Imagine you’re about to set out on a road trip. You would absolutely need to have an idea of where you wanted to go – north, south, east, or west. You would have to work within the confines of how much time you had for this trip – that would determine how far you could go.
Your financial goals are no different than that road trip; failing to plan means planning to fail.
Even if you haven’t given retirement much thought, in terms of what it looks like and feels like, chances are you have an idea of when you would like to have the freedom to walk away. For those of you bemoaning that you will need to work until you die, it’s time to see if that is really true or simply your worst fear taking over and freezing you in your tracks.
But, you have to set your goals. You have to make this a priority.
The trouble is, unlike the mortgage payment or electric bill, there are no immediate ramifications if you don’t take the time to do this. It is important, but it is not urgent. The consequences of your inaction won’t be felt for decades. That is why it is easy to procrastinate – especially if you are suffering from paralysis.
There are a number of helpful calculators on line that can gauge where you are and where you need to be in order to meet your goals, such as the ones at Vanguard.
What I like about these calculators, is that they help you nail down the answers to the questions I raised in my last blog, A Plan to Overcome Paralysis.
If you are tired of worrying about the great unknown, here are your starting steps:
- Determine how much will you need. The retirement expenses worksheet will help you get a handle on what your living expenses will be in retirement. You may not have a mortgage payment in retirement, but perhaps travel or hobbies may constitute more of your budget in retirement then it currently does.
- Take inventory of the money you will live off of every month from fixed sources (e.g., pension, social security, rental income etc.) and plug it into a retirement income worksheet. The end result of this exercise is you will have a better sense of how much you will need to draw from your investments in order bridge any gap from your fixed income sources.
- Find out when you can retire. Vanguard’s calculator is easy to use:
- Plug in how long you plan on living in retirement. It is not unreasonable to expect to live into your nineties, so don’t short-change your life expectancy.
- Enter how much you currently have saved and how much you want to be able to withdraw annually to supplement social security, pensions or other sources of income (see your retirement income worksheet).
- Don’t forget to adjust the pie chart to the side, which asks for how your portfolio is currently invested (stocks, bonds, cash).
- Once all that data is plugged in, you can run a simulation to see the probability of achieving your goals and not outliving your money based on the amount/type of assets you have, and the time frame you need the money to last over.
In the event the results that you get are unsatisfactory, don’t get discouraged. The numbers may not work, but you then can explore what it might take to reach that goal. You may need to invest more money, increase your allocation to stocks (if that risk level is appropriate), delay retirement, or plan on working a part-time job in retirement (or some combination of things). Then you can decide which sacrifices you are willing to make and whether these actions are enough to move the needle in the right direction. The control is yours; you get to decide.
Once you have a sense of the parameters you are working with, you will no longer randomly throw money into an account without rhyme or reason. You will know what you are working towards. Most important, this will free you up to actually envision what you want your retirement to be so you can begin to enjoy the process of planning with purpose. Then, you will confidently know what your destination is and how to get there.