What your nest egg should look like when you retire.
While it may seem awkward to write about a retirement nest egg during a difficult economic period, the planning process does not pause during a crisis, and in fact can be a critical time to address any adjustments of your goals for the next phase. I have written about how I was able to ‘relaunch’, or begin a soft landing toward retirement and followed that with suggestions as to how to emotionally prepare for the same. In talking with others contemplating the next phase, there seems to be more of a focus on the former, and not enough consideration of the latter, which is just as important, especially if circumstances force the prospect of an early retirement.
Having said that, financial readiness should definitely be at the front line of the strategy. This should be evident by the flood of articles featured by online content consolidators and news aggregator sites (Yahoo, Aol, et al.) suggesting what amount you can retire on. In my opinion, these articles mostly pontificate and don’t really provide an ideal roadmap to financial independence. In my experience, the only way to know ‘the number’ is to assess the many variables exclusive to your ‘situation’.
Let’s start with the ‘situation’ and basic variables related to that:
- when are you expecting to retire
- what will your income be the year you retire
- what will you have saved up to the point you expect to retire
- how long will you live (yes, actuarial tables come into play)
This process is entirely different for people at age 25, 35, 45 or 55. I began exploring this at 35, which was the age at which I was able to begin saving at a measurable level - and I saved like crazy – between 15 and 25 percent of my annual income. After a period of time you begin to get a sense for your earning potential and related savings prospects. It is only then that you can begin preparing reasonable projections.
This is where a good financial advisor comes in, and I cannot understate the value of having that advice and support as early as possible in the retirement planning. I have been through a few advisors over 25 years and have thankfully landed on one whose guidance has enabled my ‘relaunch’. Although the process of working through my plan did not start out with an identification of ‘the number’, it certainly facilitated a good understanding of what that could or should be.
A word about the expected standard of living after retirement – just because you are no longer working does not mean you are going to spend less money. In fact, while some overheads may reduce, others may take up the difference. With more free time, your expenses may reflect that you are enjoying that time with hobbies, travel and activities. In my ‘relaunch’ scenario, I decided that my quality of life (and related spending) would not change considerably after ‘dialing down’, and I built that into my plan.
Our initial projections also included several contingency scenarios that could be refined as the inputs became more reasonable. The more certainty that can be built into the formula, the more realistic you can be in identifying ‘the number’ based on the ‘situation’, and my financial advisor was instrumental in this process.
So, as you can see from all the variables involved (and I clearly haven’t covered all of them), arriving at the ‘number’ will be different for everyone, depending on expectations and lifestyle. In fact, the ‘number’ will likely be a moving target for the entirety of the planning process. But if you stay disciplined in this process, you are likely to hone in on a realistic ‘number’ that ultimately will work.