A Good Retirement Plan Starts With Goal Setting.
All your life you have been both a consumer and a contributor. You’ve been working, earning, spending and hopefully saving for that time when you become just a consumer. The more you have been involved in planning for your retirement the more likely you are to have a successful retirement. People who do not think about their future finance or leave it to their employer, their government or their retirement account fund manager will find themselves in trouble come that retirement time.
Saving money during your lifetime of work is the basic building block of a successful retirement. But how much should you save? How much money will be enough for you to have a comfortable retirement? Clearly the answers to these questions will be different for every person. However, use the following guide to plan your own retirement.
Begin with three aspects of your age. How old you are now, the age at which you want to retire (or stop working full time and begin living off your savings) and the age at which you expect to die. Mortality is a fact of life, if you will excuse the pun and has to be confronted if you are to plan effectively for a comfortable retirement. Answer these questions, how long did your parents live? You have the same DNA and may well have inherited their health conditions, so start by assuming you will live at least to their age. Do you have a healthy lifestyle? Add years if you don’t drink or smoke and have a healthy diet. Subtract at least five years if you use tobacco and or abuse alcohol. If you do smoke also consider adding to your savings now to cover future medical bills.
Example: A person aged 40 now, expecting to retire at 65 and live a further 20 years to 85 needs to move on to thinking about their money in detail. What is your annual income? In our example let’s assume $50,000. And let’s say you save 10% from now on, making $5000 this year. You will of course earn interest on your savings so let’s assume 9% pre-retirement and 6% post retirement (it is less post retirement because you are spending from the total saved amount). The person in our example will have saved $311,072 by the time they retire.
The next step in planning for a financially secure retirement is to look into a crystal ball and calculate how much money you will spend each year for the 20 years of your retirement. Again in our example let’s assume $40,000. Remember you will get some social security payments and you need to estimate these and subtract them from your expenses figure. So let’s assume around $13,000 per year. Thus total annual spending drawn from savings will be $27,000. For the 20 years of retirement this means our exemplar will need $540,000 in total but only has $311,000.
This means, in our example, that the retiree will run out of money at 79 and face 6 years of poverty when they are in most need of a stable income. Or they will leave over $200,000 of debt in their estate.
The really big question in retirement planning is what are your financial goals in life? For some people, leaving debts behind them is not an issue, while for other people it is an unthinkable situation. Other people may see the best-case scenario as a zero bank balance at the age when they shuffle off their mortal coil. You need to build your financial goals into your life money model. In our example let’s say that this person wants a comfortable twenty years of retirement and a zero balance at 85, they must look at the options to bring this about and they need to act now.
So what options are there when you need to make up a projected shortfall in retirement income? Increase your level of savings now is the first and most obvious option. If you are in a 401k or Roth retirement fund, with your employer contributing and deductions from your salary, you need to find out what the maximum contribution level is and begin making those payments.
A second option is to increase the return on your savings. Many Americans are dealing with large amounts of personal debt coming out of the consumer credit led boom years of this last decade. Unsecured debt, particularly credit card balances are extremely expensive. If you are saving money at the same time as you are making debt repayments you are well advised to make yourself debt-free as a matter of priority and only then get back to saving for your retirement.
A third option, along the same lines as option 2 is to increase your investment earnings by switching to different, higher risk but higher earning investment securities. This involves researching and switching to a self-directed Roth or 401k retirement plan.
Before taking up any of these options it is important to do the retirement plan calculation and retirement life goal setting before implementing a combination of all of the above options.