We, humans, hold the idea of a decent life very close to our hearts. One of the most crucial parts of living a decent life is having a good income for sustenance before and till post-retirement. We all face difficulties earning a living at some point or the other in our lives. It’s acceptable and feasible until we are young and working. However, when we are ready to retire, we will not be able to have a decent life if we do not have enough savings set aside for retirement. Hence, retirement planning has to be a vital component during our working life.
If you start planning for retirement during your early 20s, when you got your first job, you would have almost 40 to 45 years to save towards your retirement. But, if you start planning for your retirement when you are in your 50s, you would only have 10 to 15 years of working life to save money towards retirement. Now, no body is going to stop you from working even after when you are 65 years old, but, to be honest, do you think that in today’s world, where cases of ageism are rampant, would there be any well-paying jobs when your age is more than 65? And even if there are certain companies that would love to have you continue, how long will they let you work – until you turn 75?
It is extremely important that one should plan for his/her post-retirement life. If you want to maintain your lifestyle after you retire, you need to have enough money available that will last for the rest of your life. The key to have no money-related worries during your retirement is to start planning for it as early as possible during your working life.
We all need to have a practical approach towards life. For some of us, our kids may help support and take care of us when we are old. But do we really want to be a burden on our kids? Do we want us to have our kids take care of us while they are trying to build their own life and dealing with life phases such as building their career, growing a family and focusing on their kids. And they definitely would have their own financial worries such as saving for their kids’ education, paying off mortgage and planning for their own retirement.
Life plans are like dominoes; when one falls, the rest fall with it. In many cases, our retirement plans are dependent on our jobs, our standard of living, our earnings, our circumstances, age, etc. Below are a few important things to consider when planning for a successful retired life:
Table of Content
- How to build a Retirement fund?
- How Inflation impacts Retirement plans?
- Do we have to pay Taxes during Retirement?
- How to have an effective budget during Retirement
- How to asses the sources of Income generation during Retirement?
- How to maintain vigilance over Retirement accounts?
1. How to build a Retirement fund?
A Retirement fund is basically the fund that is kept aside or saved during one’s working life specifically for the purpose of to be used as income source during post-retirement. Let’s say you are in your 40s and plan to retire by age 65. That would mean that you have another 20 or so years left to save for your retirement. Considering that the average life expectancy of adults is 85 to 90 years, you will need enough money that will last for 20-25 years to empower you with a decent retired life for the rest of your life.
Now, during your working life, depending on your age and earnings, you can plan to set aside a fixed amount every month as savings towards your retirement fund. If you are in your 20s, you may be able to put aside $500 every month towards your retirement. Assuming a person is 25 years old and plans to retire by 65, he/she has 40 years to save towards retirement. That means $500 save per month * 12 months * 40 years = $240,000. That’s it $240K. Now, how can someone live for another 20-25 years on only $240K in retirement savings? Well, to be honest, no one can? Then, why save this money?
The trick is that you should not Save, but Invest!!! If you were to Invest $500 per month, every month, for 40 years, then depending on your Investment vehicle, you could actually have $1,500,000 or more in your retirement funds. Now, it would be much easier to have a decent retired life and survive nicely for the remainder of your life on this $1.5 Million. Keep in mind that you won’t need to cash out this $1.5 Million at one go when you retire. You only have to withdraw what you need each month and let the remaining amount stay invested in your investment vehicle so that it continues to grow. Using this logic, you only have to withdraw, let’s say. $10,000 each month to take care of your monthly expenses, while the remaining amount stays and keeps growing.
Investment vehicle is the key here. And, the magic of compound interest and rate of returns is in play here as well. Stocks have given a steady 7-10% annual returns over the last 15 year cycle. Investing in Real Estate is another investment vehicle. And, of course, utilizing 401K investment options is going to be crucial. 401K plans allow US based working adults to set aside tax deferred funds. And, many employers also contribute towards their employees 401K accounts.
To add cherry to the cake, there is a decent chance, that we may still receive Social Security benefits as long as the system is not bankrupt by the time we retire.
2. How Inflation impacts Retirement plans?
The overall increase in the cost of goods and services compared to the fall in the currency’s value is called inflation. Calculated at the consumer price index, it has seen an increment of 2% to 3% per year over the last few years. Moreover, inflation for medical aids ranges from 2% to 5% every year. The impact of Inflation is extremely important as you plan for retirement, specifically, it helps determine the amount you would need to have available during retirement considering that the cost of goods could be much much higher than it is today. And, very often, changes in income and expenditure patterns are at the mercy of rising inflation. Hence, while preparing for a beneficial post-retirement life, a blind eye towards inflation can show staggering alterations in your plans.
