Your house shouldn’t be your retirement plan

Retirement1I often hear people my parents age (my parents included) who are planning on using their home as their retirement plan. They plan to sell it when they go into retirement and downgrade, and take the proceeds to live off of. This sounds all fine and dandy, but it’s simply poor planning and truly not retirement planning at all, it’s probably more just wishful thinking. Retirement planning is actually taking the time to sit down and look at your financial picture from the day you want to retire (or hope to) until some point down the road that you think you may live to, and figuring out how much money you will need to survive and at a level of life that you’re used to.

In a nutshell, you must figure out when you believe you will become debt free (including your home being paid off) and when you want to retire. From there, you must figure out how much money you will need to live off of every month. If you don’t take the time to do this, you’ll be like my grandfather who worked as a mechanic until his death in his 80s, he was never able to truly enjoy life – because he was always working for money – he didn’t understand the concept of having money working for you. Not to mention, he left his family with nothing, because he had nothing.

After you’ve determined how much money you’ll need to survive without working – you’ll know what your financial goal is over the next several years – and you should custom tailor your investments to accommodate the appropriate types of risks you must take in order to achieve your financial goals.

As a quick example, say Fred is 50 years old and he want to retire by 65. Let’s just say Fred was very late to the game, and he hasn’t invested like he knows he should have, let’s say he has $100,000 in low risk investments. Fred knows that he will have his house paid off in 5 years, in the meanwhile, he is going to invest as much as he can afford, taking advantage of catch-up contributions to his employer sponsored 401k plan. Fred determines that he will need to have about $3,000 per month in retirement to maintain his current lifestyle. He also determines that family history tells him he can expect to live until his mid 80’s. And who knows, with medical break-through’s he wants to make sure he has the money to live until he is 90. Hence, he needs 25 years worth of living expenses. Now with some basic math he can figure out how much money he needs; He sees he will need 25(years) times 12 (months) times $3000 (monthly living expenses) or $900,000 in order to do retire when he wants to and live the way he wants to. Now, this exercise was not comprehensive, as we left out things like inflation and other concerns, but it should provide you a quick idea of the things you should consider when retirement planning.

Fred should now determine is his plan feasible. He only has $100,000 right now, can he save and create an additional $800,000 over the next 15 years to meet his goals and retire on his 65th birthday? It depends, if Fred only makes $50,000 per year, and he saved every penny he made and invested it – he may be able to reach his goals, but they don’t seem too realistic. So then Fred must figure out a different plan to meet his goals, maybe he needs to work a couple of extra years, or just be more frugal.

Here is our retirement calculator to help you get started on your own. Check back everyday for more great stories like this, or have these articles delivered right to your inbox! (Don’t worry – I hate spam too – you can unsubscribe hassle-free at any time). Thanks for reading!

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