Financial Planning
“Planning is bringing the future into the present so that you can do something about it now.”
― Alan Lakein
Retirement: Why You Should Start Planning Today
Many people hear “retirement” and think… 401K? Roth vs. Traditional IRA? Stocks, bonds, mutual funds? Do people put money away according to the suggested amount and then simply hope that when retirement comes everything will work out? One report I read estimated that 66 million Americans have put away a whopping $0 towards retirement. Many people are still thinking there might be a thing called Social Security around when they retire.
Social Security: as of 2004, the average annual Social Security retirement benefit is approximately $11,000. That is not a lot to live on folks. Plus, we all hear the news periodically that there might not be any Social Security around when we get older and need it.
And as a further WAKE UP call, I found a calculator which estimated (without Social Security):
a couple at 40
bringing in $90k a year (together)
with very modest investments
…would need to save an additional $2,690,000.00 (yes 2 million+) in order to retire at 65– OR plan on working an additional 29 years!!
Let’s break this down…
1) Standard of Living: You need to know at what standard of living you will want to live during retirement.
2) Basic Living Expenses: You will need to calculate the cost of basic living expenses (at that level) i.e. electric bill is now of $200 = what in 2030?
3) Hobbies and Leisure Activities: Know what type of hobbies, and leisure activities you will keep busy with and what their cost might be then.
4) Family Visiting/Travel: Realize that more and more children move away when grown. So while they work out of state YOU may need to do the traveling to see them. Plan for these costs.
5) Convalescent Care (nursing home costs) provincially run about $100/day median. You will need to multiply that times the same 4% inflation rate. Then multiply that times the number of years before you may need it to approximate how much you may need to afford for your housing when you need assistance. Truth be told WE need to plan to handle that cost ourselves, rather than think our children will be able to take on that kind of additional cost.
You will need to total yearly amounts. You will need the approximate yearly cost to live (at your desired level) during regular healthy retirement. And, you will need the total yearly amount of costs to live in assisted or full care living facilities (for you and your partner).
Multiply each yearly amount by the number of years you might be living in that circumstance. Example:
Retire at 65.
Live healthy retirement – 15 years (so 15 x yearly cost of healthy living).
Live assisted 8 years (so 8 x yearly cost of living in care).
You now have two totals that when added together equal your estimation of the total dollar amount you will need to draw from in order to live after retiring.
NOW you are ready to begin planning your investments in such a way that you can achieve that TOTAL number by the time you retire.
The scary fact of the matter is according to CNN Money, among people who make $25,000 or less, only 8% are invested in the stock market. Or to put it another way, 92% are not taking advantage of compound interest.
On the other hand, 88% of people making more than $1 million are in the market.
So yea, maybe you’re thinking well only 8% of those with salaries under $25,000 are invested in the stock market because their salary is so low, so they can’t afford to save more and invest it.
But the reality is it’s a common problem not just applicable to them. Apparently only 18.7% of taxpayers own stocks. Or, 81.3% of people in the United States who pay taxes do not participate in the good fortunes of the stock market.
That’s really bad when you consider the S&P 500 index’s performance for 2017 was 21.83%.
If you had invested $1,000 in an S&P 500 index fund, you would’ve made around $218 from doing nothing.
If you had invested $5,000 in the index fund, you would’ve made around $1,092 from doing nothing.
If you had invested $10,000 in the index fund, you would’ve made around $2,183 oh you get the idea.
This is literally one of the easiest ways to make money if you can be smart about it and invest in index funds.
You might think you can put it off for another few years since retirement seems so far away, but it’ll catch up to you before you know it. The next thing you know, you’re 35 and you haven’t saved a dime for retirement; and we all know how that story ends.
At a previous job of mine there was a 73 year old man working only because he hadn’t saved enough money to go into retirement, because 1. he didn’t save enough and 2. he worked in an expensive city (West Palm Beach) and had a low-paying job.
Resources to help you get started:
https://digital.fidelity.com/stgw/digital/planning/retirement/retirement-income-calculator/
https://www.fidelity.com/viewpoints/retirement/3-retirement-building-blocks
Sources:
Fidelity.com
CNN Money
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