Passive Income for Life
If you feel like you are behind on your financial planning and don’t know how or where to start, you’re not alone.
In a recently released study by Northwestern Mutual, 58% of those surveyed feel that their financial plans need improvement, and 34% had no financial plan whatsoever.
We must understand that Social Security was never intended to provide complete income replacement, and that there is no guarantee that our lawmakers will even be able to salvage what has been promised without some kind of benefit cut in the future. We therefore find ourselves responsible for filling those potential income gaps. Pensions in the private sector are no longer existent, and nobody is likely to run to our rescue if we run short of cash in our old age. Not to worry. We have a plan to replace that missing slice of income and give you the sense of security and well being you have been looking for as we edge toward the end of our working years
Even if you are ten years or less away from retirement, you can still greatly improve your chances of overcoming the retirement income gap and ensure a comfortable lifestyle by tapping a growing passive income stream. Establishing some clear goals and sticking to them can get you on the right track in short order.
But before you can get to the good stuff (cashing those dividend checks in retirement), you must establish a sound foundation on which to base your income plan. No structure of any consequence can safely rest on a footing of clay.
Why does it lean? By the time builders had finished the third of eight planned stories about five years later, the tower’s foundation had begun to settle unevenly on the ground beneath it, a dense mixture of clay, sand and shells.
It’s not going to happen overnight, but the reward in knowing that you can meet your monthly expenses on your own terms, and potentially leave a legacy for your loved ones is well worth that effort. At the end of thet day, it all comes down to preparation, determination and execution. There will be ups and downs in the markets, setbacks and times of euphoric gain. Ignore the noise as they say, and build an income stream that will carry you through all the ups and downs which is the only thing that the market does promise. Although the future is unpredictable, if you are willing to take the time to learn how to navigate these swings keeping emotion on the sidelines, you can take advantage of the many opportunities that will present themselves as markets stray from reality. The strategy is not designed to trade in and out of stocks to capture short term taxable capital gains, but rather to accumulate income producing securities at the best value available and with consistent execution and tax efficiency. It’s really down to learning the fundamentals in the beginning, but it would be negligent to omit the basic building blocks in the first installments of the series for those just starting out on their investment journey. You have to dig through the grit to get to the gold.
Even if you’re part of the 58% who feel like you’re late to the party, or even the 34% with no plan, it’s not too late to start investing for income. Retirement is inevitable for most of us, either by choice or by circumstance. We only have one shot at it so we had better get this right! Once the bigger picture starts to become clear, complete with achievable goals and a sense of direction, things will start to fall into place rapidly. Choices we make now either limit or expand our choices later. That’s what we are all about around here. Financial freedom equates to personal freedom of choice. It takes a quite a while to reach complete financial freedom and we don’t want to waste any more time. So here we go, beginning with the building blocks that I call the four “financial cornerstones”.
Perhaps the most important and at the same time the most neglected part of our financial planning is to have and maintain a budget. This is the first of our four “cornerstones”. Nobody even seems to likes the word, much less the task itself. In fact, I can see people glaze over at the very mention of it.
We can calculate our monthly income and even make a reasonable estimate as to what our future income is going to be, but without having a handle on our actual cost of living, how can we develop a workable plan with an accurate income gap target. Preparing a budget is simply an exercise in documentation in the initial stages, but becomes a valuable tool in allocation of assets once it is up and running smoothly. You have to know where your money is going in order to know where you can make changes needed to maximize your future income stream. Many people today, especially in these trying times of super high inflation live on revolving credit and have thrown in the towel, but I urge all those facing financial despair to grab the reins firmly and take control. You can do it.
Budgeting sounds complicated, tedious, and potentially full of news we don’t really want to hear, all at the same time, but it really is an essential tool in your investment toolkit, especially when you’re struggling to make ends meet. Maintaining a budget doesn’t have to be complicated, although I admit that it doesn’t compare with the excitement of that Roller Derby Championship or your favorite movie trilogy on a Sunday afternoon with popcorn and your loved ones. It is, however a necessity, and if you are serious about building a financial future that you can “bank on”, then you need to engage in this continuing exercise in self examination and discipline. There are a number of free downloadable budgets you can utilize with varying degrees of detail and analytic capabilities. You may search any number of combinations of terms to access a template that will be to your liking. Once you get the system down, it shouldn’t take you more than 15 – 20 minutes per week to keep that budget updated. It’s worth it.
The second cornerstone of your financial plan is the emergency fund. Once you have established your budget and have made any necessary adjustments in order to “create” some personal free cash flow (funds to begin allocating to your financial goals), you should begin to establish your emergency fund. An early goal might be three to six month’s of expenses as determined by your carefully curated budget from cornerstone step one (Please do the budget). Ultimately, an emergency fund of one to two years should be sought after to cover expenses during an unexpected employment gap or in the event of an large surprise expense or market dislocation during retirement. This can be built over time as you are engaging some of the other fiscal priorities.
Cornerstone number three is Life and Health insurance. Assess the liabilities you have in case something happens to you. Mortgage, college for the kids, existing debt , medical and day to day expenses (see budget – please do the budget, really folks! I promise, this is the last time). Everyone has a different level of exposure unique to their own personal journey and stage of life. The younger you are the cheaper it is going to be to get a life insurance policy in place. There are many investment strategies involving insurance and related products, for example, term, whole life, universal life, annuities, etc. Choose carefully as all these decisions have different benefits and consequences. My personal choice was a no frills term policy with the difference in premium cost invested for the long term. Health insurance is also a major consideration. Any major medical expense uncovered by insurance can derail your plan in a big hurry. Do everything you can to obtain health care coverage through your choice of employment. The individual market is a minefield, with choices few and costs potentially quite high above the subsidy threshold. Please consult your insurance professional before making any of these important decisions.
The fourth and final cornerstone completing the base for the structure is simply plain old determination and the will to succeed. Keep working the plan until you reach the level of passive income that allows you to live your dream regardless of the rate of inflation or gyrations in market valuations. Everyone’s starting points will be different based on the variety of the human condition and circumstance. There is a strategy appropriate for each based on time horizon, risk tolerance, income, expenses and a host of other variables. In upcoming articles we will offer some ideas for the construction of a long time horizon, retirement income producing portfolio based on my own opinions, 30+ years of hands on investing experienced through good and bad markets and varying economic cycles, along with any analysis offered in support. As always, before you invest a single dollar you should examine your tolerance for risk and consult your investment professional.
This expression describing financial comfort and security was coined by George W. Peck, in the book Uncle Ike and the Red Headed Boy (1899) idiomorigins.org
This is the first in the series of Income Builder. Welcome! If you enjoy the content found here, please subscribe and support us by clicking below so you won’t miss a single article. We hope to inspire, instruct and entertain. Anything contained in these articles is my own opinion and should not be construed as investment advice. Past performance is never an indicator as to future results.