One of the most frequent questions I hear from clients is: Will I have enough money to stop working and retire? Funding retirement is one of people’s most worrisome financial concerns. Yet most of us spend more time planning a vacation than we do planning for a comfortable retirement.
Typical vacation planning starts like this: Where are we going and when? How will we get there? How long and where will we stay? How much is it going to cost us?
Yet, if people planned their vacations like most plan for retirement, here’s what it might sound like: Okay, honey, it’s time for our dream vacation. Pack the bags; We’ll go to an airport and take the first plane we can catch. We’ll stay in the best hotel, eat at the finest restaurants, and stay until the money runs out.
The difference between these two approaches is that the former involves setting a goal and managing money to reach it. The latter is an impulse-driven approach based on dreams, wishes and hope.
To be more than a dream, an investment goal should include the following: 1) Time Horizon: When will you need it? 2) Amount: How much money will you need? 3) Term: For how long will you need it? 4) Resources: How much do you already have put aside, and how much more can you put aside every year, and
5) Rate of Return: What rate of return will you need? Now, let’s see what’s involved in answering these questions:
When Do You Want to Retire?
This is where you start with your dream. If you’ve always dreamt of retiring at 55, run the numbers and see what happens.
How Much Annual Income Do You Want to Make?
Simple rules of thumb indicate anywhere from 60% to more than 100% of your current annual household budget. If you can’t decide, start with 80%.
How Long Will You Need It?
If you reach the age of 65, the odds are good that you’ll live at least to age 85, so use that age for your calculations. If you’re older than 65, add 20 years to your time horizon.
How Much Savings Do You Have Already, and How Much Will You Have When You Retire?
Start with how much you’ve already accumulated in retirement assets, and how much these assets will total by the time you retire, given how much you put away and the rate at which it’s growing. Also any other sources of annual income, including Social Security, a pension, and rent or royalties, plus the value of the sale of any assets like investment property or a business.
What Annual Rate of Return Do You Need?
The answer to this must be derived from the answers to the preceding questions. Likewise, the investment choices you make and returns you earn will be heavily dependent on these answers.
Planning for retirement requires a diligent review of your current situation, potential future challenges, and goals. To alleviate your concerns and ensure that you are on track for a secure retirement, consult with a professional financial advisor who specializes in retirement planning. Together you can discuss optimal investing strategies and a strategic long-term plan geared to your specific needs…and dreams.
Reesa Manning is a Senior Financial Advisor at Integrated Wealth Management. For more information, call Reesa at (760) 834.7200 or e-mail [email protected].
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