Retirement is the sweet fruit you can reap after slogging for years at your work. It is the culmination of all those years of hard work, missed vacations and sacrifices. It is the phase when you finally get the time to do what you have always wanted to. You can travel the world, play with your grandchildren or simply be. However, you need to have a healthy retirement fund to enjoy your ripe years.
A lot of people think that retirement planning is complicated and tend to stay away from it. In reality, it is not that difficult and can give you more control over your money. The simple rule that you need to follow is is to save early and save more. Secondly, you must invest your savings across a number of investment options to grow it over the years.
The earlier you start planning for your retirement, higher will be this corpus. To arrive at an approximate amount that you will need, you can follow these steps.
Calculate the income that you will need after retirement
To do this exercise, you can divide your current expenses into two parts. The first part should contain your utility bills, grocery bills and clothing. Basically, it should contain all the expenses that you expect to continue even after retirement. It is also a good time to evaluate if you can reduce this expense after retirement. The second part of the expense should include your office-related bills like formal wear, travel to the office etc. This can also include your expenses related to the children. After retirement, you won’t have to pay for this second chunk of expenses. This exercise will give you an idea about the money you will need in your later years. However, the medical expenses may go up and it is advisable to keep a little room for them. Most experts say that you will need at least 80% of your current salary in your post-retirement years.
Calculate expected income after retirement
As a part of this step, calculate how much money you will get from all the sources after you retire. This must include money from your savings, investments like 401(k) and mutual funds, income from property etc.
Calculate how much you need to put aside
This is the most crucial step and perhaps the difficult one too. Your current responsibilities may not allow you to save enough for your retirement. However, you can adjust your lifestyle and follow budgeting to save some extra cash each month. Experts say that by the time you reach 30, you should have saved 50% of your annual salary. Similarly, below are the figures that you must have saved at different ages.
- You must have saved two times your annual salary at the age of 40
- You must have saved four times annual salary at the age of 50
- You must have saved six times annual salary at the age of 60
- You must have saved eight times annual salary at the age of 67
Another formula suggests that you must save 25% of your annual salary for your retirement. I know it seems challenging but this figure includes 401(k) and other investments.
Another rule is to save 15% of your salary and you must start as early as 25 years. Don’t worry if you have lost a considerable number of years. The key is to start as early as you can. Another crucial aspect of this formula is to invest 50% of this amount in stocks.
Adjust your retirement income
Depending upon how you want to spend your retirement years, you can make certain changes in your plan. For instance, if there will be no mortgage to pay, you can reduce your expected income. If you want to travel or if there is an illness, you can increase this amount.
Early retirement planning can give you a lot of benefits in your later years. You can choose to connect with a financial advisor if this task seems daunting.