Year after year, funding retirement consistently comes up in surveys as the most worrisome financial concern on people's minds. Yet, most people spend more time planning a vacation than they do planning for retirement. Here are some of the vacation questions everybody asks themselves:
- Where are we going and when?
- How will we get there?
- How long will we stay?
- How much is it going to cost us, and where will we get the money?
But if people planned their vacations like most plan for retirement, here's what it might sound like:
"Okay, honey, it's time for our dream vacation. Pack the bags, and bring some cash and the credit cards. We'll go to an airport and take the first plane we can catch. We'll stay in the best hotel we can find, eat at the best restaurants, and stay until the money runs out."
The difference between these two approaches is that one way involves setting a goal and managing to reach it. The other is an impulse based on dreams, wishes, and hope.
To be more than a dream, an investment goal includes the following:
- Time horizon: When will you need it?
- Amount: How much money will you need?
- Term: For how long will you need it?
- Resources: How much do you already have put aside, and how much more can you put aside every year?
- Rate of Return: What rate of return will you need?
Now, let's see what's involved in answering these questions.
When Do You Want to Retire?
Start here with your dream. There's no point in starting with your sense of when it's practical to retire, because sooner or later, you're going to want to know what the earliest date is that you can afford to retire. If you would really like to retire when you turn 55, run the numbers and see what happens.
How Much Annual Income Do You Want?
If you don't know what your lifestyle is going to cost you 20 or 30 years from now, relax. Simple rules of thumb indicate anywhere from 60% to over 100% of your current annual household budget. If you can't decide, start with 80%.
How Long Will You Need It?
Nobody knows how long they're going to live, but Americans are living longer than never. If you reach the age of 65, the odds are good that you'll live at least to age 85, so use that age for your calculations. If you're older than 65, add 20 years to your time horizon.
How Much Savings Do You Have Already, and How Much Will You Have When You Retire?
Here, you need to start with how much you've already accumulated in retirement assets, and how much they will total by the time you retire, given how much you put away and the rate at which it's growing. You also need to estimate any other sources of annual income you may have, including Social Security, a pension, and rent or royalties, plus the value of the sale of any assets, like investment property or a business.
What Annual Rate of Return Do You Need?
Note that the rate of return comes last in this sequence of questions, because it can't be answered by itself. It has to be derived from the answers to the preceding questions. The investment choices you make and the investment returns you earn will be heavily dependent on your answers to the preceding questions.
Please call if you'd like help with this analysis.