Retirement is a matter of concern for almost anybody across the world. Once the inflow of income stops, the reserve funds always seem to run out faster than expected. And soon, people face a terrible financial situation where they are forced to compromise on a lifestyle that they have become accustomed to their whole lives.
It is better to plan from the start than to face a situation like that, and be dependent on your children, relatives or worse, state welfare. Here are a few tips to help you plan properly for retirement.
Plan the reserve amount required
Think about the lifestyle that you want upon retirement. The standard of living will definitely be higher than what it is when you are in your 30s and 40s. When you reach the retirement age, you most likely have made significant advancements in your career. Naturally, you will be used to living in a certain way. It will be foolish to think that suddenly after you retire, you will be able to downgrade your standard of living. Of course, you will not. So, plan a reserve amount which will be sufficient to support your standard of living then.
And then there is a monster called inflation, which keeps on increasing the cost of living. So do remember to factor it in that when you plan your retirement number.
For example, a person who started working in 1975 would have retired about 3 years back. Here are a few comparisons to understand how much that person should have saved to have a comfortable life today. In 1975, buying a house would have cost someone $209,000 (inflation adjusted) which today costs around $275,000 which is a flat 25% hike. Similarly, a new car today costs $31,000 with an average which was only $16,578 (inflation adjusted) in 1975.
Start saving early
There is no better way to create a corpus than starting early in your life. Ah, the beauty of compound interest! Even starting your retirement savings by only a few years earlier than normal can lead to dramatic increases in your savings. So, from the beginning of your career, set a certain percentage of your income aside for retirement.
CNN financial experts say that if one starts saving $3000 from the age of 25 and saves only for 10 years while investing the amount simultaneously, this $30,000 would grow into $338,000 by the time the person reaches the age of 65. And this is considering an investment growth rate of only 7%.
Invest the saved money
Saving money is not enough unless it grows faster than the inflation rate. But where should you invest your money? The investment vehicles differ as you grow older and move from a young adult to a couple with no children and then on to a couple with children. This could be an entirely separate article, but basically when you’re young, you can take more chances and have a portfolio comprised of more stocks than bonds. So, take the risk. It’s that simple. Every individual deserves their share of taking a risk and you deserve yours too.
So, when you are in your 20s and 30s, invest in equity. Invest as much as 80% in equity because although equity is risky, it tends to give solid returns when invested in stable S&P large cap performers. And it’s infectious. If you don’t know how to invest in equity, we suggest you read about it here or and/or learn from friends who do.
The older you get, the more you should shift your portfolio from stocks to bonds. Sure, the returns will be generally lower, but they are far more stable. Ideally, in your 40s, you should not have more than 40 to 60% in equity and in your 50s, not more than 20 to 40%. Debt is comparatively secured (although it is not fully secured or guaranteed as most people claim it to be).
On an average, today, each middle-income household of US has about $14,000 invested in the equity market while 49% of the total US population is currently invested in the same. If you had invested $1 in the stock market in 2009, you would have made $3 by now, which is a 200% increase. Now think what an investment of higher value would have done with your money.
Investment post retirement
Well, retirement investing doesn’t necessarily have to stop once your income does. Although, you can dive into more detail about investing, it is arguable whether individual stock picking is even worth your time. Arguably, you are better off ensuring that you have the right debt-to-equity ratio in your portfolio, and then passively investing in ETFs, treasury bonds, or general investment vehicles that track the broader market.
Having said all this, don’t dedicate your life solely into building your retirement funds. Go out, travel, spend money, go into debt, recover, meet people and have new experiences – life is about enjoying the moments lived. Hopefully, you will have achieved everything on your bucket list prior to retirement. If not, then the aforementioned advice should ensure that you have enough savings to ensure that you do!
George writes at Sobredinero.com, a personal finance blog for Latinos in the US.