Everyone needs a retirement investment plan. Today we have many vehicles to use to build up a nest egg. Investment strategies should vary based on age, taking more risk while you are young to spur growth while trying to limit risk later in life to protect your assets. Preservation of capital becomes more and more important as we approach retirement.
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Have a Clear Vision of your Retirement
It begins with knowing what it is you want to have happen. The more clearly defined your goal, the more motivation you will have for achieving it. In order to save enough, your goal needs to be clear and your planning assumptions have to be realistic. Although your time horizon may be off in the distance, your vision needs to be tangible with defined lifestyle needs. Your vision will likely change over time, which is why it is important to review your retirement plan regularly. When you lose sight of your target, you are not likely to hit it.
Know what it will Cost
With a clear vision and well defined goals, you can then attach a price tag. The mistake many people make is that they try to use some general rule of thumb, such as calculating their retirement income need as some percentage of their current income. Your income calculation should be more deliberate, based on a realistic budget.
Another mistake people make is to assume that their expenses will decline in retirement. That’s not necessarily true anymore. When you consider the increasing costs of health care, long term care, and, even the possibility that you may be caring for your aging parents for a period of time, these can throw any budget out of whack. Plan for a cushion and factor in the increasing cost of living. With an average inflation rate of 3% your cost of living will double in 20 years. You will also want to factor in an expanding life expectancy. People who reach age 65 today have a 50% chance of living past age 90.
Most financial planners recommend the 5% rule. The 5% rule states that you can withdraw up to 5% per year from your retirement account to live off in retirement. This will insure that you do not deplete your retirement funds while you need them.
To determine what you will need to retire you first need to set a retirement budget. Once you have your monthly living expenses laid out, determine your monthly social security payment. For some people social security may cover their living expenses but for many it will not. Once you have determined the gap you can figure out what you will need to retire to live your preferred lifestyle.
Let’s say your monthly expenses will be $5,000 a month in retirement and that after taxes your social security payments will be $2,000. That leaves a $3,000 difference. Using the 5% rule, you will need to have $720,000 in your retirement account to safely withdraw $3,000 a month.
Know where you are Today
In addition to a clear vision, you need a clear picture of where you are today in relation to your goals. A thorough assessment of your financial situation including your current savings, your future savings capability, your tolerance for risk, your other priorities, will determine your current savings requirement. It is important to take periodic snapshots of your situation as it changes so you can make adjustments as needed. Another major mistake people make is that they don’t check to see that they are still on track to meeting their retirement goal.
Start Saving Now
By following these steps, you will have the vision, the goal, the cost, and, hopefully the motivation to get your plan in motion. Determining the actual amount you need to save will require some calculations that can be done using a retirement income calculator (available all over the internet). The most important step you can take right now is to simply start saving.