Most of us understand the importance of saving for retirement. However there is a difference between knowing what to do and actually doing it. All of us need to start saving for the employment free portion of our lives. There are many reasons why we decided to postpone our retirement planning efforts.
Some of these reasons include the perception that a dollar today is worth more than a dollar in the future. The “time value of money” has a way of skewing our finance decisions towards spending today rather than spending in the future. We also have the tendency to convince ourselves that we will start saving next week, next month or next year. The harsh reality is postponing your retirement planning, saving and investing for another day severely affects your ability to reach your retirement goals.
How Much Do I Need to Retire
Sooner or later everyone asks “how much do I need to retire”. This question is rather easy to answer if you have the right data and information available. How much you need to retire will depend on your desired lifestyle and expenses. So in order to calculate how much money you will need in retirement, start determining all of your expected one time and monthly expenses. In other words, determine how much money you will need in order to live the life you want during retirement.
For financial planning purposes I like to assume that I will live to be 100. This will help ensure that I don’t run out of money during my own retirement. To calculate how much money I will need, I must make a few other assumptions concerning my future lifestyle. In example you could plan to have a monthly car payment ($400), mortgage payment after refinancing ($1,500 per month), utilities/ food/ clothing ($1000 per month), health/ home/ life insurance payments ($1,000 per month) and an annual vacation ($5,000). As you can see in this basic example, expenses really stack up!
If my plan assumed that I would live 30 years after retirement, I would have to save more than $1,500,000 (that is over a million dollars). Keep in mind that this simple example omits some potential expenses and doesn’t even include adjustments for inflation, thus retirement planning can’t be ignored or postponed.
Get Started Early
When it comes to retirement planning, time can be on your side or work against you. When you plan far in advance and being to save and invest money when you have many years until retirement, you don’t have to manage your budget so aggressively. This allows you to take your time and save a little each paycheck.
However if you decide to postpone retirement planning until its too late, you will have to catch up by saving more every paycheck that you would have had to. Its much easier to maintain a comfortable lifestyle when you save a little every month for 20 years rather than saving a lot in 5 years. In addition the earlier you start investing the more your investments can grow. Starting your retirement plan as early as you can is simply the intelligent thing to do.
Leverage Employer Retirement Plans
Despite the fact that many retirement plans have changed in the past 20 years, there are still many benefits to “maxing out” your employer retirement plan contribution limits. When contributing the maximum to your 401k, IRA or other retirement savings vehicle you are reaping the benefits of lower taxable income, the time value of money and sometimes employer contribution. These advantages can be the difference between a comfortable and a stressful life after retirement. Ensure that you take advantage of as many employer sponsored retirement benefits as you can.
I hope this article clearly explains how important it is to start saving for retirement early and leverage tax efficient retirement plans.