by Chad Willardson, Founder and President of Pacific Capital
According to a 2019 study from the Schwartz Center for Economic Policy Analysis, approximately 40% of older workers and their spouses will be downwardly mobile in retirement, which means they will not have enough income to maintain their preretirement standard of living. Moreover, a study conducted by GoBankingRates in 2019 showed that 64% of Americans are expected to retire with less than $10,000 in their retirement savings accounts. Sadly, that’s not enough to even cover a few months of expenses in retirement.
Planning for retirement demands a strategic approach that goes beyond traditional savings. In this article, I’ll debunk the myth that saving money is enough and present a roadmap to a financially secure retirement. We’ll delve into the impact of inflation on your retirement income, the significance of reaching your dream income rather than a specific “retirement age,” and the power of creating passive income streams through investing for a sustained cash flow even after retiring from your day job.
Inflation’s Threat to Your Retirement Income
When preparing for retirement, you’ve got to consider the long-term effects of inflation. Over time, the cost of goods and services tends to rise, eroding the purchasing power of your savings. Therefore, relying solely on a fixed amount of money coming in each month won’t be sustainable or comfortable throughout your retirement. To combat the effects of inflation, it’s crucial to focus on investing for long-term growth.
Dream Income, Not Arbitrary “Retirement Age”
Traditionally, retirement has been associated with reaching a specific age, such as 65. However, this mindset overlooks the importance of having a reliable income stream to support your desired lifestyle during retirement. Instead of fixating on an arbitrary age, you should aim to retire once you’ve achieved the level of (non-working) income that supports your lifestyle. This approach allows for greater financial flexibility, enabling you to retire when you feel financially secure and have accumulated enough resources to sustain your desired standard of living throughout retirement. That goal could be reached at 35 or 75 or anywhere in between. That part’s up to you.
The Art of Generating Passive Income Streams
Relying solely on savings or a pension may not provide the level of financial security needed for a fulfilling retirement. Instead, focus on creating passive income streams that generate cash flow even after retiring from your day job. Investing in income-producing assets, such as dividend-paying stocks, real estate properties, bonds, and annuities can help create a consistent stream of income. These investments can deliver regular cash flow, reduce reliance on traditional savings in your bank account, and provide a cushion against the impacts of inflation.
Diversify Your Investment Portfolio
To maximize the potential for passive income generation, diversifying your investment portfolio is key. By spreading your investments across different asset classes, industries, and geographies, you can reduce the risk associated with any single investment. Never rely on one single source of income. The recent pandemic reiterated how important that is. A diversified portfolio can provide a stable and consistent income stream, even during times of market volatility. Consider seeking guidance from a financial professional who can help you construct a well-balanced portfolio tailored to your risk tolerance and financial goals.
Your Journey to Exponential Growth through the Power of Compounding
When it comes to creating passive income streams, starting early is crucial. The power of compounding allows your investments to grow exponentially over time. By reinvesting dividends, interest, or rental income, you can accelerate the growth of your investment portfolio. The longer your money remains invested, the greater the potential for compounding returns. Starting early and consistently contributing to your investment accounts can significantly impact the income you generate during retirement.
While saving money is an important habit, you can’t save your way to financial freedom. You’ve got to invest for that. Saving money to sit idle in your bank account won’t be enough to secure the retirement of your dreams. Remember, it’s never too early to start planning for your retirement and exploring investment opportunities that can provide the future income you need to relax and enjoy life once you’re done working.
Chad Willardson is the Founder and President of Pacific Capital, a fiduciary wealth advisory firm serving high-net-worth entrepreneurs and families. Alongside being one of the top wealth management experts in the country, Willardson is also the Co-Founder of GravyStack, a banking app for kids and teens, the Best-Selling Author of “Smart, Not Spoiled,” and Co-Host of “The Smart Money Parenting Show” #2 Podcast on Apple worldwide for Parenting, Kids & Family.