September 20, 2019
I love the “Shoulder Season” on Cape Cod. We can enjoy warm summer-like weather without the crushing crowds of high summer. It seems like Falmouth and all the other towns on the Cape use this time of year to do essential road projects that would create utter chaos during the summertime. Sometimes I like to think that we have three seasons on Cape Cod: Winter, Summer, and Road Work.
Road repairs and improvements create delays when you’re trying to get around. It’s no wonder then that we rely on GPS apps to help us navigate the construction. Without it, many of us would be lost – or at least perpetually late. But sometimes the unexpected happens, and you find yourself sitting in traffic, waiting for one lane on a two-lane road to open up so you can get by. As I did, just last Thursday.
As I sat there sitting in traffic, worried that I was going to be late for my appointment, I got to thinking. You see, many of us unwittingly encounter financial roadblocks that can set our retirement back for years. And unlike driving, there’s no GPS app for retirement.
Many folks are faced with a number of roadblocks on the road to retirement, and if they can’t navigate them successfully, well, their retirement may be a long way down the road. This is one of the reasons more and more people are working or actively looking for work later in life. In fact, an Associated Press poll conducted earlier this year showed that 23% of American workers don’t expect to stop working in retirement . . . ever. And get this, twenty-five percent of those polled who are fully retired said they didn’t feel financially prepared for retirement.
With our time together this week, I’d like to focus on two of those roadblocks specifically: lacking an adequate financial inventory and failing to have a debt reduction strategy. These are two crucial pieces to a sound retirement system. Two pieces that need to be accounted for in order to help avoid an unexpected delay near retirement.
Creating a financial inventory starts with understanding both your net worth and your cash flow. Having a net worth statement will help you to create a snapshot of your financial situation. You should maintain your financial inventory and update it periodically – annually, at least. This will help you monitor your progress toward your goal: a retirement that provides you with the independence and quality of life you want.
Creating a net worth statement starts with taking an inventory of your assets. Those include liquid assets and cash reserves: the money in your checking and savings accounts, any money market funds, CDs, or cash on hand. Also, account for any investments you have: mutual funds, stocks, bonds, annuities, and U.S. government securities (Treasury notes, bills, and bonds). Include the value of any retirement accounts you have – including 401k, 403b, 457b, and IRA or Roth IRA accounts.
Make sure to include any real estate assets in your name, too: your residence, income-generating properties like rentals, or your vacation home or condo. Your life insurance policy’s cash value is also worth listing here. And don’t forget about personal property – the value of the assets within your home, your cars, boats, jewelry and other valuables.
If you are self-employed or a business owner, you should also calculate the value of your business, if it’s sold or generating income for you. Also, account for any outstanding receivable loans for which you may be expecting payment.
With all that in mind, you should now have a clearer idea of your total assets. The next step is to account for your liabilities. Calculate the consumer debt you’re carrying in the form of credit card balances, car and boat loans, personal loans, and any credit lines that carry a balance. Also make sure to account for long-term debts in your name, such as your mortgage or mortgages and student loans. Current and deferred taxes should also be listed here. Finally, subtract your total liabilities from your total assets.
Folks . . . That is your net worth.
Now it’s time to understand your net cash flow. To do so, I recommend that you first add up your income and earnings to get a sense of your cash inflow. Items such as salary, wages, bonuses and commissions, interest income, dividends, rental income if applicable, pension, Social Security income – basically any money that’s coming in.
Next, determine your cash outflow. Account for fixed expenses like federal and state income taxes, mortgage, property tax, car loans, insurance premiums for your auto and home, life insurance, health insurance. There are many variable expenses you should also account for: food, credit card payments, medical expenses such as co-pays, deductibles, and prescriptions. There are utilities, fuel, vehicle costs and home maintenance expenses. Don’t forget clothing, vacations, charitable contributions and gifts. Now add together both your fixed and variable expenses to get a total. Finally, subtract your cash outflow from your cash inflow.
Folks . . . that calculation yields your net cash flow. You should now have a more unobstructed view of the road ahead.
I find that one of the biggest roadblocks to retirement many people encounter is appropriately managing credit and debt. These days, credit and debt is a normal part of doing business in today’s society, but it must be handled carefully. There’s are three basic types of debt, good debt, necessary debt, and discretionary debt. Some items to classify as good debt should be your mortgage, or student loans that help you get a better-paying job. An example of necessary debt may be the cost of your car loan, essential for work and mobility. Then there’s discretionary debt, items such as, vacation trips, expensive outings, fancy gadgets, and other items we consider to be non-essentials.
Many of us incur debt because we have no other way to pay for what we need – significant car repairs, an unexpected home repair, medical expenses. We may charge it or take out a loan because we have no other choice. That’s why it’s necessary to have a plan in place to fund it ourselves, when possible, and avoid taking on more debt. An ounce of prevention is worth a pound of cure, as my grandmother used to say.
If you find yourself in debt, remember the First Law of Holes: When you find yourself in a hole, stop digging. Understand how you got into debt, take steps to correct the problem, and adjust your financial habits accordingly. We often suggest you start by closing non-essential accounts. Then see if you can consolidate your debt to a lower rate, so you’re at least paying less to borrow that money. Work with a financial expert to find a debt consolidation strategy that works for you. Once you’re out of debt, make sure to pay the balance on those credit cards every month to avoid more problems.
Establishing an accurate financial inventory and managing credit and debt wisely may help you avoid two significant roadblocks to retirement that, left unchecked, may delay or permanently derail your retirement system. But that’s only the start.
Remember, be vigilant and stay alert, because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC
Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at email@example.com.
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