Best Time to Start
Now is as a good time as any. The earlier you start, the bigger the nest egg you’ll have on retirement. But as we know, it is difficult to start in our twenties, as at that age we save for a car and then a house. And soon after, there will be educational expenses for kids.
But you cannot afford to keep postponing your financial planning for retirement. In order to have sufficient income to cover all those non-working years, you cannot leave the plan to the very last moment. If you decide to retire at 55, you need a nest egg that can generate an income for another 25 to 35 years.
Three Simple Retirement Planning Guide
The amount you need to save will depend on the retirement lifestyle you have in mind and the income that you are earning currently. There are three steps in retirement planning guide,
Step One: What’s your monthly retirement income?
First decide how much you think you will need every month to retire comfortably. For example, you may think that if you were to retire today you would need $2,500 per month. But you are only 45 years old and your retirement is still another 20 years away. Because of inflation, you will need more than $2,500 a month in 20 years time to spend on the same things you are used today.
Assuming an average inflation rate of four per cent per annum, you will need $5,477 per month in 20 years time, so that you still have the same purchasing power as $2,500 today. The higher the rate of inflation, the greater the sum needed per month to give you the same purchasing power as today.
Step Two: Required lump sum
From previous assumption of four per cent inflation rate, you will need $5,477 per month or $65,733 per year. The next stage is to calculate the lump sum required to generate $65,733 for the rest of your life. The interest or return on your investment will determine the lump sum required to earn you a regular income of $65,733 a year.
The higher the rate of return, the smaller lump sum needed and vice versa. For example, if the average interest on your investment is 10 per cent per annum, then the lump sum needed to generate that income is $657,337. But if you managed to find investment with 20% potential return, $328,668 is enough for your retirement planning.
Step Three: How much to save?
Along the way, let say you can earn ten per cent interest per annum, you will have to save $11,128 a year or $927 every month for 20 years to get lump sum of $657,337. How do I get that? You can derive the annual or monthly savings required by multiplying the lump sum figure with the respective figure in the table. In my case, I multiply $657,337 with 0.01693.
However, if the rate of return or your interest earnings is 15 per cent per annum, then you would only need to save $5129 a year. Same if you start a bit earlier, you only need to save $5826 a year for ten per cent interest rate but 25 years of savings.
Some Precaution Though
With retirement planning, you are looking into the future. So you will be making a lot of assumptions. Though how much you need to save depends on the assumptions made, working through the three steps will give you some better picture of what is expected and whether you are on the right track to a retirement lifestyle that you want.
Can I Retire?: How Much Money You Need to Retire and How to Manage Your Retirement Savings, Explained in 100 Pages or Less
Thank you. GBU to... :)
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