Too often we fall into the trap of associating retirement with being old and by doing so we create a self fulfilling prophecy. We delay planning because we think retirement is something you do when you get older, and instead mostly focus on the now. Instead of thinking of retirement as something you do in your 60’s or 70’s, why not shoot for retiring in your 30’s, 40’s or 50’s? But how will you ever retire young if you never try and figure out what it will take to do so?
So how do you get started? Below, I’ve sequentially listed several of things you should do to start planning your retirement early (this list is not meant to be comprehensive, rather a starting point to get you thinking). You need to see if your goals are feasible and or what you need to do to make retiring early a reality (this exercise will be for someone in their 20’s, simply use the same concepts if you’re older):
- Determine how you want to live in retirement: Everyone wants to live comfortably, but define that comfort level. Determine your anticipated living expenses on an annual basis out through your life expectancy. Some expenses to consider would be monthly rent, leisure, insurance, health care, emergency funds, etc.
- Determine how much money it will take in the bank to support your lifestyle. For example, if you’re 25 now and want to retire by 30, will you have enough funds saved up to cover your lifetime expenses? If not, readjust your retirement age or lower your expenses. Also consider how your income will be distributed throughout your retirement. You start off with a chunk of money in the bank and that money earns you money, however, as you draw down that balance, the income you make off of those investments will also go down.
- Make an investment plan to meet your savings goals. Anyone can pull a number out of the air of how much money in the bank they need to support their retirement needs, but can you amass that amount of money or not? This process will help you determine whether or not you can or cannot meet your savings goals. For example, if you’re 25 and have determined you will need $1,000,000 to retire at 35, and you anticipate making around $50,000 in income for the next 10 years, you may come to the reality that 35 is unrealistic and you have to push your age back another 10 years.
- After you’ve determined realistic savings and retirement plans, put your plan into action and monitor your progress. Your situation may change and or the markets may change. You may be promoted or lose a job and need to adjust your goals along the way. The market may explode or implode.
- As you move throughout the life of your retirement plan it’s critical to adjust your risks accordingly. When you are younger or earlier on in your investing you’re more willing to take risks, as you progress through your plan it doesn’t make sense to take as many risks, as you move from wealth accumulation to wealth protection.
If you wait until you’re older to plan for retirement you will concentrate too much on the now instead of the future. You will continue to work for your money instead of having your money work for you. It’s important to start planning as early as possible. Why not figure out what it would take to retire at 30, 40, 50… instead of waiting to figure out what it will take to retire in your 60’s or 70’s? You really have little to lose by going through an exercise like this of your own. If it seems too complicated, consider working with a financial planner or other professional that can help you along the way.