By Kali Hawlk
“Retirement planning” is one of those big financial concepts we’ve all heard of, but may not be entirely sure how to tackle — and calling it a big idea might be an equally big understatement.
There are so many variables to consider, and much of what you need to plan around are factors that are either outside your control, completely unknowable in the present moment, or both.
No one knows what their financial situation will look like in 10, 20, or 30 years, because it’s impossible to know with certainty what income you’ll earn, what kind of employment history you’ll create, or what (if any) setbacks you encounter and deal with along the way. It’s difficult to balance saving enough for the future without depriving yourself today, and it’s hard to calculate the value you’ll need sitting in your nest egg because no one knows how long they’ll live.
Traditional retirement planning forces us to make guesstimates and assumptions with our financial situation. We act today in hopes that we’re taking the right course of action for tomorrow.
With uncertainty like that, can you really plan your retirement? Can you manage it without the help of a financial professional to guide you?
If you’re willing to do some research, ask questions, and educate yourself, I believe it’s possible. Here’s how to start to plan your retirement.
Consider Alternatives and Choose Your Adventure
Gone are the days when everyone retired at 63, collected a pension for a few years, and died around the age of 70.
Sure, that may be an exaggeration — but the point is that traditional retirement planning and the simple rules of thumb created to help you figure out how much you’d need to retire are outdated.
Your retirement is what you make it. You can retire at 35. You can keep working because you love what you do until you’re 80.
The choose-your-own-adventure style of retirement makes guidelines like “multiply your desired annual income by 25″ a bit obsolete. You may want a more customized calculation to help you plan your retirement.
You’ll need to sit down and think about what you want — and when you want it — to get an idea of how much you’ll need for your retirement years.
Get Clear on What You Want
It’s impossible to plan your retirement if you don’t have a clue what you want that part of your life to look like. Yes, it’s difficult to imagine yourself and what you’ll want to do in 30 or 40 years. But you can set down some basic parameters.
Ask yourself these questions, and be honest with your answers:
- Do you plan to live a frugal lifestyle with minimal expenses? If so, how will you manage this and how will you ensure your bills remain low in retirement?
- Do you want to live lavishly in retirement and enjoy frequent meals out, shopping trips, spoiling family members, taking expensive vacations?
- Do you want to travel extensively or are you looking forward to being a homebody?
- What hobbies or activities would you enjoy? Will your hobbies cost money, and if so, how much? Could you monetize those hobbies, and if you can, what’s your plan for doing that?
Don’t fail to take into account the abundant amount of free time you’ll have in retirement. Don’t assume “what you want” out of this stage is to relax and do nothing — that may sound great now if you’ve been working hard for years and you know you’ll have to continue to work for a few more decades. But once you enter retirement, you may find a life of leisure is boring and unsatisfying.
Once you have an idea of the kind of lifestyle you want, create a mock budget for it. If, for example, you want the ability to travel overseas for two months out of the year, calculate how much that will cost.
Or if you want to retire to your own homestead and think you’ll be living a frugal, self-sustaining life, calculate the cost of items you’ll need to maintain that lifestyle. (Maybe account for enough money to make repairs around your farm or how much it costs to feed any livestock you have.)
The point here is that we’ll all have some basic living expenses to consider: a mortgage or rent if we don’t own our living spaces, utilities, food, transportation, medical bills. Beyond that, the type of lifestyle you want to lead will determine how much more you’ll need beyond the basics.
Estimate the Basic Costs
Speaking of those basics, you can estimate those costs, too.
Some things in retirement won’t change. You’ll still need a place to live, food to eat, and medical care to stay healthy, just like you do today. You can start planning for retirement by estimating these expenses in the future.
Will you aim to pay off the mortgage on the home where you’ll live out the rest of your years while you’re still working? Do you plan to travel full-time and be responsible for monthly rents?
Do you plan on keeping the bills you currently have, like car payments or a big cable TV subscription? Or will you downsize your life that you currently pay for?
Make a list of these basic expenses and tally them up to get an idea of what your normal monthly costs will look like. My estimated budget would likely look very similar to the one I have today, with the exception of a mortgage payment. I don’t want to have any debt at all going into retirement, so I want to plan to eliminate those costs before I get there.
I’d also want to add in line items for increased property maintenance costs, as I hope to live on a large amount of land. I’d likely bump up what I think I’d need for discretionary spending (I want to be able to buy myself a latte any time I please, thank you very much) and add in the estimated costs for a few big trips each year.
Start Taking Action
With the above exercises complete, it’s time to start starting action to make what you want into what you’ll realistically have. The first step: start saving now! Save as much money as you can, as soon as you can.
Compound interest can only work for you if you give it enough time to do so. The longer you wait, the more you’ll have to contribute to your retirement savings on your own to reach your goals.
Next, take advantage of retirement accounts available to you. If you have a 401(k), use it and grab the employer match. If you have some sort of modified pension program, put in what you need to guarantee you’ll receive the income you need in the future.
Aim to max out your tax-deferred accounts first. Getting a savings on your tax bill today means you can contribute more money to your retirement accounts this year — and again, the more you can contribute and the earlier you can do it, the bigger your nest egg will be when you’re ready to start withdrawing from it.
Make use of a Roth IRA, too. It’s not tax-deferred, but it is “tax-advantaged” because your earnings can grow tax-free. Your contributions that you make now are taxable, but when you withdraw money in the future you don’t have to pay taxes on those funds. A combination of tax-advantaged accounts helps keep your burden owed to Uncle Sam balanced now and in the future.
Then, invest these accounts wisely. My preferred strategy is to purchase index funds and to avoid “bad investor behaviors” like trying to time the market, making emotional decisions, and trying to pick individual stocks.
Finally, leave your investments where they are. Part of successfully planning for your retirement is never withdrawing the money you’ve contributed to your retirement accounts for the future. You can rebalance investment portfolios to ensure you maintain the asset allocation you want (i.e. 80% stocks, 20% bonds), but you should not raid your retirement savings before you’ve actually made it to retirement.