Step #1 — What does retirement mean to you?
Many people think of retirement as a time in your life where you can work if you want to, but not because you have to. In other words, how would you feel if you could work for fun and/or pursue your passions without worrying about money?
This requires financial independence, or having enough money to:
- Cover your needs and basic wants
- After taxes
- After inflation
- For some period of time (usually you and your beloved’s lifetime)
The amount of money necessary for financial independence is called “Critical Capital”. This is a pile of money that can sustain all your retirement expenses with inflation and after taxes for the requisite time period. This may be in an assortment of piles of money such as funds in your 401(k), Roth IRAs, and taxable money. Retirement could mean reaching a point where you have enough Critical Capital to spend your money making a life versus being forced to spend your life making money. Now that’s exciting!
Step #2 — What is the role of mortgage planning?
Your mortgage is most likely your single largest debt, and your house is most likely your single largest asset. Your mortgage and home equity situation impact your:
- Cash flow
- Tax deductions (or lack thereof)
- Net worth and wealth position
- Liquidity (access to your money)
- Estate and legacy planning
It’s important to ask yourself whether your mortgage or real estate equity strategy is helping or hurting your chances of acquiring the right amount of Critical Capital. Does it make more sense to use a smaller mortgage and invest more cash flow into your Critical Capital fund? Does it make more sense to use a bigger mortgage and invest more upfront cash into your Critical Capital fund? What about using or planning to use reverse mortgage now or at some point in the future? Mortgage planning asks and answers all these questions to help you avoid missing your mark and not having enough Critical Capital. Your mortgage, housing, and cash flow strategy play a large role in helping you achieve financial independence.
Step #3 — How will you get enough Critical Capital?
Remember, the amount of money necessary for financial independence is called “Critical Capital”. There are three specific steps that I use to help you acquire enough Critical Capital for financial independence:
- Calculate Critical Capital — how much do you need?
- Determine the future value of how much you have already saved — what will your current investments be worth in the future?
- Determine how much you still need to save — how can you change your cash flow or real estate equity situation in order to make up for the shortfall?
As a CMPS professional, I work as a team with your CPA, CFP® and other financial advisors to help you determine how much cash flow you need during retirement and the best way to generate that income. I can also refer you to a financial planner if you don’t already have one. Either way, give me a call or send me an email to schedule a time to discuss your options in further detail.