Many of us are like the ostrich with the head in the sand when danger is around. Especially when it comes to thinking about and planning for our retirement. For the young, it is so far off that there is no need to think about it. While people are in the middle of their lives, they just have too many other financial pressures to give it much thought. By the time we are in our 50’s and 60’s, panic has set in. We realize that we will not have the kind of retirement that we had all planned since our savings are just too low.
This usually means working a lot longer, in some cases well past the age of 65. Some people want to work, while others never want to work again. Let’s at least have a choice.
How Can We Avoid this Panic?
The answer is actually quite simple. It does take some willpower and some perseverance. However, if you start early enough saving for your retirement, it can be quite easy to have large retirement saving at the time you retire. The best part is that after a short while you will not even miss the money that you are saving each week from your paycheck. Just take 10% and put it in a savings account. Somewhere you cannot touch it for any reason until you retire. Let’s illustrate this with a couple of small examples.
If you were to start setting aside $100 a month until retirement at age 60, at an average of 7% interest rate you would have $239k set aside in your savings for retirement. If you retired at age 60 and lived until age 80, you would receive $22k per year. Not bad for just setting aside $100 per month!
We use this example to illustrate just how easy it is to build up a retirement plan by saving a small amount each month. In fact, we go a bit further by suggesting that a person should set aside 10% of their salary every year for retirement.Â Ten percent is certainly affordable and once you get used to being without the money, you do not even think about that 10% you are setting aside.
The Ten Percent Investment Plan Solution
Let’s assume that you make $50 thousand a year and you are disciplined to set aside 10% or $5000 per year in your retirement savings plan.Â $5000 per year sounds like a lot, but it is only $416 a month. You might have done without a car or some other convenience, but that should be an easy sacrifice to make your retirement comfortable.
So with our example, you are going to set aside an average of $5000 a year into a savings plan at an average of 7% interest rate until age 60. By the time you are age 60, you will have $998k or almost a million dollars saved. If you live for another 20 years until age 80, you can afford to draw $94k per year from your retirement plan. Wow, that is not too shabby! All for just setting aside 10% a year.
Some Issues to Consider
Now some people will say that there is no way I can afford to set aside %5000 a year in my early 20s. True our best earning years are later in life. However, if you always invest 10%, you may end up only setting aside $2k a year initially, but in later years as salaries increase you may find that 10% means you are investing as much as $10k a year. This will more than makeup for the difference in the beginning years.
Can you make an average of 7% return every year? Probably over the lifetime of your savings plan. Some years you will make significantly less while other years you will make significantly more. It should average out to around 7% over the 40 years or even a bit higher based on past statistics for the markets.
But the government will tax me and take a lot of my earnings. This is true and that is why you need to invest your money in a tax-free savings account ( Canada) or an RRSP ( Canada ) or a 401 K ( United States ). These accounts will let you build up your nest egg without being taxed by the government while you are saving for your retirement. When you do retire, and begin withdrawing funds, you will be taxed at the tax rate commensurate with your total income at the time of retirement.
This is Your Life, Take Care of Yourself
We have seen over the past decade that a number of really big companies have suffered badly or gone out of business. Also, the volatility of the markets has caused many people who are retired or are pre-retirement to wonder if they will have enough money to be comfortable.
The message we have all learned is that we must look after ourselves and not depend on our company or our government to look after us. That means we must take responsibility for our own savings investments and practice good savings techniques as well as good investment strategies. This means we need to be involved with our investments.
Be extremely careful and invest wisely. Avoid placing all of your investments in one place. If it is too good to be true then it probably is. Just think about the recent Ponsi schemes that have come to light as of late. Investors lost millions of dollars when the investment is something that was too good to be true.
Diversify investments across multiple companies, and diversify investments across multiple advisers and then pump them for information to make your own decisions about what the best approach is for your investment strategy.
Invest 10% of your income every year into triple A investments, inside a tax-free account, diversify your investments and avoid investments that sound too good to be true. Start early in your life with your 10% plan and in no time at all you will have a retirement nest egg that will help to ensure your comfort during retirement.
It takes discipline, to place the 10% in your investment savings plan every year. It also takes discipline to not touch this nest egg when you are short of money or need to buy a house.