How to plan for retirement
Lets face it, no matter who you are, what you do and how old you are right now, there is day when all of us will retire, or at least want to retire.
For most people retirement means having financial independence and being able to make the choice of working or not working.
How to plan for retirement – Questions you need to ask yourself
- Would you want to able to afford at least the same lifestyle you are living today?
- Would be comfortable being dependent on your children or others for your monthly expenses at retirement or be financially independent?
- Do you want to have the freedom to ‘Do what you want, when you want and how you want’ when your retire?
How to plan for retirement – When do you plan to retire?
When I meet people about financial planning one of the questions I ask is ‘When do you plan to retire?’. Most people have a blank look in their eyes, while others say between 45-50. Some say 60-65. The point is, there is no right or wrong answer about the right retirement age, it all depends on your own personal situation, wants and needs.
But, not planning for retirement is the most common mistake people make. Some procrastinate while others pretend that their game has no end. Others say that they have more important commitments like children’s education planning to look after before they can consider retirement planning. Like it or not, I tell them that they need to start thinking about retirement planning and the earlier the better.
How to plan for retirement – Where do you want to retire? and what do you see yourself doing?
When considering ‘How to plan for retirement‘, consider where you would want to retire. Answer the questions below to yourself in as much detail as possible. I cannot stress more on the importance of doing this.
Unless you have a detailed picture of your retirement years, you will keep wondering ‘How to plan for retirement‘.
- Which country do you see yourself retiring in?
- What do you see yourself doing during retirement?
- Would like to travel around the world, visiting countries you haven’t seen?
- Would you like to build your own dream house?
- Would like to do any particular activity which is not possible right now?
How to plan for retirement – How many years after retirement should you plan for?
Based on your family health history and your own lifestyle choices, you can probably arrive at a number of how many years you would expect to live after retirement, and consequently the number of years you would need to plan for, to be financially independent after retirement.
If you expect to retire at 60, typically you would need to plan for 20-25 years after retirement.
How to plan for Retirement – Calculating the total amount you would need to have by retirement to live comfortably
This is a tough one, especially if you haven’t done the previous section correctly. Based on the questions answered earlier, you will now have a rough idea about how much you need on a monthly basis, to do all the activities mentioned above. If not, I can always help you arrive at this figure when we meet in person as I have a very comprehensive version of a retirement calculator in the form of an excel file.
But to begin with, start by thinking about your basic monthly expenses in today’s terms for maintaining the same lifestyle your are leading now. This should be fairly easy to calculate based on your current expenses. Multiply this number by twelve to get an annual figure. Then itemize the approximate annual expenses of all the other things you would like to do at retirement in today’s terms. Add all of the above and you will arrive at a number, which you can call ‘Total Annual Expense at Retirement in today’s terms’.
Then you have to factor in the effects of inflation and calculate the future value of the ‘Total Annual Expense at Retirement in today’s terms’ at the age of retirement. Then you need to calculate the total amount you would need in bank deposits to earn you the calculated future value in interest annually.
After all this is done, you need to back calculate the monthly amount you need to save in order to hit this number at retirement.
Feel free to leave your questions and comments below.