Securing a safe INCOME RESERVOIR in your planning is our key focus today. We can see this in our 20s to 40s, or as seniors in our 70s to 90s ...and certainly as baby-boomers. No financial plan is safe without a “reservoir” where you can get money for special concerns or opportunities when you need it. It’s time for a fresh look at this because times like 2008 and 2015 come at least twice every decade … and a strong reservoir ensures you have money available when you need it.
OPPOSITE OF AN INCOME RESERVOIR.
First let’s look at the opposite of this reservoir. One opposite is spending your money when there's plenty, and having none when it's gone. Another opposite would be equity funds rising and plunging like a roller coaster. Stock markets are often down at the very time you're needing to get money!
Consider the young person facing $2000 in car repairs – or a middle-aged family needing $15,000 for education expenses – or a retiree whose roof needs to be replaced to the tune of $18,000. Equity funds rock and roll like the stock market, so while they help build long term wealth (like a yo-yo while climbing stairs) they won’t likely put money in your hands for unforeseen emergencies. Safer than pure equities are to enlarge the focus on dividends, real estate, infrastructure income, but even these could be down 10% or 20% at times. So you need a safe reservoir which can put money in your hands when you need it.
* Peculiar surprise below: “Reverse Lottery” as a way you to enlarge and empower your income reservoir.
Income Reservoir – in our Cycle of Life.
A fun way to talk about this can be exploring how the "income reservoir" fits into our life-cycle.
THE FIFTEEN YEAR OLD asks mom or dad for $50 – whatever the purpose may be. They’re using mom and dad as an ATM or as their personal income-reservoir. Many seniors describe how financial needs come up more often even among adult children who again need help from their now-older parents.
YOUNG PEOPLE TODAY are typically more interested in saving money than they were years ago. When “millenials” find work they know this job-market is insecure so they can be easily encouraged to save at least a few months’ income to draw on later when out of work or needing cash. And the savings can double to help them also buy a first home.
LATE 20s or 30s, they buy a home. That’s the hardest year of all because they’re highly mortgaged, paying property taxes, and may also have young children. This first year in a new home isn’t when they’re likely to put much money aside for emergencies …but they’ll be grateful if their earlier plans helped them gather a few thousand dollars for the “rainy day” that happens with break-downs, repairs, and all that happens in every home and family.
AFTER A FEW YEARS this family can breathe again, more comfortable with household costs and hopefully ready to save more money. Two types of “reservoir” arise as they can save some money, and they’ve also paid down the debt on their mortgage while perhaps seeing equity grow in their home.
If they stop the world on New Years Eve to review their financial picture perhaps they’ll see: (a) $2000 more saved, (b) $6000 less owing on their mortgage, (c) $12,000 more value in their home. In those areas a family could have $20,000 higher net worth and a good bit of this adds to their cash or line of credit to access in an emergency or some bump in the road of life.
PICTURE OUR 40s AND EARLY 50s as a time when people feel safe in their careers, enjoying solid income and having good control over their expenses. Some will keep six-months’ income in risk-free emergency savings. Some have this growing and immediately available in cash-value of their life insurance policies. Some consider their home-equity as a sufficient buffer and keep lines of credit at zero … to avoid investing in anything paying 1% or less.
Where’s the “income reservoir”? …it’s the combination this family has in short-term savings, home equity, life insurances, and in this manner their emergency funds could be growing 5% or better (year-over-year) and yet be immediately available if life’s crises were to arise.
50 COMES QUICKLY, 60s EVEN FASTER, so we’re looking now at our planning for retirement. Lifestyle is going to cost money. Money has to last into our 90s or beyond, and some of those years will be our most expensive ever! See further on this retirement and financial planning in my recent book, Your Business, Your Retirement and the 9 key questions you must satisfy to enjoy the greatest success in senior lifestyles.
Totally aside from home equity, and apart from the savings element of your life insurances, we’re looking at all areas of public/private pensions and savings you have for retirement income. Our focus here on the “income reservoir” is to ensure you have at least three years’ income in stable investments that you can draw on if you choose (or are forced into) an earlier retirement.
How vital this is becomes clear in the story of a friend who was suddenly "downsized" out of his career in 2008 at the age of 62 and had to draw early from his savings. While his net worth continued well, the impact of drawing income early was hard on his investments. If he’d had a three year income-reservoir from age 58 onwards, it would have been prudent and much easier for him.
RETIRING OR SEMI-RETIRING IN OUR 60s, 70s and beyond we all agree on the clear need for lasting financial health and security. Income is essential unless you eat bird seed and live on $1500 a month from CPP and OAS (government pensions).
My retired clients mostly want $5,000 to $9,000 per month to enjoy life as they choose. To support this, we focus two ways. For the long term, we heighten investment returns with Canadian and Global equity funds, dividends, real estate income, infrastructure income. Short-term, with a 3-year window, we want a strong foundation of “fixed income” (see FIXED INCOME) to protect ongoing cash-flow with low risk.
(Risk is a wiggly concept as investing for 1% returns means running out of money too soon, but investing aggressively in equities can also mean running out of money. We must keep short-term money safe, and long-term money growing. So this is how “life income mandates” is built to serve your needs over all the years to come.)
Reverse Lottery as an “old-yet-new” Income Reservoir.
Watch this amazing video. It offers a fresh view of how to suddenly get money when things go wrong. You know in anyone's lifetime things are bound to go wrong someday …even more than once! So we need the resources that pay us “when life sucks” (it’s a quote!).
Will people get ill? ..will accidents happen? ..will someone lose their independence? ..will death occur? ..do we know when? ..do we know the costs? .. How much money will we need: for an event, or for a family, for survivors, for the next 5, 20, 30 years?
What will YOU need? When could you need it? How quickly, how urgently? Have you pre-arranged it? Do we need to ensure your “reverse lottery” is ready to pay the moment you need it? Have a look -- let me know because this too fits with your income reservoir. LINK to VIDEO.
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Yours in financial security for LIFE!
BrianBrian Weatherdon, MA. CFP. CLU. CPCA. CRC. MDRT. 905-637-3500 x 223 627 Guelph Line, Burlington, Ontario. L7R 3M7. 1-877-937-3500 FREE x 223 Brian@SovereignWealth.ca Amazon: “A Lifetime Of Wealth — And How Not To Lose It.” NEW: Your Business, Your Retirement: Halton Retirement Study. ** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. For information on near 10,000 investment funds and other financial structures please feel free to contact me directly. Returns shown are from Morningstar and other major financial news media. Research is sourced from leading sources including GLC, RBC, CIBC, Franklin Templeton, Mackenzie, and a wide range of highly reputed firms. Opinions reflected in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to serve alongside your legal and accounting advisors with whom we can best protect your financial security and advance your goals. We are grateful always to receive your comments and questions.