Planning for retirement is not as easy as you think it might be. I’m not talking about whether you’ll go fishing or grow a vegetable garden. I’m talking about getting to retirement with enough funds to last you a lifetime.
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Following is a set of factors that play an important role in getting to that successful retirement (all adjustable in the Free Millionin10 Retirement Calculator™)
Date of Birth: Obvious one right? Yes but important nonetheless. If you plan to work till 65 this one is easy. You can mark your calendar 65 years past the date of your birth. If you plan to retire prior to 65 we need the date of birth to calculate the day you can start withdrawing from your retirements accounts. This date is set at 59 years and 6 months after your date of birth.
Life expectancy: Nobody wants to think about what age they will die but if you want to plan a successful retirement you will need to pick an age. You might be shocked to learn the United States ranks 34th (wikipedia.org) om longevity but for now let’s just focus on the actual age: woman’s life expectancy 81, man’s 76. If I were planning for my retirement I’d try to be more optimistic. The important thing to take away here is: your retirement has to last you a lifetime!
Retirement date: Again, if you plan to work till 65, easy; birth date plus 65 years. If you’re more ambitious and aim for an early retirement, you have to choose a realistic date. Pick it too early and you may not have enough or you may end up depleting your after tax accounts prior to age 59.5.
Current financial situation: If you want to plan for tomorrow you need to know where you are today. Chances are you’re not starting from scratch. How much do you currently have in your retirement accounts, savings and after-tax investment accounts? Again if you plan on retiring at 65 your retirement accounts should be your main focus. For early retirement you will depend on the after-tax accounts. You may also want to check on your other assets like equity in your residence or maybe you have some other none-monetary investments. Should you run out of money during retirement you could possibly monetize these investments.
Current living expenses: in order to figure out how much you’ll need to live on after retirement you need to figure out how much it is you currently live on. I’ve often heard that after retirement your expenses will go down. I’m not so sure of that. First of all doing nothing can cost you but more importantly inflation is going to make a big difference here (more on that in a bit). If you haven’t done it yet, create a budget based on your current expenses and figure out what it is you spend today. If you plan on paying of your mortgage prior to retiring than that will definitely have a mitigating effect on your expenses after retirement.
Current income: How much you make today will determine how much you can invest and save towards your retirement. If your employer offers a 401(k) your salary will determine how much you can put in your 401(k). Don’t forget about the potential company matching; this can easily add up to 3% of your entire salary. If you’re planning for your retirement also consider any expected annual raises (even though those aren’t as certain as they used to be).
You need a plan: Put enough in your 401(k) and you’ll be set to retire at 65. What is enough and what if you want to retire earlier? You need a plan. How much will you be saving on a monthly basis, how much will you contribute your 401(k) and how much will you invest in the stock market to get to a comfortable retirement? If you do plan on quitting a little earlier, when will it be? 5 years from now, 10 years from now? How long do you need to keep up the investments and savings to get there? Set yourself a goal and plan what you will save, invest and contribute, preferably on a monthly basis.
Assumptions:
When it comes to planning for the future and especially when finances are involved we have to resort to assumptions. The future is not set in stone. It is up to you as the planner to make those assumptions based on your appetite for risk or lack-there-off.
Expected returns on investments: This is where things get murky. Listen to Dave Ramsey and he’ll tell you, you can expect 12% which seems like a bit of stretch to me. Listen to more conservative voices and you’ll be told 6%. The truth is nobody knows. If you’re planning for retirement play with both ends of the spectrum and find an in-between that you’re comfortable with. Over the 17 years I’ve been investing I’ve gotten very close to an 8% return, but as I’ve learned this week China can really mess that up.
Savings interest: Not even sure we should bother with that one as it is almost negligible compared to investment returns but still every little bit helps. In my plan I assume a 0.04% interest; there are cash vehicles that will return more.
Inflation: DO NOT IGNORE inflation; it is real even though it might not feel like it in the moment. In 1962 a new car cost $2,924.00 in 1971, $$3,560.00 in 1999 $21,022.00 and today $31,252.00. It is hard to imagine that your $47,000.00 annual expenses today will be up to $87,000.00 in 2045, yet with a 2.5% assumed inflation it will be.
There you have it, some of the important factors that will make your retirement a success, be it as 65 or at an earlier age. You may wonder why I didn’t add social security into the mix. Well I probably should, it certainly could make your retirement a little more comfortable. Then again maybe social security should be under the heading “assumptions” assuming there will still be social security by the time you retire.
If you want to see all these factors in play in a real retirement plan download my retirement planner FOR FREE. You can enter all the factors mentioned above and some more and it will show you where you might land based on your situation and your assumptions.
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Good luck reaching your financial goals.
