Copyright, 2007, Ronald J. Iverson  

STAGE 3-  Now that you have tabulated your asset base - do the following:

1) Remember from the previous Asset Inventory Page that we had a break between items 18 and 19.  The reason for that break is significant.  The first 18 items are generally items that should appreciate over the years-some at a high rate, and some at a lower rate-and some may remain relatively stable, but should not, in the long run of your retirement years, go down in value.

2) Items 19 through 24 would normally be items that depreciate--or in the case of the last two items, simply hold steady.  There is an old saying-"Anything with a motor, doesn't appreciate."-unless of course, you keep your car so long that it becomes an antique!

3) So, tabulate the value of today's generally appreciable items-items 1 through 18.  Regard them as growth items for your retirement, and keep in mind that recent real estate holding appreciation has far exceeded most investment returns, but that rising housing values may not hold up to continued expectations.

  
                          Today's total value of appreciable assets:      $__________

4) Now add up the value of items 19 through 24.  They are the depreciable items. (Items 23 and 24 will not really "depreciate," but a funeral 20 years from now will likely cost more than you have set aside at this time.) Do not yet subtract them from the above amount, we will do that in a moment.  They still have value to you today, but tomorrow's value will likely go down.

                Today's total value of depreciable or steady assets:  $__________

5) Here's what you've done.  You have completed two base asset pictures.  The first is a base of appreciable assets that you can use to roughly calculate how your retirement picture can be counted on to appreciate--in other words provide continual income for the length of your retirement.  Examine the results of Step 3.  If it looks like you can safely assume a 5-8% annual return (or inflation) on these items, and the base is large enough, you may feel pretty secure about retiring.  If not, you need to go to work to add savings strength, and sound investment decisions to your asset inventory.  But, hold the phone, there's more.

6) Take a look at the value of the results of Step 4.  These items are ones, which will work against the positive results of Step 3.  True, you may decide to "downsize" during the retirement period, but in all likihood, these are items, which will need replacing during your retirement years.  Thus, you need to project today, how much you will be willing to spend in the first twenty or so years of your retirement, to replace those items.  Whatever the calculation, the end result is diminishment of the total of Step 3.  So, simply figure what you wrote in Step 3, and what you wrote in Step 4, and now subtract Step 4, to achieve some idea of a net total.  Remember, the Step 4 items are decisions (maybe sacrifices), which you are willing to make, and which will have to be made up in future buying.

   Step 3  $________ Subtract Step 4 $_________  =  Net total $_________
    
7) At this point, you have only dealt with your "Asset Base." For instance, you have calculated the Total asset base, and the "Net total" asset base--but have not yet separated out the non-income producing portions.  There is a difference.  Remember when we talked about "House Rich-Cash Poor" positioning of real estate, or other non-income producing assets?  These assets are a factor, and even though they may be appreciating, until such a time that repositioning (profit from the sale of the real estate) is accomplished, cash flow income from those sources should be excluded from your annual or monthly retirement income projections.  In other words, these items are "non-liquid," and do possess value in that they may be liquidated, but in their current state do not provide retirement income until liquidated, then invested or saved.  So, now add up the "sleeping" (non-income producing) assets, of items 1, 2, 3, 4, 5, 9, 16, and possibly 18. 

                          Total value of non-income producing assets $ __________ 

8) Now you are ready to add up the total value of your income producing assets; items 6-8, 10-15, and possibly 17 and 18 depending on what they may be.  These are the items that you have preserved for your retirement.  In other words, two parts (savings and pensions) of the original three-legged stool of retirement.  These are items which do not have to be sold for you to receive an income from them, and, in essence are expected to be a large part of your retirement income.

                                Total value of income producing assets $ ____________

9) You can logically attach a percentage, (anywhere from 3-8% to this amount), and calculate the anticipated annual income you will have available from these assets, which will be available to use as retirement income.

                         Income from income producing assets @ 5%  $___________

(After separating out the income producing assets from the non-income producing assets, you may be surprised to find that your income producing assets won't quite get the job done.  And, that even though the non-income producers, have significant value, they will not provide a great deal of consistent cash flow to your retirement objectives.  In other words, they will not contribute to your income picture until such time that you sell them.  Everyone should be so lucky--assets are assets, no matter what--but you can only count on the income producers to contribute immediately and consistently to the income needs of your retirement.) 

10)   Now, on a positive retirement note, calculate what expenses you can expect to go down, and other expenses you  can choose to reduce.  Take a look at your checkbook for the last twelve months expenditures associated with your job.   Look at the job related expenses that will disappear once you achieve retirement.  You may surprise yourself.  Depending on the type of work you do, wardrobe and transportation factors will likely enter in.  Perhaps there's not a real need for three or even two autos.  Child care costs or adult day care costs may even be a factor.  You will find several items once you make a determined effort to find them.  These items will be eliminated from your retirement income needs.

                                    Total annual job related expenditures $__________

11)  In addition, there are employment deduction considerations.  Look at your pay stubs, or, in the case of the self-employed, your last 1099. It's probably a safe bet that income taxes will be reduced.  Right below that will be FICA  (Social Security and Medicare contributions).  All three of these items should reduce, or be totally eliminated, depending on your income, should you choose to keep working.  Then remove any voluntary deductions, such as 401(k) contributions. These items will have a major impact on lowering your monthly expense ledger.  So look at it this way--you are actually playing offense and defense simultaneously--like in a chess or basketball game.  What you don't pay any longer to be employed, in essence, transfers to the positive side of your personal expense ledger.  Kind of like "A penny saved, is a penny earned."

                          Total annual employment related deductions $__________  

12)   Now, obviously, you must prepare for the loss of income from your job, if retirement is the goal. Calculate the loss of income from your job, unless you intend to work part-time or replace job one, with job two, and/or job three.

                                                 Loss of income from your job. $ __________

Financial advisors feel that a person needs 70 to 80 percent of his or her pre-retirement income to live comfortably during retirement.  Social Security normally replaces no more than 40 percent.  What's even more scary is that some people wander into retirement without any thought of decreasing expenses-simply spending at will.  You might even look at it this way--"Let's see now, how do I look into the future and exist for the next thirty years on less money than I am making working today?"

In Stages 4, 5, 6, 7, and 8 (A Retirement Blueprint -- Part 12), we will compile all the steps and see what develops for you based on your own calculations, and start to develop some mindsets to deal with a new way of life--a satisfactory retirement.