It’s key to focus on the factors you can control when creating a retirement plan.
Though it might seem far away, the decisions you make today about how much to save and where to invest your money will affect the quality of your retirement. Other factors will creep into your plans, too, such as the rising cost of living, whether you experience a divorce or choose to become self-employed and pensionless. Therefore, it’s key to focus on the factors you can control when creating a retirement plan.
Start with a vision: All retirement plans need to start with the vision you have for your future. Think big! Ask yourself the following: When do you want to retire? Where would you like to live? Would you like to travel? Will you be making gifts or donations? What kinds of hobbies would you like to participate in? Based on family history, will you live longer or shorter than the average person (average lifespan today is mid-80s)? What potential medical costs do you foresee in the future?
Quantify your vision: In today’s dollars, meaning that you should strip out any factors of inflation, what does an average year of your ideal retirement cost? Lay out the categories and put a price tag by each:
- Regular living expenses such as utilities, parking, property taxes, internet, and mobile phone, rent (if applicable), home insurance, and auto related costs. If you’re a homeowner, remember that you’ll likely be mortgage-free, or close to it;
- Travel expenses such as long- or short-term vacation rentals, plane tickets, costs for managing a vacation property, car rentals, and travel medical insurance;
- Gifts of money to people and places such as children, church, or charity;
- Hobbies such as golf, art classes, book clubs, squash clubs, and more;
- Life and medical insurance premiums. Note that as you age, term life policies become very expensive.
What does it all add up to over the course of one year? Now, add another 50 per cent to those costs to factor in inflation. For example, if the year costs $50,000, add another $25,000 for a total of $75,000 to factor in inflation. Last, break that total number down by month.
Convert your costs into a value for your nest egg: Use a rule of thumb to help calculate the size of the nest egg you’ll need. It’s simply that for every $1,000 per month you need in your retirement, it will require approximately $250,000 of retirement savings. In other words, it takes about $250,000 of invested money (earning regular interest and dividends) to generate $1,000 per month of income in retirement.
If your retirement vision costs $4,000 per month, you’ll need a nest egg of approximately $1 million. If your vision is $6,000 per month, your nest egg would need to be $1.5 million, and so on.
Where are your retirement savings today versus the size of your nest egg?: Does it feel like you’re far from your nest-egg goal? That’s what you can focus on next; amping up your savings. Play around with a compound interest calculator online to determine how much to save each month. Adjust the monthly savings value and rate of return (which we recommend you keep at 6.5 to 7 per cent), until you reach the desired size of your nest egg.
If you’re not saving enough, take a look at your budget to find ways to save a bit more. Or, consider growing your income through a higher paying job or taking on additional work.
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