In the retirement world, we often talk about the “Big Picture”- the end goal at which we will have maximized our health, happiness, and prosperity. The difficulty is that sometimes seeing the Big Picture gets complicated when there are so many little things in life that require immediate attention.
For me, that includes things like needing a new car, wanting to buy a house, and that emergency vet bill I paid when my dogs ate 10 lbs of thawing chicken wings. It’s hard to see how any of these little things can have any effect on my Big Picture, but they can and they do. When Little Things are managed, they can be used to your advantage to minimize retirement risk.
What is a “Little Thing?"
I would classify this as any short-term need or goal. In the retirement world, “short-term” is any time frame less than one year, so we’re talking about needs or goals in the here and now. Obviously short-term goals are easier to focus on because there’s an immediate return or effect.
For example, when you go shopping, you get to leave with your purchase. Here’s where you take it to the next level: utilize your short-term goals to service your long-term goals, and manage your short-term needs with a long-term structure. In other words -- make your present goals work for you in the future, and prepare for emergencies now so you’re ready for them later.
How do I use Short-Term Goals to Service Long-Term Ones?
Shop. With a Credit Card.
That’s right, I said it. One major advantage in the retirement stage of life (the big picture) is having no large outstanding loans, particularly a mortgage. If we imagine a timeline starting at retirement and work backwards, we will eventually find ourselves at the beginning of the timeline – to the little thing that affects the big picture - in our 20’s when we start to establish a credit history.
Now I’m not saying you should rack up your debt in the name of credit history. Using too much credit can be EXTREMELY damaging. Credit reporting companies like Experian recommend that you utilize no more than 30% of your available credit to remain in ideal standing. It’s also important to get increasingly larger lines of credit – but, again, not use them in their entirety – to show that the debt and credit can be managed on a larger scale.
By monitoring and maintaining credit history, a continued worthiness is established, which leads to lower interest rates and fewer fees on future loans.
Buy a House
Homeownership – “The American Dream." Whether that means a condo in the city or a ranch in the suburbs, home ownership is a huge goal for many people. How can it possibly be considered a Little Thing when it’s so expensive? Well, it is a pre-retirement purchase and is a short-term goal once credit history has been established, so in the Big Picture, it really is a stepping stone.
There are, of course, risks with homeownership (pipes freeze, appliances break, markets crash), but there are also great advantages, the greatest being equity. Equity is the value of an asset, like a home, in excess of what is owed on the asset – in essence it represents the degree to which a person owns a home.
In the Big Picture, one of the greatest advantages a retiree can have is having full ownership of their home. It saves money (no mortgage), offers options with health and care giving in late-stages of life (downsizing or having children move in as caregivers), and provides an opportunity for funds in the form of a reverse mortgage. Obviously not of all of these are applicable for all people, but the point is that home ownership offers versatility, which is HUGE in the Big Picture. You know that whole, “All of your eggs in one basket” thing? Well, it’s true.
Even when your eggs are well diversified in a number of well-woven baskets, things happen. That pipe bursts, those chicken wings are devoured, and suddenly the balance in the force is disturbed.
How Do We Prepare for These Emergencies or Short-Term Needs?
The Dreaded Budget
The key to having short-term goals service long-term ones is to manage your short-term needs in a long-term fashion. What does that even mean? It means that plumber services, vet bills, and emergency concerts at Red Rocks can be accommodated and monitored for the short-term and over time.
In the short-term, prepare a budget, and annually check the budget with a cash flow statement for long-term adjustments. You can create a budget on paper, on your computer, or through websites like mint that will do the number crunching for you.
There are three stages of budgeting: planning, implementation, and evaluation. In the planning stage, all income and expenses are outlined. Expenses are separated into Fixed Expenses like rent and loan payments, and Variable Expenses like food and entertainment. A savings account for emergencies should fall into the Fixed Income category.
Personally, I struggle with saving - a lot. I plan and plan and then somehow end up with six out-to-dinner charges and no savings. So in my planning stage, I actually add that to my budget. I call it the Buffet Buffer. In my implementation stage, I use this buffet buffer as somewhat of a revolving expense. If I don’t use it within that pay period, it’s a bonus into my savings account.
The evaluation step of budgeting involves periodically (quarterly, annually) reviewing your spending habits. The best way to do this is to create a cash flow statement using a template like this one. By evaluating an annual cash flow statement, a budget can be modified, risks can be addressed and, just as importantly, progressed can be noted.
Remember, one of the greatest advantages of having short-term goals is achieving them and feeling that sense of accomplishment. By planning, implementing, and evaluating a budget, suddenly this list of little short-term goals and needs is part of a continuing effort that becomes the big picture.
Any short-term goal can be a puzzle piece in a long-term goal if it’s planned properly. We want to achieve these goals in the now, but it’s a great advantage to also have them contribute to the big picture!