Three Questions for Better Retirement Planning
By Moe Zulfiqar for Daily Gains Letter |
Planning for retirement is hands down critical for everyone. It is the stage of life where a person should be able to sit back and relax, rather than worry about where the money will come from for the next month’s bills.
To give you an idea, according to a study done by National Bureau of Economic Research this year, 46% of Americans die with less $10,000 in assets. Majority of the people die with no housing wealth and are completely dependant on the social security. (Source: https://www.nber.org/reporter/2012number1/venti.html)
Similarly, according to Retirement Confidence Survey (RCS), conducted by the Employee Benefits Research Institute, the confidence of Americans in their ability to retire comfortably is at its historical low levels. They are concerned about their job uncertainty and amount of debt they hold.
In addition, to their bleak confidence in retirement, American workers are not preparing for their retirement properly. Fifty-six percent of the workers have not calculated the amount of money they need in order to retire peacefully. Moreover, 60% of the workers reported that they have total household savings and investments of less than $25,000. (Source: https://www.ebri.org/pdf/surveys/rcs/2012/PR962_13Mar12_RCS.pdf.)
So, by now, it should be clear that retirement planning is important. If a person doesn’t plan for retirement, then they are in for a period of worry when it’s time for them to enjoy their life. As they say, when you fail to plan, you plan to fail. It is wise to have a plan for retirement.
When starting to plan for retirement, there are three most important questions that a person must ask themselves. These questions provide guidance for how to plan and what to do.
1. How much money do I need to retire comfortably?
This is the most important question that a person planning for retirement must ask themselves. Ultimately, this question lets them decide what kind of changes they will have to make in their current lifestyle and what they will be expecting in their retirement life.
With that said, the amount needed for retirement differs from a person to person, but it can easily be calculated once you know what you want during your retirement period. Things to consider when calculating the amount you need for retirement: inflation, savings, and income.
2. How much time do I have until retirement?
The amount of time can affect the retirement planning the most. Once a person identifies the timeframe of their retirement, they can plan accordingly.
For example, a person in their early 20s will have much more time than a person in their 50s. Look at it this way, if average American retires at the age of 65 years, a person who is 25, he or she will have 40 years to plan and save for retirement. On the other hand, it is only 15 years for the person who is starting at 50.
3. Where do I begin?
Once again, there is no clear cut answer to this question, but it can provide guidance on where to start. The most important factor for retirement planning is the age. As stated earlier, if a person is younger, then they will have much more time compare to the person who is older.
Basic time value of money calculation: say a person who is 30 years old saves $300.00 a month and invests it at 10% interest compounded yearly. By the time they are 65, and have regularly contributed $300.00 towards their retirement savings, they will have $1,020.406.75.
In a like manner, a person who is 50 years old will only have $119,623.39 by the time they retire.
A younger person can afford to take a higher risk compared to someone in their later years. So, it is wise to build a retirement portfolio around the risk and the time period a person has.
Keep in mind that retirement planning is a process that continues until a person actually retires. You should also bear in mind that your retirement plan may change at some point in time due to many different reasons. It is necessary to re-evaluate it often—and check the progress.
