How to plan for retirement can be quite simple yet many people wait. This site is dedicated to giving you the nudge you need to get started. In this first post, I will discuss some simple steps required in order to plan for your retirement.
How To Plan for Retirement: step 1
How Much Income will you require during your retirement years? Many people feel that less annual income, around 70% of your current income, will be sufficient. This is a good rule of thumb if your retirement date is more than 10 years away. If your target retirement date is less than 10 years out, perhaps you would prefer to use your actual budget and calculate the planned changes once retired. More detail to come in a future post as there are many questions to answer that are related to changes in costs in areas such as: leisure, healthcare, mortgage/rent/residence, travel, etc.
How To Plan for Retirement: step 2
When Will You Retire? More specifically, at what age will you retire? We all look forward to the day when we can kick back and do as we wish. Will you wait until 65, are you on the trail to Freedom 55 or perhaps the date coincides with a pension plan date or the date your children are financially autonomous with their studies paid for. What is important here is to take a stab at a target date! If the date changes in the future adjustments can be made. Yet, for many people, no clear target is chosen because the future is not easily foreseen. The suggestion here is to choose a date that makes some sense: the year your pension plan can be accessed without penalty, the year the mortgage is paid off, etc.
How To Plan for Retirement: step 3
How long do you expect to live? The question in step 2 is natural to ask and fun to look forward to, this one can be eerie. You have an idea how much retirement income you need on an annual basis, now you need to know how many years will you be spending this cash. Here is a Reason to Procrastinate: nobody likes to think about the end of their life. So, rather than dwelling on the negative side of things, how long do people generally live? We can use the statistics in mortality tables for an estimate or perhaps your family has a certain trend such as: all the men in my family die in their 70s.
So think about it: here were 3 simple steps required in order to plan for your retirement.
How Much Income Will You Require during your retirement years,
When Will You Retire and
How Long Do You Expect to Live?
The answers to these 3 questions will indicate how much cash will be required for your retirement years.
Here is my example:
Age 44, 70% of my current salary is roughly $62,000. My target date is 2028 which coincides with the year my youngest daughter could finish university (I plan to have my mortgage paid off by then too. )
Since I don’t have a clear picture of family health history and I pride myself on taking care of myself, I am using age 90 as a conservative estimate. This means I will live 28 years in retirement. Simple math says I need $728,000 (in today’s dollars) without factoring inflation or returns. I’ll add these factors in a future post.