1. Your vision of the future
When you think of your retirement what do you see? Do you think you will retire early or will you be among the majority of the population who retire between the ages of 62 and 67?
Retirement planning should commence when we begin our work lives but rarely does. Depending on who you work for, some employers get you started by encouraging you to contribute to some form of financial retirement plan by matching a percentage of your contribution. Consider yourself lucky if you work for that kind of employer.
2. Your definition of retirement
The dictionary says "the act of ending your working or professional career." I always thought it was when I could stop having to work, you may think that too.
Unfortunately, many of us will not have enough retirement money to survive, much less enjoy our retirement. We will have to find part-time work just to make ends meet. This should be a motivating factor in devoting time to your retirement plan and diligently working toward building a substantial sum to help you get through the later years of your life.
3. Lifestyle you plan to have
Do you plan on traveling and seeing the wonders of the world? Will you continue to own a home, a car, a motor home, a motorcycle, or yacht? Will you become the expert fisherman you always wanted to be, or maybe the accomplished artist, or author? Will you visit your relatives and children, or play bridge, or bowl with your friends?
4. Funds to pay for your retirement
Have you saved or are you saving for your retirement? Do you know what a 401K, Individual Retirement Account, or Roth IRA is? It's never too late to start saving, but too often we don't consider what our needs are going to be and do not have the wherewithal to afford the things we want to do in retirement. It is not uncommon to postpone our retirement savings until after our education loans are paid off. That may be a good reason, affordability, but not a good choice. The earlier you begin saving for retirement, the better off you will be.
You may be expecting to afford your lifestyle on your social security alone. That is unrealistic, or your vision and lifestyle are quite modest. You might be able to accomplish this feat if you moved to a third world country or somewhere the living expenses are very low.
You should expect your Social Security Benefits to be between $1,000.00 or $2,000.00 per month after reaching retirement age which is between 65 and 67 depending on who is deciding. This translates to the poverty line in the United States, $12,000 for an individual or $24,000 for a couple with two children.
5. Health limitations to consider
As we grow older, our health problems often appear. Unplanned expenses like surgeries, doctor visits, and medications are things we don't think of when planning for the future. Health insurance is another expense we don't realize we will have to cover when we stop working. These days it is more common to have to contribute to health care costs even if we are still employed. Health insurance plays a critical role when we reach retirement age. Health care expenses are not projected to decline, ever.
6. life expectancy - how long we will live
This may be the reason most people put off planning for retirement. Facing the question of the age of our demise is not something anyone is comfortable doing, but even less so at 25 or 30 years of age.
Here are a couple of reasons to get over the shudder of your life expectancy. When you compute how much money you will have (not need) in retirement you can use this rule of thumb. You will have to begin withdrawals from your tax-deferred retirement savings, if you have any, at the age 70½. The government says so and even fines you if you fail to do so.
These Required Minimum Distributions are calculated based on how much is in your retirement account and how long you think you will live to collect it. It is modestly reasonable to expect to live into your mid-80s, so the difference between your age at retirement and say 86 means that on a $41,000.00 account you will roughly take between $2,000.00 and $3,000.00 per year. On $100,000.00 it would be between $5,000.00 and $9,000.00 per year and you would add that to your social security income and pay the taxes due.*
Assuming you did the right thing and started planning for retirement as soon as you were employed, made sacrifices, and saved in an Individual Retirement Account, you will still find that things will come up you did not plan for. To ease the burden of those unexpected things you will be wise to have contingency plans for several things that can and do go wrong. What if your spouse gets in an accident or becomes ill and can't work? What if one of your children suffers from an illness that requires costly medical expenses? What if you or your spouse loses their employment and you are faced with foreclosure and lose the equity in your house? Often times people do not plan for retirement thinking the equity in their home is their retirement. That may work for some but is just as risky as putting your retirement savings into the stock market, both have associated risks as well as returns.
*Note the examples given here are rough estimates and should not be taken as accurate examples. Please contact your financial advisor for details on you specific plans and needs. Another option for retirees is an annuity which protects the holder against losing value like stocks and bonds.