Many of us look forward to a time in our lives when we will not need to work to meet our cost of living. This is when you have achieved financial independence. Traditionally this is associated with older people, but financial independence can be achieved at a younger age as proven by those adopting the FIRE (Financial Independence, Retire Early) lifestyle.
Understanding Your Retirement
There are many different scenarios when imagining the perfect retirement. There is no “one size fits all” solution. But there are steps you can take to improve your chances of success. Making sure you have a firm grasp of what you want to achieve will keep you motivated through the years. Making sure you review your plans at least annually will help keep them on track.
Research has shown when investors work with a financial planner they have greater clarity of their retirement plans, are more likely to be successful and have greater peace of mind.
Retirement Planning Through The Decades…
In Your 20’s
When planning for retirement, it is best to start early. Ideally in your 20’s. Then you have the benefit of compounding. Practically, many people in their 20’s do not get started, income is usually stretched in just providing accommodation and the costs of student debt. And anyway, retirement seems a long way off. However, now is the time to start. Join employer-based schemes if they are offered or start your own if they are not available. The key is to start and make regular monthly contributions. Save a percentage of your income, not a fixed amount. That way as your income rises so too will your retirement contributions.
In Your 30’s
Your career is now on firmer footing. You are earning a bit more. However, this is the decade most people get married in. Whilst this usually results in a saving when two working adults live in the same house. Accommodation costs rise and if you plan to start a family usually one of the salaries is lost for a short time. It is still not too late to start retirement planning. Unlike in your 20’s when you saved a percentage of your income. Now you should be saving a percentage of household income.
In Your 40’s
If you have not started saving yet, now is your peak earnings period. Older children may be at college or university, but it is time to make up for lost time. Those who started in their 20’s are 20 years ahead of you in their planning. However, you should be able to make up for lost time with a firm commitment to building your wealth.
In Your 50’s
If you have been saving regularly throughout your career you should have a nice nest-egg set aside for your retirement. About 10 years from your chosen retirement age, you should be thinking of reducing the risk within your portfolio. This is to protect the value of your pension fund and the income you can sustain during retirement.
5 Years Before Retirement
Retirement is a time of transition. Psychologically the change can be particularly challenging for those with very demanding jobs, especially when the transition is sudden. Therefore, time spent imagining your life in retirement and planning what you would do is time well spent. These are some of the questions you may want to consider:
Who do you want to be living nearby?
Will elderly parents need your help?
Do you have grandchildren who you want to see regularly?
Are your friends in a particular country?
What is the cost of living in that country? Here’s some data on the cost of living in about 100 countries. Click here.
Apart from more time, there will be changes in your expenses. Work related expenses will reduce but leisure expenses can increase. Whilst retirement has been described as “the longest holiday” you may find you travel more. You may also need to replace benefits provided by your employer such as a car or private medical insurance.
5 Years After Retirement
The first 5 to 10 years of your retirement is likely to be the most active. It is a time when you are probably going to be the most active: new hobbies, traveling without worrying about holiday allowances, and perhaps downsizing your home.
Because your are now drawing from your portfolio to support your lifestyle, it is also the time when a drop in your portfolio’s value will have the most effect on your standard of living. For this reason, many retirees are more risk averse than when they were working towards retirement.
Further along in retirement, concerns such as long term care and estate planning become more prevalent.