Retirement situations differ vastly between individuals. In the modern day and age, expectations of a long retirement are built into society: people think of retirement largely as deserved, and necessary. In most places, the days of working until the end are gone. The one most-agreed-upon notion for retirement is that the earlier you start to save, the earlier you can retire. As world markets become more volatile, costs of healthcare change and lifespans lengthen, your retirement picture is guaranteed to be different from even those similar to you.
Therefore, a smart retiree begins thinking about his or her future plans long before they retire, and is safely ready years before the target date. When you retire depends on your annual salary, how much you save (and have saved), where you plan to retire and your lifestyle, your pensions if any, dividends or investment return and your age (for benefits eligibility).
Invest in Smart and Safe Assets
There are a few tenets necessary for young working professionals to begin a healthy retirement plan. Pay yourself first: put away 20% of each check before you do anything. Invest in smart and safe assets, adjusting risk as you grow older. Do not go into debt.
The questions are different for those getting closer to the big R. Are you living in a place with high property taxes? Perhaps still in the home that housed your growing family? This might be a large burden on your finances over time, for space you don’t need. When you have a steady paycheck, living large doesn’t seem like it’s a drain on you. After retirement when you have none at all, going out to eat, buying new clothes, new cars, and especially using your newfound free time for vacations will quickly sap your funds.
An effective way to control how much you retire with is to control how much you save, and therefore how much you spend. The equation is similar for those who aren’t planning on retiring soon but ads a variable: time. It works two ways. If you think about retirement a decade before you actually retire, you have ten years to be scrappy and save in excess of your normal rate. On the other hand, when you’re retired, saving doesn’t mean storing money over time, but not spending it.
Make Sure you Calculate
For most people, a happy retirement means living at your established status quo but without the compounded requirement of work. You continue buying what you buy, doing what you do and living where you live but with a whole lot more free time. Make sure you calculate not only the lack of a wage into your budget, but also the fact that when you have this much free time, a lot of it will be spent doing things that cost money, not make money. That is, unless you plan on sitting at home watching TV during your whole retirement.
As morbid as is it to discuss when you’ll die, the fact is that lifetimes are increasing every year. If you retire at the very reasonable age of 65, it’s not unheard of that you may spend 30 long years in retirement. You might look at your nest egg worth a million pounds and think to yourself, “Wow, I’m a millionaire. I’ve got nothing to worry about.” The truth is that may not even be half what you need.
Look to the 4% rule. The rule states that 4% is a reasonable amount to withdraw yearly from an investment portfolio in order to keep the investment healthy and sustainable. On a million pounds, that gives you 40,000 pounds per year. That works out to about 3,300 pounds per month. Not enough to cover most couples’ expenses. Some retirement planners even advise against 4% due to growing volatility in the world’s markets, opting for 3% instead. Even with a pension and social benefits, you might be living “paycheck to paycheck”. This is why forward planning is essential.
Property taxes, mortgages, food, vacations…
It may be scary for those already approaching retirement, but the only way to know is to check. Map out exactly what your expenses will be in the years before you plan on retiring. Property taxes, mortgages, food, vacations, insurance, dependents etc. Then figure out where any passive income will come from when you’re retired. Investments, pensions, social benefits, inheritances (you will want to leave money for your children too, don’t forget).
By knowing your expenses and passive incomes, as well as the amount you currently have and plan on saving before retirement, you can get an accurate picture of your budget. Surprise! It may not be enough to sustain your current lifestyle for decades. It may also be prudent to plan for a long life. The point is you might live in retirement the same amount of years as your career, but without an income stream. Chances are you spent more than you saved in those years.
There are many ways to plan and navigate through your financial future, and no path is best. If you’re young, it’s never too soon to start. If you’re older, it’s never too late. The truth is, happiness from retirement doesn’t come from how much money you have for yourself, it comes from how much time you have to carve out a piece of your life different from all others.
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