Last week we talked about risk - the different kinds of risks; risk as it relates to your investments - that pot of money you've saved for the future you. Very much like a pension plan, this pot of money is meant to pay you to NOT work (aka retirement). But will the pot be large enough to satisfy your retirement needs? That depends largely on what you would like to do during retirement. Do you want to go on 3 or 4 trips every year? Spend your winters in a warm climate? Motorhome and see all of North America? Shower your family or community with financial generosity?
OR
Do you just want to enjoy your time at home - reading library books; volunteering at your local (fill in the blank; there are many places in every community that would love your time). Do you need two vehicles? Or will one suffice? Do you want to live in a mansion? Or a small apartment or house? Do you love shopping? If so, be warned. Saturday is the biggest sales day in the retail world. If you are retired, EVERY DAY IS A SATURDAY!
Answering these questions will help you determine how much money you need to retire. Once you've figured that out, you will be able to calculate how much you need in order to retire. My only advise to you is to make sure you "over plan". Don't plan for the quiet, stay at home, read books and volunteer life then decide years later that you do want to live in a mansion and travel the world! It's much safer to plan for the "Life of Luxury" and then change your mind. There are lots of good things you can do with excess money!!
Here's a little exercise you can do right at home with just pen, paper and a calculator. It looks like this:
EXPENSES BASIC RETIREMENT DREAM RETIREMENT
Under these headings, list expenses (in todays prices). For example, car expense (gas, registration, repairs, etc) might be for just one car in the BASIC column, but 2 cars in the DREAM column. Housing costs - BASIC might just be apartment rent; DREAM might be upkeep and expenses for a mansion.
Once you have everything listed, total both columns. Using the INVESTMENT and REGULAR DEPOSIT calculators, enter your years to retirement, your current investments, your monthly deposits, your rate of return, and inflation of 2%. Once you have that number, go to the INVESTMENT and REGULAR WITHDRAWAL number. Enter your total, the number of years you THINK you will live for, the rate of return, the inflation (2% - that was the normal number, NOT counting 2022!) and the monthly withdrawal amount. Make sure you do two of these. One with the BASIC amount; one with the DREAM amount.
If you can cover the DREAM amount, then life is good! If you can only cover the BASIC amount, you know you can retire if you really want to. If you end up somewhere in between, then you are probably okay.
HOWEVER, if you don't even make the BASIC retirement, you will have to make some choices. Here are the obvious ones:
- Work a few extra years before retiring
- work part time after you retire to supplement your income
- invest more money between now and retirement
- take more risk with your investments
I know it is a bit difficult for younger people to think about retirement but the key is that they have TIME on their side. Early investing gives your money way more time to work for you. Maybe you won't have to make any of those tough choices if you just start early and commit to a "Pay Yourself First" Plan.
Till next time!
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