So you’re taking a trip and you’re deciding what to bring. The weather, your free time, transport and accommodation, all important considerations right?
Planning a trip and your retirement should be approached in a similar way. If you’re in your 40’s you may have about 20-30 years to prepare for a period of time that could last about 30-35 years. It’s natural to think about what you’ll wear and how you’ll get there, but equally so, will the nurses be nice, and will you still have teeth?
Your parents and your grandparents lived a different kind of life during their ‘building up’ years, and their retirement was a reflection of that. You were born into materialism though, so travel and the nicer things are what you’ll want to settle into when you retire. Now surely this isn’t you I’m describing right, but someone you know perhaps?
Start with the end in mind here – set the scene as a 65-year-old ideally with well functioning hips/knees and toes but medical insurance in case things go south. How much you need is a function of the kind of fun you want to have in your retirement. Yes, you can have fun! Here’s the goal that I’m setting for my wife and I: net income (current) x years in retirement = provision that I want to have* at time of retirement. If I can achieve this, and it’s hard being in debt with children believe you me, I do think we’ll have fun.
Net Income: Your life is a function of your net income. Your neighbourhood, your friends, the number of children you have, yes, all a function of your net income. At the time of retirement, your desires for life and the finer things will not dissipate. Sure you’ll have no financial dependents or mortgage (ideally), but you’ll be left with something far more expensive – free time. Retirement will gobble up as much money as you currently earn after tax, perhaps even more. Just take my word for it and plan for it – if you have too much leftover, donate the surplus to a charity that helps poor retired people read good.
Years in retirement: Your retirement will have a start and an end date – yes, you will die I promise you this! Take a moment now to let that sink in. Okay, come back to me. Do your maths based on the amount of time you actually think you’ll live for – ideally aim for the middle. Make no mistake though – you’ll be retired for a long time. You’ll need money – lots of it! While we’re on the topic of death though, do you want to leave something behind to family or to some other cause? When was the last time your will was reviewed?
Provision: You may choose to sell up everything, or keep a couple investments going to yield passive income. Perhaps you’ll invest a large sum of capital somewhere to ‘drip-feed’ money to you each year. This is where some advice now and then surely wouldn’t hurt, from someone who knows a bit more about things than you do. All I’m going to say again is aim high – there’s no harm in amassing a bit more monetary wealth than you actually need, especially if you live for something greater than just yourself.
*Let’s not get too fancy here, so forget the fact there could be things like interest, inflation, taxes, or assets that continue to produce an income during retirement.