Retirement Planning – Where to start?


People save money for many different reasons, but perhaps the most common reason is for retirement. The goal here is to replace income from work with income from investments. It can seem like a daunting task to plan for such a large need, particularly when people these days are far more mobile and may not necessarily know where they will spend their later years.

Here are some simple questions you can start to consider now. Don’t worry if you can’t answer them all yet. Some of them may even have more that one answer:

  • At what age do you anticipate retirement?
  • What country do you plan to make as your base in retirement?
  • Do you want to maintain a similar standard of living in retirement to the one you have now? – simply put do you think you will need the same income, less income, or about the same income as you have now?
  • What value of property would you want in today’s terms?
  • Which assets have you “ear-marked” for retirement planning?
  • Do you think these assets will be adequate?

People tend to underestimate the amount of money they are likely to need to retire securely. Some advisers will say you need a pot of ten times what you earn currently. However, if you are working on current interest rates that is not going to last very long. If you currently earn $100,000 per year, then that’s a million dollar pension pot. Going on historic averages, let’s assume you can earn 5% per year on your capital. That gives you an income of $50,000 per year, or half of what you are earning now. However, the current US base rate is only 1%! A million dollars is only going to earn you $10,000 per year in this environment. The current UK base rate is only 0.25%…

Of course we don’t know where interest rates will be in 20, 30 or 40 years time, but surely it is better to plan conservatively? The number you should really be aiming for is more like 20 times your current income. So a person currently earning $100,000 per year needs $2,000,000. Now two million dollars is a lot of money, but don’t be disheartened. If you start saving and investing early you have the power of compound interest on your side.

If you want to get into more detail on calculating retirement needs, there are a lot of resources available online. Here’s a really simple and easy to use calculator from Vanguard for a start. It’s a US based calculator so it may not be best for everybody. I just like the way you can use the sliders to adjust the variables and see how it affects the end result. If you don’t like it then just google financial calculator and find one that works for you.

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