Friday, November 17, 2017
9 Keys to Retirement Planning
Wealth is such a subjective topic. We all have different ideas of what being wealthy is. Some people want a mansion on the rich side of town. I personally would rather a nice condo right downtown. Some want the Ferrari or Mercedes. For me, it’s the juicy investment account that can provide me financial freedom. Despite this, we all have one common wish: The ability to retire with dignity. No one wants to be old and poor. However, many of our seniors are living below the poverty line. They all receive Government benefits so what does that tell you? That the government doesn’t provide you enough in retirement to live a comfortable life. How do we solve this problem? That’s right, you guessed it, save money for retirement. You can’t just save money and expect everything to be okay, you must have a plan. In today’s post, I am going to show you 9 keys to a successful retirement plan. By the time you are retired, most of your savings will be wrapped up in this form of planning, so let’s make it a successful one.
1) Start now
Actually, start yesterday. More like start last year. No matter what age you are, if you are over 18 and out of school you should be saving for your retirement. People are living as long in retirement as they are working during their lives. You have to figure that if you live until age 90, you will spend 25 years in retirement. With people living into their late nineties not that uncommon, you need those extra saving years to get ahead. Starting early will maximize your results and the beauty of compound interest will make you very wealthy. That only works if you start early. If you start later you will have to dedicate a much higher percentage of your take-home pay to savings.
2) Pick a date to dip
You have to pick a date that you wish to retire. Now this date can and will change, but it is important to pick one for a few reasons. First off, the date you choose will determine how much you need to save. It will show you how aggressive or relaxed you can be on your spending and saving habits. Secondly, picking a date allow you to adjust as time goes on. Remember this date will change over time as life present new triumphs and challenges. The goal is to make a date and be ready for it with all bases covered. Regular review will be needed to make sure you are on track.
3) Find out what retirement will cost
We all have bills and they take a large portion of our take-home pay. The good thing about it is when we are working we can usually handle them comfortably. It becomes a different story when you are retired. You should know what life will cost you when you are retired. That seems difficult because who really knows how expensive life will be in 10, 20, 30 or 40 years. This is where understanding inflation will come in. Inflation averages around 2% per year. That means that your dollar will be worth a little less in the future. So, if your average expenses per month are $3000, in 40 years they will be about $6,624.12. That’s quite the jump! So, if you plan for 30 years of retirement (age 65-95), you will need $2,384,683.20 in retirement savings to retire comfortably. That is your number to aim for. Now it might seem like a lot, but remember that that is money from all sources including government, personal and employee retirement funds. Another reason to start early eh?
4) Find your retirement income sources
For those closing in on retirement, the sources are well known from which they will draw an income. For us in the younger generation, we are unsure if government sources will still exist 30 years from now. When I do retirement planning for the people heading into retirement I factor in Canada Pension Plan and Old Age Security. I would recommend that younger people assume those sources will not be there, just in case they are done away with by the time we reach the big day. Either way, you should have several sources of income during retirement including government money, employment pension money, and personal retirement savings. Those with a company pension, make sure you save on the side as well. You never know when your company will downsize or negotiate a new pension deal. Ideally, you will have enough invested where this would not be an issue.
5) Build an Emergency Fund
You need to have an ever-growing Emergency Fund in straight cash. Now the people at the bank might tell you that you should invest every last dollar you have, I disagree. The reason is simple: When the markets have a huge downswing, which is inevitable, you don’t want to have to draw from your investments to live. This becomes very important in retirement because most of your money will be in retirement savings. Having a large nest egg of one year’s salary in straight cash will allow you to live off while you allow the market to recover. Remember, the only people who truly lost in the 2008 market collapse were the ones withdrawing. If you can float during recovery, you can recoup any market losses. The emergency fund also allows you to deal with life’s traumas like sickness, injury or the loss of a loved one which becomes more common in your older years.
6) Pick the Vehicles
You are the driver; your investments are the car that will get you to retirement. Whether it’s Tax-Free Savings Accounts or Registered Retirement Savings Plans or my favorite, both, you need to choose the most efficient vehicle to park your hard-earned money in. These vehicles will be invested in products based on your time horizon (when you intend on using the money) and you risk tolerance (how you react to market swings). Always understand the tax implications of what vehicle you have your money in and the risk associated with what you are invested in. The person who you work with on this plan should explain both to you.
7) Think about Housing
It is important to think about where you will live during retirement. Owning a home has many great factors including no rent expenses during retirement if you have the mortgage paid off. If you plan on renting all that means is, you need more funds to cover that expense. Considering all the variables is important. Home ownership isn’t for everyone, but it can be a good piece of the retirement puzzle. Being forced to spend meager government funds on rent in retirement is how many seniors face poverty in their elder years. Think about housing before it forces itself on you.
8) Think about fun stuff too
Do you want to travel in retirement? Do you want to have a cottage or a vacation home? Do you want to spend half the year in Florida? Do you want an RV and cruise around the countryside all summer? Take into consideration what fun things you want to do during retirement as well as the essentials. If you only think about the essentials, you will only be able to do the essentials. You work hard your whole life, retirement should be your time to enjoy yourself, not stare out the window and the sun because you are poor. Retirement planning should be focused on the lifestyle you want to live more than the bills you have to pay. The numbers are just numbers. It is the lifestyle goals that make them important.
9) Have a checklist during your working years
During your working years have a checklist of things you want to accomplish that will set you up for retirement. This can include saving for the kid’s education, building that emergency fund, buying that motorcycle, paying off the house, getting those promotions and making more income, retirement savings levels, covering yourself with insurance, taking care of your elder parents and much more. Having a checklist of goals you want to accomplish each year will help greatly with the retirement planning process. You will be able to track progress and see results. These are your goals and dreams and only you can hold yourself accountable for them.
Retiring wealthy is the ultimate goal. The problem is sometimes life gets in the way. You must take the concrete steps to make sure that one of your monthly bill payments is to your future self. If you treat it as a bill and not a wish, you will go far. Remember that having money is only not important to those who have too much of it. For the rest of us, it will allow us to realize our dreams and give us options we didn’t think we had.
“Whether you are just entering the workforce or nearing retirement age, planning for the future is critical.” – Ron Lewis
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