Originally posted at moneyweb.co.za by Adam Bacher, Adam Bacher & Associates Wealth Management, August 25, 2020.
You might remember thinking back to school or university days learning about Maslow’s hierarchy of needs pyramid. Just to remind you, in 1943 Abraham Maslow, an American psychologist, proposed in his research paper a theory around the theme of human motivation. Maslow taught that human beings are motivated by unmet needs, and that lower needs must be satisfied before higher needs can be addressed. So as an example, people’s basic needs such as physical survival must be met before other needs higher up the pyramid such as love or actualisation can be addressed.
So how does this relate to the topic of planning for retirement? The bringing together of Maslow and retirement was brought to fore in Mitch Anthony’s brilliant book The New Retirementality. This book was originally published in 2001 and is still enjoying huge success in it’s recently released fifth edition.
In the concept of retirement funding, he says we first need to figure out what we desire out of life in this phase and THEN only work out how we are going to pay for it.
In his Income for Life plan, he says we are looking to simultaneously settle both emotional and financial ledgers. We can’t simply number crunch our way to emotional well-being and quality of life but neither can we achieve these ends without crunching the numbers and making the necessary adjustments.
So, in designing an Income for Life, Anthony pivots the Maslow pyramid in a way that creates a new way of thinking which is extremely powerful in planning for our retirement needs.
The hierarchy Maslow offered was physical survival, safety, love, esteem and self-actualisation. For the purpose of the financial/life discussion, these categories have been renamed. As an example, “Love” in Maslow’s definition had to do with belonging – to a spouse, to a family or to a community. So, this area in the newly constructed pyramid (see below) has been titled “gifting or gift money” as this is most often the materiel expression of love.
Source: Mitch Anthony
What Maslow called esteem; has now been renamed to freedom. Maslow was referring to the self-esteem from doing things well and being recognised for the action. In the Income for Life model this is categorised under “freedom money” because unless people have the freedom to do what they want with their occupational lives, they will be missing the esteem and satisfaction that comes from doing what they are best at.
There is also the aspect of financial freedom that allows us to address not just esteem but enjoyment as well. Hobbies, trips and exploration cost money, and if we don’t prepare an income stream to address these costs, we may not realise these experiences. Freedom has been placed below gifting on the hierarchy because from a financial point of view, it is quite unlikely that we will give money away to others before we are free.
Below are the phases of financial preparation we need for Income for Life Planning (in order):
This the money that we need to make ends meet. Work out how much you actually need to survive on a monthly basis. The money needed to pay your basic necessities is your survival income.
Safety income is the money needed to meet life’s unexpected turns. These are funds needed to protect ourselves from the various risks out there such as health risks, investment risk, loss of income and financial needs within the family. Looking at your insurance/assurance costs is a start to get a grasp on this number.
This is the money required to do all the things that bring enjoyment and fulfilment to life. Some people engage in low-cost relaxation activities like walking while others walk after a golf ball at a private club which comes with a steep price tag. Travel, adventure, and personal growth are also some of the considerations to include when calculating the amount needed to fund your freedom.
Gift income is money for the people and causes we deeply care about. Here our money can be used for a higher calling of bringing blessing to those people and causes we deeply care about. You might be part of the “sandwich generation” experiencing financials pulls on both ends of the generational spectrum.
Dream income is money for the things we’ve always dreamed of being, doing and having. A nice name for this income is “bucket-list” income. Borrowing from the movie of the same title starring Jack Nicholson. What do you want to be? What do you want to do? What do you want to have?
Paying for it
The final phase for this Income of Life exercise is to sit with a financial advisor who can do a cashflow match comparing potential income sources to your aspirations – which sources will pay for which needs? If it’s a case of only having enough for survival and safety at this point, then you will at least have comfort knowing that those two critical bases are covered.
As author Anthony rightly points out, you will now have a much clearer picture of how much you will require for your other needs. You can then set goals around saving and budgeting to find the income necessary for funding these important needs of freedom, gifts and actualisation to help you fund the life you want.