What Does it Take to Turn a Dream into Reality?

My mother was in her mid-nineties when my wife, Cindy, my daughter, Erica, and I took her on a mini-vacation to New York City. This little trip was, in part, motivated by my mother’s heartfelt desire to buy a silk scarf at Bloomingdales.

While there, we did the normal touristy things like going to museums, visiting Central Park, eating at wonderful restaurants, and seeing a Broadway show. On the last day, we made it to Bloomingdales.

My mother picked out a beautiful silk scarf. I thought “Excellent! A successful trip!” Then, my mother asked the sales clerk for the price. Frantically shaking my head, I tried to keep the salesperson from telling my mom the price. I planned to buy it as a gift; she didn’t need to know the cost! Unfortunately, my timing was off. The scarf cost more than $100, and my mother said that that was much too expensive. I pleaded with her to let me buy her the scarf, but she would have none of it. I had to listen and be respectful, but it made me a little sad.

I see this type of thinking with many of my clients. How do you balance desires with practicalities? On the scale of the trip, buying the scarf was inconsequential. But for my mother, the financial outlay for a personal indulgence crossed the line—too expensive. So, how do you come to terms with what you can or cannot afford? When is an indulgence perfectly acceptable? When can you turn a dream into a reality?

One of our signature offerings for our clients is planning that we call, “Running the Numbers.” We look at the client’s collective resources and determine how much money they can safely spend and never run out of money during their lifetime. We prepare detailed projections of what clients are spending now, factor in changes and projections for the future and then we compare that number with a “safe withdrawal rate.”

The rule of thumb (not everyone agrees) is that you can safely spend 4% of your portfolio for a thirty-year retirement. As you age and your life expectancy goes down, the safe withdrawal rate goes up. We frequently find that many of our older clients are spending far less than their safe withdrawal rate, and some are spending too much.

Of course, you have to consider other assets and sources of income such as Social Security, a pension, rental properties, or a paid-up primary residence that you could potentially sell or remortgage.

But, you’ll never know how much you can truly afford to safely spend unless you do the math or, “Run the Numbers.”

Another benefit of “Running the Numbers” is to determine a “Master Plan.” Most new clients come in with multiple accounts of varying investments. People talked to the retirement plan administrator at work and decided on an asset allocation for their 401(k). They talked to an investment advisor and followed some of that advice. Their CPA may have mentioned they should contribute to a Roth IRA. At some point, usually after the first child, they drafted a will and bought some insurance. All piecemeal.

We like to look at the entire picture and come up with an integrated plan considering all of the client’s resources as well as their specific family circumstances and, perhaps most importantly, their goals and dreams. The objective is to come up with the ultimate personalized retirement and estate plan for each client. Our recommendations often include a series of Roth IRA conversions over a number of years. The advantage of the smaller conversions over multiple years is it keeps the client in a lower tax bracket. Then, for our assets under management (AUM) clients, we update the plan every year or even more often in the event of a major life change.

Knowing how much money you can safely spend and never run out of money is one of the best ways to achieve peace of mind. Granted, we can’t predict every eventuality. Life is risky! But we can make predictions based on reasonable assumptions. Once you understand how much you can spend, you can decide if you want to spend that much, or less. The choice is yours—but it is an informed decision.

Multiple clients have thanked me for changing the way they think and even act around money once they know what they can truly afford. Some have retired earlier, some have bought a second home, many have taken family vacations that they would not have otherwise. What I don’t want anyone to do is to deny themselves a silk scarf from Bloomingdales when in reality, they can certainly afford it.

P.S. If you are interested in our more traditional financial information (we have written 5 best-selling financial books, many peer-reviewed articles, have 185 hours of our radio archives, etc.), we encourage you to visit our website, www.paytaxeslater.com, that has a wealth of valuable free material of special interest to IRA and retirement plan owners, or call (412) 521-2732 for a free copy of The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA or to see if you qualify for a free second opinion consultation.

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