“A goal without a plan is just a wish.”
- Antoine de Saint-Exupery
Every time I hear this quote, I think about how true it is. Don’t get me wrong, wishes are good things. I still make a wish when blowing out the candles on my birthday cake—I hope it comes true, but I don’t necessarily expect that it will.
I don’t think that any of us would decide to take a road trip, blindly hop in the car, and start driving, hoping that we make it to our intended destination. Rather, we would likely sit down, research where we want to go, what we want to do, and develop a plan to get there. Not only would we plan out what we’d do while on vacation, but we’d also think about the financial part of it:
- Decide when we want to go
- Determine how much it will cost
- Figure out how to save enough to pay for the trip
Planning a vacation is something we typically do on an annual basis. It’s something with which we’re familiar and comfortable.
When it comes to planning for retirement, however, many of us are blindly putting what we hope is enough into our 401k every year. Usually, this amount is simply the amount our employer matches or the amount we feel we can “afford” to contribute.
The odds of our successfully getting where we want to go with this strategy are about as good as my birthday cake wish coming true—not impossible, but unlikely!
Many of us feel intimidated by planning for retirement, because the stakes are higher, the calculations a little more complex, and the variables a little more difficult to determine. However, the steps in planning for retirement aren’t much different from planning a vacation—I like to think of retirement as the “ultimate vacation.”
- Decide when you want to retire
- Determine how much it will cost
- Figure out how to save enough to last you through retirement
Let’s walk through this planning process.
Decide when you want to retire.
Is it the “traditional” 65?
Are you targeting working until your Social Security “full-retirement age” (between 66-67)?
Will you shift to part-time and continue working until 70 or beyond?
Start with your ideal situation and be open to adjustments if necessary.
Determine how much it will cost.
This is where identifying your goals comes into play. What do you want retirement to look like?
Do you want to travel the world, or would you prefer to be gardening right in your own backyard?
Do you plan on staying in your home, or will you be downsizing – locally or in another state?
Are there a lot of expenses that will decrease when you retire? Will some increase?
Once you have a good idea of what your ideal retirement looks like, you can start calculating what your total retirement spending is estimated to be. Of course, there are many unknowns.
One thing we do know is that data shows that life expectancy is increasing – based on the SSA 2014 Life Tables, for a married couple age 65 today, there is a 90% chance of at least one of them living to age 80 and a 49% chance that one of them lives past 90.
Figure out how to save enough to last you through retirement.
By setting those lifestyle goals and determining their costs, you know how much you’ll need to have saved for retirement. Now, you need to figure out how to get from where you are now to where you need to be when you retire.
For example, a 45-year-old with $300,000 in retirement savings, who wants to retire at 65 with $2,000,000 saved for retirement, would find that they need to save a little over $2,000 per month to reach their goal (assuming a 6% annual rate of return).
A quick reminder that not all of that savings needs to come from you. Your employer 401k matching is helping you achieve that goal of $2,000 per month (assuming you stay long enough to have all the matching contributions vested, of course)!
Now you have a plan—a plan to achieve the retirement you wish for, a plan to achieve your goals. Of the numerous advantages to having a plan, the two most important are:
- You know how much you need to save and can make it a priority to “pay yourself first”
- You can target the mix of investments needed to achieve your goals and invest confidently for the long-term without letting the temporary ups and downs of the market make you uneasy
While there are plenty of calculators and tools available online, working with a financial planner to help ensure that you’re taking everything into account—health care costs, taxes, reasonable rates of return, and inflation (the “invisible” eroder of spending power)—and properly calculating your needs and costs is something to consider, especially the closer you are to retirement.
You’re planning for retirement once; financial planners plan for retirement all the time.
When you plan well, you can be well. Enjoy the “ultimate vacation”!
The example is hypothetical and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.