If you were to ask me to boil down the basics of saving for retirement, it would go something like this: Start saving, get a plan together so you know how much to save and keep revising the plan to make the assumptions more accurate.
Many people skip the third step of continually trying to improve the plan. But an efficient plan can help shave off years of working 9 to 5 and also reduces stress because you are simply more in tune with your progress. Interested in some improvements? Here are some suggestions:
Focus on income in retirement instead of just a number. Striving for a number saved for retirement can be a good first step, but you need to know how that nest egg will turn into an income stream to pay for your expenses. You can't just bring your brokerage statement to the grocery store and expect the cashier to sell your shares to cover the bills, right?
Be aware of how much you have in pre-tax and post-tax accounts. Guessing future tax rates well into the future is impossible, but you should know that money in pre-tax accounts needs to be discounted because Uncle Sam owns at least a portion of those funds. Having $100,000 in a Roth IRA is a completely different situation than having the same amount in a 401(k). And if that money is in a taxable account, you should figure out how much of it was generated by capital gains in case you need to ever withdraw from the principal.
Appreciate the power of inflation. While not everything will be more costly, the general trend of your spending will always go up due to inflation. A millionaire may have been uber-wealthy in 1980, but many millionaires today consider themselves to be middle class. By the time you retire, a million dollars will be worth even less. Factor that into your projections for the income you will need in retirement.
On the flip side, your hard work will translate into much higher wages down the road. Most people move up the ranks as their career progresses, but even those who don't get many promotions will at least get inflation-adjusted salary increases. Just as inflation should be added to your spending projections, your continual improvement in saving amounts each year should be factored in as well.
Recognize that good times and bad times will both occur regularly. Stop being too optimistic when the stock market is roaring and too pessimistic during market crashes. Even market experts tend to extrapolate from recent market returns and assume the world has changed. But resist the temptation to overreact, because a down market will snap back eventually and an overheated market will loose its luster. That's just how the market works.
Weigh your long-term needs. Your ability to save is the number one deciding factor on whether you can retire comfortably or not. That shiny pair of new shoes, incredible deal on a 100 point wine or life-changing iPad may seem like the only obstacle to profound happiness. But let's face it, that same thought about a different product crossed your mind a few short months ago.
Think about details other than the financials. Money can be the biggest retirement worry, but life isn't just about dollars and cents. Where do you plan to live? Where are your friends and family? How can you be happy? Think about this carefully, because spending more isn't always the answer.
Retirement planning is difficult because you are trying to make assumptions about events many decades in the future. When you think you have a solid plan, read it over and think about it some more. Chances are good that you can still improve upon the model.
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