Planning Ahead is the Key
Have you been dreaming about retirement but wonder if it can ever happen for you? Most of us think we are just “one lottery ticket away” from retirement, and we are too depressed to even consider it as a serious possibility. So instead of thoughtfully planning for it, we tuck our heads in the sand and hope it will all take care of itself someday.
The earlier you begin to think about it, and plan for it, the sooner it will be able to happen. The first thing you will need to do is to determine what your expenses will be in retirement. The place to start is to determine what you currently spend. Track the expenses for at least six month then translate into an annual budget. If you use have been using an accounting software program like Quicken, it is easy to track your expenses. If not, create an Excel spread sheet and start keeping track of every penny you spend. You can use the following categories for your expenses.
- Monthly mortgage
Home maintenance and repairs
- Household supplies (cleaning, paper products, mops, brooms, etc)
- Lawn care
- Snow removal
- Painting & miscellaneous repairs
House insuranceProperty Taxes
- Everyday Living Expenses
- Groceries (include eating out)
- Clothing, shoes, and toiletries
- Gym or other memberships
- Hobbies or interests
- Medicines or medical co-payments
- Miscellaneous unexpected expenses
- Loans, if any
- Gas, oil, maintenance
- Licensing and property taxes if any
Other Insurance Costs
- Long term care
- Credit Cards
- Educational loans
- Other debts
Begin looking at these expenses to see if there are some you can eliminate before retirement, for example, credit card debt, educational loans, or any other debt you have, such as a car loan. You might want to see about downgrading your living expenses by selling your larger home and getting into something smaller like a maintenance free condo. You definitely do not want to go into retirement with a heavy debt load unless you are one of the lucky people to have a very well-funded pension plan and a huge nest egg.
There are many schools of thought on how to estimate your expenses during retirement. Some people say you will only need 70% of your previous earnings in retirement due to the savings you will have from not working everyday. While it is true that you will save on commuting expenses and business lunches, you may have an increase in other costs such as health care costs, dental, and other benefits previously paid by your employer. If you are only a few years away from retirement, probably the best thing to do is to assume that your costs will stay the about the same. If you are several years away, you will need to consider an inflation factor of, say 2% to 3% per year.
Ideally you started saving in your early twenties. Most financial planners suggest that you put away at least a minimum of 10% of your earnings as soon as you start working. The earlier you begin saving, the more your savings will grow, thanks to the wonder of compounding. So how do you know if you have saved enough for retirement? It is pretty simple, really. You have to compare your projected expenses to what you project your income will be. If you have enough income to cover your expenses, then you can retire. Sounds pretty simple, right, but how do you translate the savings you have into an income figure?
Most financial experts tell you to plan on withdrawing no more than 4% - 5% per year to maintain the principle. So let’s assume for a moment that you have amassed $l million. You are only talking about an income from your savings of $40,000 per year. Now add your annual income from your savings, IRAs, Certificates of Deposit, 401Ks, annuities, and other investments (4% of whatever that number is) to determine what your available retirement savings annual income will be.
Add to that any pension income that you will receive and your Social Security benefit. The Social Security Administration sends an annual notice to all wage earners to let them know what they can reasonably expect to receive when they retire. If you don’t have that statement, you can go to their website and request a statement.
Compare your projected income to your projected expenses. If you come up short of what you need, you have two choices.
Your first choice is to keep working to build up your retirement nest egg and social security benefit. Not only will your retirement income grow, you will have fewer years that you will need to collect. If you are over fifty, the IRS will also allow you to make “catch up contributions” to your 40lK and IRA accounts. I have read that you will need about $15 to $20 in savings to cover each dollar of the annual difference between your projected income and your projected expenses. So, for example, if you come up short by $20,000 a year, you will need to create a nest egg of about $300,000 to $400,000 to make up the difference. Working a few years longer will help you build up that nest egg. And let’s face it, people are living longer today. We need to be preparing to live to at least ninety, since I have read that about 20% of men and 33% of women who are 65 today will live beyond 90 years of age.
The second choice you have is to find ways to supplement your income during your retirement years. You may be asking yourself, “In this economy, what kind of retirement income opportunities are there for retirees”? Some people have made investments earlier that will give them a passive income in retirement, such as dividend-paying stocks, or income-producing real estate. Others decide to continue working part time. Many professionals decide to consult or work on contract in their chosen field. Others who have the educational credentials become adjunct professors in their chosen field. Others turn to a hobby they enjoy, and work part time in a related business. If they have pretty good computer skills they might even start an online blog related to their hobby or other passion and find ways make money on their blog.
Since I don’t have any real estate investments or dividend producing stocks, I decided to start an online business. I only have a couple of hours a day to work at it, so I know it will take a year or so to get it up and running. But once I learn the skills needed to be successful in an online business, it will afford me the flexibility to enjoy my retirement without being tied to a specific work location or work hours.
Retirement can be a very scary thing, especially if you are single like me, with no one else to count on, or if you have not been able to set amass a huge nest egg. But it is not impossible. Start planning for retirement as soon as you can, but don’t ever feel like it is too late, or that you are doomed to work until you die. Start now thinking about ways you can cut back expenses, pay off debt, and build future passive income. With a little planning and focused goal setting, you can have a successful retirement and enjoy the rest of your golden years.