required to understand the impact these investments have had on the business and relative to what was projected all with the hope of optimizing investments.
Marketers do similar planning and analysis using techniques like Market Mix Modeling which is a statistical analysis on sales and marketing data to estimate the impact of various tactics (marketing mix) on sales and then forecast the impact of future sets of tactics.
Before a year even starts, these companies compile a list of “Building blocks” which include last years base volume, planned innovation, trade and marketing investments with the volumes associated. The team then tracks each of those building blocks in a phased approach throughout the year.
This seems like a very rigorous logical and data based approach with elements that could be reapplied to our personal finances to drive a better return. Some steps that could be taken on the personal finance front include:
Tracking historical Assets and the return they have delivered.
Tracking the growth trajectory of various asset groups
Tracking the management of expenses.
Tracking various financial ratios like savings rate, Monthly investment income / expenses
Targets for the years net worth broken out by quarter
Building blocks to help drive the net worth target with regular tracking.
% of net worth in tax deferred accounts
% of tax deferred investment room being used.
Budget required while in the work force vs. in retirement.
Portfolio mix vs. desired allocation over time.
Tracking our personal finances is just as important as our company business because after all, it is our business!
Have you ever seen a lunch room at work with a stack of Girl Guide cookies saying $5 please put the money in the envelope? Parents who do this think they are contributing to their kids childhood or are they actually robbing them of critical skills that will stick with them for life? skills they can make a living from?
What if we looked at this a little bit differently? What if we used this as a learning opportunity for our children and taught them how to sell? Most people find it a bit awkward to ask people for money or to support them but that is exactly what many people have to do during the workday to be successful. They have that feeling of anxiety and try to put off asking for the sale so it won’t get “uncomfortable” or to protect from “rejection”. In reality, the more often you ask or get a rejection, the more equipped and practiced our children get at dealing with it.
How about a reframe? Hey kids, lets go and see how many rejections we can get! Expect them because they are going to come, but sometimes they might buy. What about role playing with them to help them open the shade to purchase with a stranger, determine, understand, verify and handle objections? Hey, I am with the Girl Guides and I am selling cookies to support my group. Are you interested in purchasing some cookies today?
If you get a buying signal, could you ask “how many boxes would you like? It is $20 for 4 boxes or $5 for one box” to provide them an option to purchase 4 right away. “I don’t like cookies” Is there anyone in your life who likes cookies?, “I don’t have the cash” I can come back and get it at a better time or you can email money transfer my dad.
What if you took it a step further and paid your kids a 50% commision on every box so they could get excited about it. They can easily sell $60/hr which would amount to $30/hr at a 50% commision – that hourly rate is 3X babysitting showing them they could actually make a great living per hour selling! Don’t forget about teaching the importance of savings rate and investing their earnings as well!
Girl Guide cookies are not for raising money, they are for raising strong, confident girls. So next time a parent asks you to buy something tell them “Get your kid to sell them to me, let me give them a bit of a hard time so they earn it and I would gladly buy the goods and build up your kid in the process”.