Do the Math

Most people don't love doing math. Since digging into the numbers is stressful, often times they'll take the shortcut of following their gut instincts. Don't fall into this trap. If your gut is telling you to get a sandwich, feel free to listen. If your gut is saying it has a great financial idea, you may want to learn how we take the guess work out of financial planning by doing the math.

There are lots of examples where people tend to take short cuts rather than doing math. How much should you save to your 401(k)? Some people go with whatever the employer matches. Others may use the rule of thumb saving 10%. Some people do the maximum allowable contribution. Which is best? You can't know until you do the math for yourself.

You need to look at how much you make, how much you spend, how much you expect to spend in retirement, what your current tax bracket is, what your future expected tax brackets are, what other investments you have and your estimated rate of return. That may sound like a lot of work but if you do it right, you'll get an answer that is right for you.

Another question I get is whether to keep a house as a rental property or sell it and use the proceeds somewhere else. Let's look at the factors. What are expected net proceeds from a sale? What is the estimated rent? What are the mortgage, insurance, taxes and HOA? What are the other upkeep costs? Do you want to be a land lord? Will you hire a property management firm? Where else can you invest the proceeds? Do you need liquidity? What are the tax implications of a future sale compared to selling now? Again, that's a lot of work but you'll get an answer that is right.

Probably the biggest question people have is, how much can I spend in retirement? Many people use the 4% rule of thumb. That may be about right on average, but it may not be right for you. To get your answer, we need to look at your investments, pensions, social security, inflation estimates, tax bracket, family longevity, health situation, legacy goals and potential changes moving forward. There are a lot of moving pieces but once you understand them you can project how much you'll be able to live on in retirement.

The next time you catch yourself making a decision based on a hunch rather than on the numbers, give me a call. You might like working with me because in the real world paying your smart friend to do your math homework isn't cheating, it's responsible.

Investments contain the risk of loss. Before implementing any investment strategy, you should consult with an expert to look at the details in your financial situation.