How to Achieve Financial Security | What is Financial Security | First Financial Consulting

How to Achieve Financial Security | What is Financial Security | First Financial Consulting

Achieve Financial Security

Everyone wants to achieve financial security and plan for their financial future, and it is possible to do. However, most people fail to achieve financial security because they make three critical mistakes. Let’s pretend you’re sixty, and you plan on retiring when you’re sixty-five. You’ve saved a lot, built a decent nest egg, and you plan to hunker down and preserve your assets. Sounds good right? Well in all actuality, this mistake will most likely be detrimental to your retirement.

You Will Live Longer Than You Think

Most retirees spend about twenty years in retirement. This has changed somewhat from the norm that we might be used to hearing. As technology and medical capabilities increase, the average lifespan for people continues to increase as well. The graph below from the Federal Reserve Economic Data (FRED) illustrates the increase in US life expectancy. This is a good thing but, it poses a real risk that you might outlive your money in retirement. Planning to live longer is a basic, but necessary, an assumption you have to make when planning for your financial security.

graph showing life expectancy in the united states

You’ll Spend More in Retirement

There’s a common misconception that retirees will only spend about 85% of what they spent before retirement. However, the data suggests otherwise. In fact, many retirees will spend more in retirement than they did before retirement. Some of the reasons why retirees spend more in retirement should not come as a surprise. Health care costs are increasing every year. Travel is getting more expensive. Spending time with the grandkids can also prove to be an expensive benefit in retirement. The list goes on. If you spend more than you planned to spend in retirement, you really run the risk of running out of money and not achieving financial security. Don’t make this mistake when planning for your financial future.

Failing to Guard Against Inflation

In those twenty years of retirement, we know the costs of goods are going to go up. In fact, you’re probably going to see your costs double, even if your lifestyle has not changed. Let’s use groceries as an example. Take the grocery expenses that you spend now and imagine that you bought the same items over the next twenty years. You should expect that these prices would increase due to inflation. In fact, these prices will most likely double thanks to inflation. The graph below captures the consumer price index from 2009 to 2019. The consumer price index is often used as a good measure of the impact of inflation. It measures the average monthly change in the price of goods and services paid by urban consumers nationwide. This graph, even though it is just a simple illustration, serves as yet another example of the negative impact that inflation can have on your finances.

graph showing the effect of inflation

Let’s use another example. Assume you have 1 million dollars and you’re withdrawing 50 thousand every year. When you end retirement in twenty years, you should have 2 million dollars and be withdrawing 100 thousand dollars just to maintain your lifestyle and maintain the real value of your principal after inflation. Neglecting to plan for inflation in your financial future is probably one of the worst mistakes you can make because it impacts both the expense side and asset side of the equation.

Achieving Financial Security

So, what’s the solution? How do you achieve financial security? In short, you need a solid financial plan to achieve financial security. Your financial plan needs to be detailed; don’t try to fit it on the back of a napkin. It needs to include today’s expenses, tomorrow’s expenses, and accurate time frames. You then should develop an investment plan that will preserve your assets in retirement.

Creating a financial plan ensures that you have a road map for the days ahead. It allows you to reconcile all of your income and spending in one place. This allows you to determine where you are and where you want to be in the coming years. It’s also a great way to plan for any bucket list items that you might have in retirement. An investment plan is what guards and preserves your investments in retirement. It allows you to grow your wealth while also guarding against hidden dangers such as inflation.

At First Financial Consulting, we specialize in providing our clients with detailed financial plans and investment plans tailored to their unique situation. We’ve been helping our clients achieve financial security since the day we opened by providing objective advice. If you’d like help in achieving your financial security, or even if you want a second opinion, we’re always here to help.