Do Not Wait: How To Plan for Retirement

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.

Author: Robert

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14 Responses to Do Not Wait: How To Plan for Retirement

  1. This is definitely a good start, Robert.
    Many people go their entire lives without ever answering ANY these important questions.
    I hope a few take your advice and sit down with their spouse to hash these out.
    Thanks!

  2. I think an important thing to realize is that retirement planning is not an exact science. The best thing to do is start saving as soon as possible. Using me for an example, I have no idea what kind of salary I will be making so I don’t know what 70% of that will be. Since I’m in college still, it was just important that I start. I will work out the details later when I have an actual salary.

  3. @ MoneyMan,
    I’d say that the important part is to have a line of direction. It is almost impossible to know which kind of income you will need at retirement. However, you know that if you are saving 10% of your income until you retire, you shouldn’t be too bad ;-)

  4. I think 70% of your annual income is overstated by FAs and mutual fund salesmen. The average person will never save this much and doesn’t need that much to retire, once debt is paid.

  5. @Jungle,

    your point is good. I have recently read an article stating that several individuals will only require about 50% of their income at retirement. I think there are several points to consider before establishing how much you will need such as:
    #1 will you have debt at retirement
    #2 will you change your car every 3 years or keep the same one for several years
    #3 do you intend to travel a lot
    #4 have you considered healthcare fees (in addition to having a nurse at home or other health related expense).

    The 70% rule of thumb also comes from the fact that pension plans will give you a maximum of 70% of your base salary.

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  7. In 21 years time I will retire with an indexed pension approximately 70% of my greatest 5 years salary. Currently, my goal is to stash as much as I can into RRSPs as we feel the tax benefits from it, then lay off slightly after 4-5 years and try to max out our TFSA. At which point can you monitor where you are heading? It’s so frustrating to “guess” how much we will need and how much is required to put away now. I don’t want to end up making $100,000/yr at retirement….wait a second, sure I would if it wasn’t taxed.

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  10. I TOTALLY agree on the necessity of planning for retirement – and obviously even more important – the necessity of putting the plan in operation. Planning without the second part is basically planning on winning the Lotto. However an item which is usually not mentioned when planning for retirement is “What will happen to me in the last few years of my life? The years when I will most need medical care and spend the most money?” I am not trying to sell anything – just pointing out some numbers. I live in Montreal, Quebec Canada – and the current cost of BASIC care is about $2,500/mth. “Quality Care”? About $5,000/mth “Top End Care?” About $10,000/mth. The oldest boomers (today age 64) will pay about DOUBLE those numbers. The youngest? About QUADRUPLE! “The government will provide! HAH!!! The government is US – the taxpayers. I was born in 1945 – we had about 42 tax payers per retiree. We are about to hit TWO. I am sorry – there is no way our tax system can support THAT. Thought we had a financial crisis a year or two ago? When the US has to admit the non-existance of the funds to provide Social Security, Medicare and Medicaid (which should be in about 10 years – they will have no choice) the shortfall? Just under $100 TRILLION.

    Boy – we had better plan – because the only one we can count on is US

  11. by Future Money-Bags | October 19, 2010 at 2:26 am

    Inflation is a very very important factor to plan into retirement!
    The average inflation rate for the past 30 years, is 3%.
    If you are able to live off of $2,500/month in todays dollars, and you want to retire in 35 years for example, you would need roughly $6,500/month to be able to afford the same living style that you do today.
    So in order to beat, or atleast compete against inflatioin, you must increase your savings by 3% each year. This will give you a much larger retirement fund to live off of once you retire (at age 55,60,65+) until you die (at age 80,85,90+).

    Imagine $6,500/month, thats $78,000/ year. And thats just a modest $2,500/month in todays dollars…

    Happy retirement planning to all!

  12. Plus “Health Cost Inflation” – forget the exact name – has been growing faster than the regular CPI every year but 1 since they started measuring it. Every reputable source I know says to project THAT inflation rate at 6%. Remember health costs are a HUGE item as we age

  13. Inflation is surely a big killer in any retirement plans!

    out of curiosity, what do you use as an average inflation?

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