Steps to a Sound Retirement Plan

It is no secret that the United States is the beacon of capitalism in the world. The country however has several social safety nets it has put in place to take care of its citizens, none more important and well known as Social Security and Medicare. It is important to know that the future of Social Security is highly uncertain. President after President have operated the United States at a budget deficit. The most recent administration has been no exception. Essentially, at some point, this social safety net is likely to disappear.

All of this simply means one thing. We better plan and save for our retirement while we still can. While nothing beats starting early, it is never too late. I’ve provided a step by step plan on how you can start planning and saving for your retirement immediately. Remember, when it comes to retirement, a lot is great, a little is better than nothing.

Just like any other endeavor, retirement planning should start with a goal. A dollar amount you want to have saved as your nest egg when you retire. Experts recommend that the day you retire, you should have saved up approximately 25 times what you plan on spending every year in retirement. This is called the 4% rule. Essentially, it states that you can withdraw 4% of your nest egg every year in retirement and the returns you get on the other 96% will continue to offset this withdrawal every year allowing you to indefinitely survive on your savings. Below table shows a comparison of what you might need depending on your income expectations in retirement based on the 4% rule. It is noteworthy however that the 4% rule is just what some experts recommend. You can go conservative by going 3% to help the dollars go further and make sure that if you have unexpected expenses, you are covered and not over stretching yourself. Personally, I like to go 3% but that is just me.

If you have any other sources of income that you expect in retirement – a military pension or disability pay, for example, you may be able to adjust the retirement savings number lower, so give yourself a pat on the back for creating that security for yourself.

Retirement is highly subjective and ultimately it is the lifestyle you desire when you retire that will determine the size of the nest egg you will need which will in turn decide what you need to do today to get there. If the size of your nest egg is the value on one side of the equation, the other side of equation has three input variables – 1) What you have saved up today, 2) How much time you have before you retire and 3) How much you can save every year until you retire. Essentially, the equation of retirement is below –

Nest Egg = Today’s Savings + Future Annual Savings compounded over the number of years left before Retirement

The additional factor of compounding which is absolutely vital and works in your favor but it is not something you have a lot of control over. You can adjust where your savings are invested to tweak the amount of returns but that is something I will talk about in future articles.

1. What you have saved up already – This can include any 401k savings you have today, cash, stock, bonds etc. subtracted by the debt you have today. I wouldn’t count the equity you have in your primary home since I believe that a home is something you will need to live in retirement anyway and should absolutely be paid off before you retire. That is a separate plan you should have in place already and if not, let me know in the comments and I will write about a mortgage payoff plan. This number is pretty much a constant. You can’t go back and change the past.
2. Number of years you have before you retire – This is slightly variable since ultimately, you can choose how long you want to work or what age you want to retire. If you do not have a lot of money saved up already and are starting late, you might want to consider either delaying your retirement, or saving up extra every month, or both.
3. Dollars you can save every month – This is what you have the most control over. Ultimately, your lifestyle determines how much you can save every month. Once you know what you want saved up for retirement and when you want to retire, you can easily calculate what you will need to save every month to get to your goal using a retirement calculator.

Now that you have that number in figured out, it is time to build an action plan. The first and most important step of that action plan is creating a budget and you can learn how to create on here. Start your budget with filling out that savings number first and then allocate dollars to your necessities. Mortgage, food and utilities. Then, depending on how much money you have left over, think about clearing out any debt you have. Get rid of that expensive car and get a cheap car so you won’t have car payments. Put any additional dollars towards that student loan that has been hanging around your neck for the last 10 years. Stop buying clothes and new shoes until that debt is paid off. See if you can sell that home theater system and use those dollars to pay off some debt. Remember, every dollar that you save today, every sacrifice you make now will add to the richness of your golden years – literally and figuratively. I know it seems far away now but trust me, it is coming and the better equipped you are to take care of yourself in retirement, the healthier your retirement will be. The last thing you need when your body is slowly deteriorating is financial stress. Imagine being able to purchase that beach house with the nice view and living out your retirement waking up to the sound of the ocean and having coffee with sand beneath your feet every morning. It is possible. It just takes long term financial discipline.

So, figure out what your retirement goals are, what it will take to achieve them, what you need to do today to get there and start making those changes today. It will feel challenging for a little while. Slowly, it will just become a part of who you are. If you have questions, leave it in the comments. If you like the content, give it a like and hit ‘Subscribe’. If you really like it, share the content. It keeps me motivated to keep writing and sharing.