3. Do we have to pay Taxes during Retirement?
Benjamin Franklin said, “… in this world; nothing is certain except death and taxes.” Well, taxes do summon the death of an individual’s delight over income generation. It is a reality; for every purchase, there is a tax that has to be paid for every activity. Post-retirement, you would undoubtedly have taxes on most accounts either from investment activity or from taxed withdrawals. Don’t forget to count taxes during planning, as it may lead you towards extreme unexpected shortfalls.
- Note that certain Investment account such as 401K account will not have an early withdrawal penalty if you were to start withdrawing after 59.5 years of age. However, you would still have to pay income taxes on the amount that you are withdrawing.
- Also, ensure that you consider accounting for taxes when receiving an expected pension or having enough cash on hand to spend. Along with inflation, the cost of taxation from income also increases with time.
4. How to have an effective Budget during Retirement
During post-retirement, for many people, investment withdrawals or pensions will become the main source of income. However, proper budgeting needs to be done so that this income will help meet your day-to-day survival needs. Just as how we should be using budgets during our working life to ensure we have enough money to take care of us, similarly, we need to make sure the money that we have during retirement, also lasts for the remainder of our life. Hence, proper and effective Budgeting is extremely important. As we perform post-retirement financial planning, we must also consider the approximate cost of living that is going to be different from the current cost of living.
Thus, visualizing expenditures as a non-retired individual helps judge the fair amount that will be needed post-retirement. Then, after accounting for taxes and inflation, you can calculate the amount you need each month to have a decent lifestyle during retirement.
One can start by evaluating spending on dining out, groceries, medical, fuel, etc., and learn how much he needs and how much expenditure is in excess as requirements and expenses change over time. Having a sound idea of what we need and what we want makes a huge difference, and for that, it is good to come up with a retirement budget. Developing the habit of discussing these plans with your significant other, peers, and family members will show and clarify several different thoughts and perspectives about financial needs during retirement.
5. How to assess the sources of Income generation during Retirement?
All said and done, the fact is, a good income makes everything possible. Just look at wealthy people and the things they are able to do due to their money. Jokes apart, sources of income are as crucial as income itself during your working life as well as during your retired life.
If you have a single source of steady income during your working life, you can get rich by following smart investment strategies, but, if you are able to generate income from multiple sources, then you can not only become rich, but become wealthy.
How? Well, it’s simple. With a single source of income, there isn’t much left to consume after compensating for the cost of living. There may not be much left with multiple sources after compensating for the cost of living, but you could have more than enough for ease in life and for investments..
Similarly, even during retirement, you can still have income coming from multiple sources such as your Investments, 401K accounts, Real Estate investments, some side businesses, etc. The key is that you become a smart investor during your working life and invest in multiple investment vehicles so that you have multiple income streams during your retired life.
6. How to maintain vigilance over Retirement Accounts?
When it comes to retirement savings, it is always good to overestimate how much you will be needing during retirement. Most of the time, people forget or they just can’t find time to be on track to save enough before retirement. “That’s life…“, Frank Sinatra said melodiously.
So, it is recommended that you have a word or two with an investment adviser once in a while to keep a close check on your online account or keep a watch on your retirement account.
And, most importantly, use a service such as MoneyPatrol to closely track all your investment accounts and keep monitoring your portfolio very often to ensure that you are on track to achieve your retirement money goals.
- The age or time of retirement is directly proportionate to the time span and capability of an individual to generate active income. Most people usually retire at the age of 60 because that much time is required to cover all the desired and necessary expenditures of life and then to plan for a retired future.
- It is very important to make and have investments that will provide at least 70% to 80% of your current monthly income post-retirement. It is wise to take inflation into consideration.
- Also, do invest in investment vehicles that offer more than 6% annual returns and beat inflation. Don’t forget that Investments grow due to compounding and compounding requires time.
- Invest time in creating a diversified portfolio of fixed income and market-linked instruments. Investing in index funds or stocks can provide a steady growth over time. Index funds are safe for steady returns. In comparison, equity requires risk appetite.
So, should our post-retirement plans be at the mercy of current income? What to make of life when you’ve worked your entire life but still have chaos in your post-retirement life?
The wisest thing to do is to invest in tools that will provide you with essential aid in setting several short-term and long-term goals as well as acquiring them with the greatest certainty.
We recommend that you use MoneyPatrol on a regular basis as it is an invaluable tool that will assist you in fully comprehending, managing, and monitoring your finances. As the Beetles said appropriately, “Can’t Buy Me, Love.” It may not be love, but a certainty towards ease and comfort in life that can be achieved be becoming proactive and saving + investing for your retirement.