Plan your retirement now.
How do you see your retirement phase? Do you wish to retire early? Do you intend to travel a lot? You may have always wished to relocate after retirement. Are there any new hobbies you wish to take up? Is there a part-time job you would like to do for fun? Or do you plan to just relax and spend your days at a club in the country or with a fishing rod?
The answers to the above questions are important, as they will shape your retirement plan. Whatever you wish for, remember you need to provide adequately for retirement. For that, you have to start saving right away. If you plan to retire early, you need to save a lot more before the day arrives..
How does one go about drawing up a retirement plan? The first step is to consider retirement a priority in your plans for the future. This will help you do your homework and focus your efforts towards achieving your goals.
Setting your goals
Imagine what your retirement looks like – factor in money, work, lifestyle, health and housing and analyze each of the following questions:
- How much retirement income do I need?
- How much money do I need to pay off debts and bills?
- Will I travel? How much money should I set aside for travel expenses?
- Will my mortgage be paid off before retirement? If not, how will I meet my monthly payments?
- What will be my living costs – here or in the place I wish to move to?
- How much should I budget for medical expenses?
These will help you arrive at an approximate size of your nest egg and an idea of how much you need to save to build one. In fact, you should begin estimating your monthly savings from this point onwards. This step is very critical but most individuals lose interest and do not carry the planning to completion. The US Government’s MyMoney.gov site provides many tools to help you plan for retirement. Your financial planner is another person who can help you in this regard.
How much retirement income do I need?
Financial experts say that you need around 70% of your pre-retirement income to sustain your current lifestyle. However if you expect to have expenses related to travel, entertainment and other activities, you will need more.
Younger people in the early stages of their working careers may find it difficult to estimate their future income needs which is 30 years away. However it is imperative that they begin saving every month and review their retirement plan every 2-3 years.
Realities you cannot ignore.
- Longevity - Our life expectancy is higher than what it was for our grandparents. People are living longer and they living for a lot more years beyond retirement than before. Based on current estimates, a retiring 55-year old male and 55-year old female can expect to live approximately 23 and 27 years in retirement. This means that the likelihood of living at least 20 years in retirement is pretty high. While general health and family history play their part, the trend of longer lives is expected to continue.
- Inflation - Inflation can erode your savings like nothing else. While inflation has been low the last few years, there is no guarantee in which direction it will turn in the future. What looks like a sizeable retirement amount now can shrink considerably down the years due to inflation. As an example, with an inflation rate of 3%, if you retire comfortably at age 60 with an annual income of $40,000, by the time you hit 80, you will need $72,000 to sustain your standard of living.
- Insurance - While you are working, you are probably insured through group policies covering for disability, health and life. Once you retire, you lose the coverage. If you and/or your spouse were to now suffer a major illness or disability, how will you pay for the hospitalization and medical expenses? You therefore need to plan for adequate insurance and savings for your retirement phase.
- Social Security - The earliest you can start receiving Social Security benefits is age 62. At 62, you receive 80% of what you would have received at the “normal” retirement age. This age has gradually moved from 65 to 67 years. If you wait till age 70, your monthly benefits will be even higher. Deferring Social Security benefits for as long as possible can increase monthly benefits. However have you planned for other sources of income, in the absence of Social Security, to be able to live comfortably in retirement?
Take Action
Choosing when to retire and how to live thereafter is an individual decision. The best strategy is to do your homework, determine how much money you need to set aside to let you live the lifestyle you want, seek out professional advice when needed - and start now!
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