Self-help guru Anthony Robbins once remarked that if several “experts” agreed on one area, you should probably mark it down as “the truth.” That’s why I’m always amazed when people begin talking about investments without discussing goals first. Every great financial planner I know starts with the goal and then works backward to determine what funds to use and how much to save. It’s a simple formula that’s actually pretty easy:
The Amount You Need to Retire = Amount You’ll Save x Rate of Return
Not complicated, was it? If you first figure out how much you need for retirement and the amount of risk you’re willing to take, then it’s easy to decide how much you need to save per paycheck toward the goal. OR if you have a set amount that you can save and know what you need, then finding your rate of return assumption is easy. This return will help you pick investments (you now only have to research a mix of investments that has a history of reaching that return).
How To Determine the Cost of Retirement
The amount of cash in your retirement bag-o-money depends on a few factors:
– longevity (how long are you gonna be around?)
– fixed costs, (such as a mortgage, health care, and utilities)
– discretionary costs, (including vacations and fun)
– inflation between now and then (many people use 3 or 4%)
– MINUS the amount you expect from sources such as pensions and Social Security
That’ll give you the amount you’ll need to retire.
Should You Plan On Working In Retirement?
I wouldn’t advocate planning on work in retirement. While I do think that a non-busy brain turns to mush (anyone know somebody who retired from a demanding job and then died months later?), counting on work income is a problem. Do you know if your health will hold out? Do you know that work will be available? There are so many variables that I liked planning on NOT working, and then if my client wanted to work that was extra “fun” money.
Want More? Here’s Some Fun
I love this video from The Makin’ Sense Babe, who’s given me permission to use her stuff here at Stacking Benjamins:
In Other News: Thanks to Edward Antrobus for linking to Jenny Lang’s guest post here a few weeks ago: A Job That Pays $800 Per Hour? Sign Me Up! His piece is on utility hacking and is an excellent resource if you’re planning on cutting your utility bill costs. Check it out!
Today’s Workout: 1 mile easy
Day’s I’ve Run In A Row: 345
Current Favorite Song on my “running” mix: Pompeii by Bastille