what is your monthly nut?

monthly nutWhat’s your number? Not your phone number but that other number, the one that really matters. The amount you need every month in order to retire. In other words, what’s your monthly nut?

Do you remember that ING commercial that asked, “What’s Your Number?” They were referring to what you’ll need to have saved in order to afford retirement. People from all walks of life were shown carrying around a number. They were all different numbers but they were all large. The commercial was memorable but it missed the mark on one simple point … the large numbers weren’t relatable to most people.

“How much do I need to retire?” is a question we often get. Our response is the same every single time – How much do you want a month for income? Everyone needs cash-flow, no matter how big your investment account balance. It all boils down to how much do you really spend a month and what is that number? The scary thing is … most people don’t know. Most people think they know, but those we have helped really drill down to the true number are shocked when it comes back $2,000-$3,000 a month more than what they had planned on.

Most people derive their monthly cash-flow from one place and that is their job. What we are trying to teach people is that you need to have assets that are working for you now in addition to you working for the assets. Most people also defer their monthly residual income by putting money into retirement plans. Why are we so hell-bent on deferring our income? Why, if all of us are pursuing time freedom (retirement), are we using our capital to delay that moment? It really doesn’t make much sense. The only real way it makes sense is from a tax perspective.

But, when making decisions, taxes should not be the primary motivating factor. The primary motivating factor should be from a net worth and residual income perspective combined with your strengths and passion.

What we are trying to convey is that conventional financial planning is backward. For example, let’s show you what we mean:

John Smith is 35 years old and he puts $1,000 into a 401K plan. He is deferring the use of his money today, to gain a tax benefit and put money away for later, so it can grow and provide income later on. But, how much later?

Let’s look forward and say John Smith never saves another dime for retirement and never has another source of income than his day job. Isn’t John Smith really saving for the last year of his life? If John Smith quits working today and let’s say his monthly expenses were $1,000 a month, wouldn’t he have only 1 month’s cash to survive on financially?

With current, conventional “financial planning” you are literally saving for the last day of your life first and then working backward to the date where the gross total of your assets and sources of income are greater than your current income needs. That is fundamentally backward.

So, why are we as Financial Advisors telling you that financial planning is backward? Because our whole industry has created a “plan” for you to give us your hard earned money, so WE can earn income off of it now, and give YOU back as little as possible in return. Phillip and I are uncommon in that we want our clients to live and plan for tomorrow and help you achieve the life you want now, and by doing so, tomorrow will take care of itself. So, what should true financial planning look like? In our John Smith example, he should be putting that $1,000 in savings, earning a 5% interest rate, which comes out to $50 of annual income residually.

The rich have figured out these three things:

  1. You can design the life you want by controlling resources and putting them on your side.
  2. A dollar today is worth more than a dollar in the future.
  3. The more income and cash-flow you have now, the less risk you have financially when something doesn’t go your way.

Just to give you a little history and context, “Retirement Income Planning” is an experiment that was started in 1974. This is a construct of the financial entities, manufacturing and industrial companies along with Congress to come up with a plan, so they could raid our pensions and defined benefit plans designed to take care of employees in retirement. Those income guarantees and programs are very expensive for companies to maintain. Further, pensions and defined benefit plans tied up lots of capital and people started living longer, and longer and longer.

So, these companies with the help of Wall Street, raided and bought companies, stripped out the pension plans, which instantly made the company more profitable, and then it was sold for a profit and in the middle of that, they installed a 401K retirement plan to fill the gap.

The economic recovery (measured by job growth) after the 2008 financial collapse was the longest in recorded history according to dozens of economists. Why? Two main reasons:

  1. Student Loan Debt: It has reached over $1 Trillion dollars and most of the millennials coming out of school already have a mortgage in the form of student loan repayments. They are forced into lower paying jobs and are not in a position to start their own company or try something and fail because they need cash to repay their loans.
  2. Most people’s wealth now is tied up in two illiquid places, their 401K, and their home. Those two places do not produce cash-flow nor residual income prior to 59.5 or the home being paid off. People who were laid off were not in a position to start new companies and take a risk because their monthly nut was too large, and their assets were largely cut-off from them.

The other thing most people don’t understand is that the IRS tax code is geared for business owners. Who shaped the IRS tax code? Businesses, lobbying Congress for loopholes, deductions, tax breaks and benefits for taking a risk, hiring, creating products and creating jobs and new industries.

How do you start to protect yourself from the IRS and taxes that could go up over time? Well, you have income from sources that are not job-related and you have a corporate structure to protect you from tax.

So, what is the path forward? The path forward in our view is to protect that monthly nut by starting to generate residual income now, actually increasing your ability to save now, and putting your assets to work now, not later. We can help you get started with your residual income plan. Give us a call and let us help.