Budgeting for Your Retirement Dreams
Most people dream at least a little about retirement. Their retirement dreams are remarkably similar in some ways too. You know, living on the beach somewhere, travelling all over the country or world, sleeping in every morning – leisurely pursuits for sure. But how do you know if you’ll be able to afford those dreams when retirement comes knocking?
For instance, some of us have been saving regularly, even diligently for years. We’ve been trying to build that nest egg so that when the time came, we could pull the plug on the 9-to-5 job and kick back once and for all. We know how much we’ve saved so far and we have a rough idea of how much we’ll have down the road but how will we know for sure that it will be enough?
The thing to do is to build yourself a budget, a retirement budget. It will resemble greatly your normal monthly budget but with some differences. For instance your income will be from much different sources and your expense section will have some new lines in it and will be missing some of the old ones as well.
Gone will be the regular income line; it will be replaced by pension, annuity, and/or Social Security lines. Perhaps your housing mortgage line will be gone because you’re planning to have your house completely paid off by that time. And maybe you’ll have eliminated your credit cards (along with their interest) and replaced them with reloadable prepaid debit cards for your out-of-pocket expenses. In any case, once you have a realistic monthly budget built you’ll have a concrete idea of how much money you’ll need to make it through any given month. Then you turn to your retirement savings and do a little math.
A good rule-of-thumb is that you will only be able to withdraw approximately 4 or 5 percent of your retirement portfolio every year. If you withdraw more, you’ll probably run out of money because your nest egg won’t be able to generate enough interest income to replace it. Divide that 4 or 5 percent by the 12 months in a year and you’ll see just how much of your retirement you’ll truly be able to afford. When I did this exercise a few years ago, I found that I had exactly enough money to retire for one week out of every month. It was pretty eye-opening.
As a result, I adjusted my retirement savings plan and adjusted my thinking to stay in the work force a few years longer than I originally thought I’d have to. I also began planning (in the back of my mind) to start some kind of part-time business to supplement my income during my golden years. I even stopped using my credit cards, started paying them off, and switched over to reloadable debit cards to save a little faster.
Mentally, these weren’t easy adjustments to make but I’m comfortable with them now. I feel like I’m in control and moving down a real path to retirement. My retirement dreams are within my reach; I just have to execute my plan.
Filed under Uncategorized | Comment (0)Step One Towards Early Retirement
Like most people you probably don’t enjoy waking up at the crack of dawn every morning, rushing to get ready for work and then wasting hours of your life stuck in traffic. So what can you do to retire early? First you need to start with a disciplined approach to savings. The key idea is “pay yourself first”.
The savings rate in America has been on a steady decline since the 80’s. According to the Wall Street Journal household debt has finally decreased for the first time since 1952! Over the past several years the savings rate has actually dipped below zero! Think about that for a minute, how do you ever expect to retire if your spending more that your making? This is due to so many American’s racking up credit card debt thinking they didn’t need to save for their own retirement because they were busy watching the value of their homes skyrocketing! Well we all know what has happened recently to home prices.
I think we’ve all learned our lesson and its time to get down to saving for retirement and building up that nest egg. The savings rate this year is expected to be approximately 3-5%, Goldman Sachs has even predicted it to be as high as 6-10%.
So what do you need to do to get started? The best way you can start saving is to set up an automatic savings plan. Pre Authorized debits from your bank account into a savings account, brokerage account or retirement account. Anything to get the money out of your everyday bank account! Once these funds are separated you won’t be tempted to spend them, out of sight out of mind!
That doesn’t mean you can forget about them though! You need to make a commitment to stay informed about what you are investing in and how your nest egg is growing. Ignorance is not an excuse when it comes to your retirement, after all no one else is going to save for your retirement except you! So get started, set up an automatic savings transfer today and you’ll be one step closer to your dream of early retirement.
Filed under Disciplined Savings | Comment (0)