Note: This article is from J.D. Roth, who founded Get Rich Slowly in 2006. J.D.'s non-financial writing can be found at More Than Money.
Once every six months, whether I need to or not, I meet with my investment adviser from Fidelity. I've been doing this for five years, and have come to value the experience as truly educational. On Tuesday, for instance, my new adviser Michael talked me through some income planning.
My financial life has been turbulent over the past few years:
- First, I was deep in debt and struggling.
- When Get Rich Slowly began to grow, I paid off my debt and accumulated cash.
- When I sold Get Rich Slowly, I invested the windfall in index funds and municipal bonds.
- When Kris and I divorced, she received the municipal bonds.
- When I bought my condo, some of my index funds were converted into real estate.
For years, my income and expenses have been all over the map with no semblance of normalcy and no consistency. Now, at last, things are settling into something of a routine and I can think about planning for the future. Since June, I've once again been tracking every penny I spend in order to get a clear picture of my financial situation.
In my meeting with Fidelity, I explained to Michael that my income is smaller than it has been since the 1990s. Between writing gigs and interest income on three business loans, I make less than $2000 per month. (I'm also being paid about $1000 per month principal on those three loans, which I treat as income even though it's not. It's more like savings.)
My monthly spending is reasonable except that I spend a lot on travel. My income (including principal on the loans) would come close to covering my expenses if I didn't take two big trips (and several small trips) every year. But I do take those trips, and that adds $2000 per month to my expenses.
So far, I've subsidized my travel by slowly drawing down cash savings, but those funds will be gone by the end of 2014. It's time to start thinking about the future. If I choose to maintain this sort of lifestyle, how will I fund it? Michael and I talked about the options.
One path, of course, is to make more money, and that's my top choice.
At any time, I could return to the traditional work force. It might be fun to do so, but I'd rather earn more from my writing. I could pick up paid gigs writing about personal finance — I don't get paid for my work at Get Rich Slowly, and I've resigned from my column at Entrepreneur magazine effective next month — but I've found that getting paid to write about money takes the joy out of it. I could write another financial book; in fact, I'm doing so right now. Or I could change my focus to fiction, which holds a certain appeal. (I plan to take a fiction writing class starting in January.)
Another path is to start a side business. Or two.
I told Michael about my desire to open a money store where I'd sell books and magazines, hold classes about budgeting and investing, and offer one-on-one counseling. Or I could try to make money from another blog. I have several great domains and ideas on the back-burner, including a couple I could do with Kim. Or I could start some other of business. I do not lack for ideas!
Michael suggested another way to fund my lifestyle: “For a while, until you're making full-time income again, you could take systematic withdrawals from your portfolio. You wouldn't need to take a lot. Just enough to cover the difference between your existing income and expenses.”
He showed me Fidelity's guide to retirement income investing, which includes a simple calculator that computes “potential sustainable monthly withdrawals” from a portfolio based on a starting balance, asset allocation, and life expectancy. In other words, you tell it how much you have and how long you expect to live, and the calculator tells you — at a “90% confidence level” — how much income your portfolio could give you for the rest of your life.
If we assume you'll live until 80, for instance, and have a balanced portfolio (50% stocks, 40% bonds, 10% cash):
- If you're 30 years old and have $100,000 saved, there's a 90% chance that your portfolio would produce $291 per month, adjusted for inflation.
- If you're my age — 44 years old — and have $1,000,000 saved, there's a 90% chance that your portfolio would produce $3348 per month.
- If you're 60 years old and have $250,000 saved, there's a 90% chance that your portfolio would produce $1202 per month for the next twenty years.
After playing with the numbers for a few minutes, I'd come up with a plan.
I like my lifestyle. It's comfortable but not extravagant. Still, I've become lazy. It'd be good for me to exercise my frugality muscles a little more. I can cut back on food, for one. (My food expenses have been high for the past two years because I eat out a lot and I shop at a fancy supermarket.) I can also find ways to travel more economically by focusing on domestic travel instead of going abroad.
Meanwhile, I'll fund my spending with income and cash savings for as long as possible. Also, I'll strive to increase my income from writing (through the book I'm working on) and a couple of targeted websites (including at least one that I do with Kim). As a last resort, I'll tap into my investments to subsidize my lifestyle, as Michael suggested. But I shouldn't have to worry about that for a couple of years. By then, I hope to have established equilibrium!
Not everything in my meetings at Fidelity is useful. I don't care about the hot new funds, and I'm not interested in annuities. But each time I talk with an adviser, I learn something new, and I think that's the point.
It's easy to get wrapped up in the day-to-day details of our own lives. We get mired in the minutia of our finances so that sometimes we miss the forest for the trees. Plus, it's an objective third party can always see things we don't, helping us to explore options we might not otherwise have considered.