I had a lot of fun yesterday being on the panel for the #retireeNextDoor Tweetcast. Jeff Rose from Good Financial Cents and Money Tips did a fantastic job hosting it and some wonderful advice was shared.
Like I mentioned the other week, we tend to put off preparing for retirement for a few reasons. I think one huge factor is the unknown. We hear all these huge numbers about what we need that it can be discouraging. I don’t think we have to be afraid of it.
Planning for retirement is a bit like saving up for a baby – you will never be able to prepare for every event, but you’re better off having something saved up rather than nothing.You can get an idea of where to start if the two of you can sit down and find what works for you.
Define Your Retirement
Make it a dinner date and talk about what you’d like to do when you’re retired. Ignore the numbers for just a moment and just focus on what you want. Retirement is a kind of a catch all phrase that doesn’t really help you plan as everyone has different ideas on how they’d spend it.
Joe Saul-Sehy from Stacking Benjamins had a wonderful remark about retirement yesterday. He said retirement isn’t an event, it’s a 40+ year span of life for many. It may be easier to think of it in phases. What do you want to do when you’re in your 30s, 40s, 50s, 60s, and beyond?
After talking about it, you two may want to do a hybrid or stepping stone retirement. Perhaps you set a goal to build an income stream that will allow one or both of you to explore a new business or to start investing in real estate. You’re not officially retiring, but rather you’re now able to quit your day job and give full time attention to building the income stream and boosting net worth for when you do stop working for money.
Every couple will come up with their own plan, but you can make progress until it’s discussed.
Finding Your Retirement Number
Now that you have a picture of what you want, the two of you can work backwards and see about much money you need to retire. You may discover that your retirement doesn’t have to require a million dollars in the bank to achieve. Or you may see that it will take a boatload of money.
If you’re in the latter category and you are freaking out about not having enough when it’s time, take a few days and break your goals down further to extract the absolute essentials. What do you truly want? What are the non-negotiable? Start with those and get a baseline number and build from there.
No matter what your goal is, the best thing you can do as a couple is to start now. If you haven’t already, start this week. Pick some amount you can afford, automate your contributions, and increase it with every raise/bump in pay. Time is one of your biggest allies, so use it.
Should You Include Social Security?
Personally we don’t include Social Security in our retirement plans. I have no idea how exactly it play out, but I’m pretty sure that it will be stripped down by the time we qualify to take it. I’d rather be pleasantly surprised at the extra income than be disappointed because it wasn’t what I had planned for.
Unless you will be retiring soon, I think you’re better off not making it a pillar of your retirement plan. (Completely my personal opinion)
Thoughts on Retirement and What It Means to You
I hope the two of you have a chance this week to discuss your retirement plan. I’d love to hear what you come up with and what your overall strategy is to get there.
Even though most of us know that retirement planning is something we should be doing, real life tends to get in the way of us actually getting it done. Retirement is so far away in your timeline, it’s tempting to put it off for a bit.
What’s worse, we can be our worst enemies and make some huge mistakes when it comes to planning for retirement. I’m going to share some of the biggest mistakes and how you can begin to fix them.
Waiting Until You Have More Money
One of the biggest mistakes couples and really individuals make is waiting for the next raise to happen before they invest. They feel like their small contributions now will have little or no effect so why not just give a year (or two….or more) and when they get enough then they’ll invest.
I have some great news – you don’t need a lot of money to start investing and time is one of your biggest allies when it comes to your portfolio’s growth.
I actually wrote about how you can start investing with $1,000 or less because when I graduated for college, I knew I wanted to set aside money for retirement, but I didn’t have much money.
Investing Without a Goal
I think the big question people have when trying to figure out their retirement number is how much they will need as a couple to retire. Of course that completely depends on your own family’s circumstances.
So just how do you come up with the right amount?
While the traditional rule of the says that you should plan for around 75% of your current income, Todd Tresidder, author of several financial books including How Much Do I Need to Retire? and early retiree himself, shows that it’s more practical to look at your expenses and make a reasonable ballpark figure as to what you will need. He cites from various studies that most of your budget categories see significant decrease with the exception of health insurance.
The last hurdle for couples when it comes to retirement is not automating their contributions. How many times have you thought about investing, but by the end of the month, there’s hardly any money to give? Protect yourself now (and later when you need to retire) by setting up automatic contributions.
If you haven’t already, check with your employer and see if they offer a 401(k) with a matching contribution plan. That’s basically free money that boost your returns. Having it automatically deducted means you’d hardly miss it as you simly budget from your take home pay.
Depending on your employer, you’ll have different funds to invest in. If available, consider putting your contributions towards low cost index funds.
My advice is to increase the amount as you receive raises and promotions through work. It doesn’t have to be significant, just take it up a notch every increase. Besides allowing you to invest more, you’re also lowering your taxable income, a double bonus.
Build a Better Retirement Today
None of these mistakes are made intentional, as if someone wants to sabotage their retirement, but they are all too common and they will hurt your chances at your goals. So if you haven’t already, now is the time to start planning, get your contributions calculated, and automate them. Your future self will thank you.
Find out how to increase your odds of retiring successfully by joining MoneyTips.com’s #RetireeNextDoor (LIVE!) virtual event on November 18th, 11 am – noon PT. Register now to get answers to your retirement questions from more than two dozen of the top voices in personal finance, including yours truly.