Ah! Retirement! What is your vision? Are you cruising the deep blue seas, traveling by RV through national parks, or maybe even gallivanting through Europe? However you picture yourself in retirement, you will never get there without a plan. And it takes years of planning and saving to be able to stop working and let your money work for you.
Forgo a few luxuries now and start building your nest egg today. Don't be misled that you have all the time in the world. It's just not so. Anything you save today magically grows over the years. It's called compound interest – where interest is added to the principal and that new total now gains interest. CNN Money gives this example. "If a 25 year old saves $3,000 a year for 10 years and then stops saving altogether, his $30,000 will grow to $472,000 at age 65. This assumes an 8% annual growth. It's so much more difficult to save later in life. If this young person procrastinated and didn't start saving until he was 35, he would have to save $3,000 a year for 30 years to see his $90,000 grow to only $367,000 at age 65."
If you are lucky enough to have a job that provides a 401k, take advantage of your good fortune and save at least the company match. This is free money! If you don't have a 401k, set up an automatic draft to be deposited into an IRA. (Individual retirement account). Don't be discouraged if your income is low. Save a percentage anyway and train your savings muscle. As you advance in your job and become more experienced, your earnings will grow with you and so will your savings. The rule of thumb has been to save at least 10% of your salary. But, The Center for Retirement Research states that an average earner who starts saving at 35 and retires at 67 needs to save 18%, assuming a 4% return. If you are in debt and can't see any way to save, read The Richest Man in Babylon by George S. Clason for an inexpensive lesson in money management that transcends time.
Retirement goals are very personal. It depends, among other variables, on your salary, your rate of return, when you expect to retire and how long you think you will live. Using our retirement calculator can give you a good estimate of your future retirement needs. Financial advisors suggests that you will need 70% to 80% of your pre-retirement income to live comfortably. They take into consideration that when you stop working you won't have the expense of commuting to work, or of a professional wardrobe. You will stop paying Medicare and Social Security taxes and will stop saving. And hopefully, you will have eliminated your mortgage payment.
First, you can downsize to a smaller house and add the profits to your retirement savings. If you are flexible, you might consider moving to a city with a lower cost of living. If you are a two car household, consider eliminating one of the cars to save on insurance, maintenance and fuel. You may need to join the 25% of adults aged 60 and older who are still in the workforce. This is not a bad thing. It keeps you more active and engaged and will enable your Social Security payments to grow. Although you may begin receiving Social Security early at age 62, you will collect about 25% less than what you could at full retirement age. If you postpone collection until age 70, you will receive about 32% more than at full retirement age. For most people it is generally easier to lower your expenses than to catch up growing savings faster, and many people who try to play catch up end up falling for ponzi schemes, other financial scams, or even simply taking on excessive financial risk.