It may seem that is far too early to even think about saving for retirement, however the simple math shows that if you begin early, not only is it easier to save for retirement, you can almost be guaranteed to have more than enough for retirement. Planning and then forming habits about saving for retirement pretty much ensures that you can have a comfortable life, subject to your expectations. Develop your retirement checklist now.
The chart above shows the age that savings begins and the amount you have to save each month to achieve a retirement account of $750,000 with an average 0f 8% return on the investments. It is pretty obvious that if you start early , you only need to save a small amount each month until you retire. If you delay savings until later years, the amount you need to save goes up dramatically.
Why do we talk about expectations. Well I recently met with a friend of mind who was worried that he might not have enough for retirement. He is 65 and will have a combined income from several pension plans of $110,000 a year. After I picked myself off the floor I said to him, that there is always more stuff you want. There is always more things you want to do than what you will be able to afford,. But this level of income in retirement will be more than sufficient. Most people would give their eye teeth to have even half that amount.
The following is a plan for getting started with retirement savings starting in your mid 30’s. Follow it and you will not need to worry about retirement funding:
Timeframe: Mid-30s to early 40s
Objective: Develop the habit of saving.
Savings: 1.5 times your annual salary before taxes by age 35.
- Take full advantageÂ employer-sponsored retirement plan savings whichÂ is the easiest way to put your savings on autopilot.
- Boost your contribution. Increase your savings rate as your paycheck increases.
- Explore other tax-advantaged ways to save. Depending on the country that you are in, there may be other tax advantaged savings opportunities that you can explore.
- Six month Emergency Fund. Always have six months of savings tucked away somewhere that you can draw on if you are laid off or have a health issue that prevents you from working.
Invest in Quality.
- Never invest in high risk investments. Seek out quality blue chip investments that have both a growth potential and pay dividends.
Retirement Checklist – Timeframe: Mid-40s to early 50s
Objective : Focus on how you invest your money.
Savings: 3 times annual salary before taxes by age 45
- Review your portfolio. Work with a financial adviser and re-balance your portfolio along the lines of your investment profile. This can be scheduled annually or after a significant change in the markets.
- Update your investment strategy. As you get closer to retirement, you will want to update your investment strategy and reduce risk exposure that may be in your portfolio. The objective is to move in the direction of preserving capital and maximize income.
- Catch-up contributions. If you have fallen behind on your contributions or just want to make an extra deposit, this is the time to do that. Getting ahead of the savings curve can have huge benefits in terms of meeting your objectives at retirement.
- Give yourself a reality check. Use one of the retirement calculators that are available and plug in the numbers. You will know quickly if you are on target or not and whether you need to make some adjustments to your assumptions and savings plans.
- Consolidate retirement accounts. Many of us have more than one job through our career and may also have more than one retirement account as well. Consolidating them can make it much easier to manage and achieve your objectives. Always make sure that your investments are diversified across stocks and bonds.
Retirement Checklist – Timeframe: Mid-50s and beyond
Objective: Decide what type of retirement you want and how much money you will need
Savings:6 times your annual salary before taxes by age 55.
- Prune my stock portfolio. As you get closer to retirement and plan to withdraw your funds, you will want to keep more of your portfolio in cash so that you are less exposed to market fluctuations. Having 2 years worth of cash is a great way to avoid having to sell low to meet your retirement cash withdrawals.
- Plan your retirement. When you retire, how will you fill the hours of each day? Will you travel, will you move, what hobbies will you follow and will you have the money to meet your plans? fill your days and you will enjoy them much more.
- Review yourÂ income plan often. As you approach retirement, it is a good idea to review your plan often to confirm and update assumptions about your expected income as well as your planned activities and expenses.
- Decide when to take Government Pensions. Taking government pensions early usually means a reduced pension, however cash flow and money needs may make it necessary to cash in early. Health issues are another issue. Use one of the calculators to help you decide when to take your government pension.
- Develop a Plan B. Life throws a lot of curves at us. Over a 30 or 40 year planning horizon, many changes to your assumptions can occur. Develop a plan B that helps you to meet your goals. Some people will do a sensitivity analysis on their assumptions to see what happens. For example, assume you will need to retire at 60 instead of 65 due to company layoffs. What does that do to your retirement savings plans and life style?
If you spend some time on this now, retirement will be far more rewarding and quality of life will be far more enjoyable! For more ideas about retirement planning, click here.
It is far too early to worry about retirement, I am only 30 and I have 40 years to save!