Planning for retirement can be a complicated process. There are so many variables and unknowns that it can difficult for anyone to know exactly how their retirement will look. However, this doesn't mean that I'm content to give up and just let things happen as they may when it comes to our golden years. In fact, I've discovered some very simple things I can do to make our retirement picture much clearer.
Thinking in Terms of Future Values
It's easy to get lost in or even defeated in present value numbers. Thinking in terms of hundreds or thousands of dollars sometimes skews my perception of what could be. These smaller amounts seem almost insignificant when the experts are often quoting necessary retirement amounts in the hundreds of thousands or even millions of dollars. But putting smaller amounts into future value terms helps me keep things into perspective.
For example, sticking $2,000 in my IRA might not seem like it'd do much in the overall scheme of retirement planning. But if I leave it there 30 years earning 6 percent interest, it could end up being over $11,000 by the time I near retirement, which makes a little more sense.
If costs were to stay like they are right now over the next 30 years, retirement planning might not be all that difficult. However, there's that little thing known as "inflation" that can come into play. With inflation averaging right around 2 to 2.5 percent right now (at least according to our federal government -- our family's personal rate is certainly higher than that), it can take a chunk out of our retirement earnings over the years. In my previous example in which my IRA is earning 6 percent interest, taking out 3 percent for inflation can work to essentially cut our returns in half, which certainly is a reality check when it comes to how our money is working for us.
Knowing Current Costs
Just understanding inflation isn't going to do me much good though if I don't understand how much we're spending. While our current expenses will likely change significantly by the time we retire, not only in the amount we spend but in where and how we spend, having a grasp upon them now can help me clarify our retirement picture. By utilizing inflation numbers to project what these expenses will be in retirement, I can get a better handle on how much we'll need to save -- and in turn, earn on our retirement savings -- to cover our costs in retirement.
Having a Vision
I know some people who desperately want to retire, yet don't have a clear vision of what they want to do or where they want to end up once retired. This can be hazardous since not having such items ironed out before reaching retirement age can lead to increased expenses whether through spending due to boredom, increased travel costs, or even having to relocate.
Even though we still have decades until retirement, my wife and I are already developing a vision for where we want to end up in our golden years. While this goal isn't set in stone since it might hinge upon where the kids end up, at least having an idea of when we want to retire, where, what type of living arrangement we want (condo versus home, or apartment versus home, etc.), how much we'd like to travel, if we'd like to continue working part-time, and similar issues laid out in advance, we have a better idea of what it will take to retire and when we can contemplate doing so.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
- Retirement Benefits
- Personal Budgeting