I recently saw an article with a headline that read “Retire in Thailand for just US$200,000!” I must admit, the thought of living in a country with beautiful climate, wonderful food and culture, access to affordable healthcare and low cost of living is very tempting. Unfortunately it’s not practical for everyone.
It begs the questions though – how does one figure out how much money they will need to retirement comfortably?
It’s a difficult question to answer. There are no hard and fast rules and the amount depends on so many variables such as expected expenses, the rate of inflation, life expectancy, and return on investments. Some of these are very difficult to predict.
The reality is, however, that the vast majority of people grossly underestimate the amount that they’ll need.
And then there are those who worry about not having a comfortable retirement without really knowing where they stand financially, creating unnecessary stress.
While none of us can predict the future, like anything, the best way to prepare for a great retirement is to plan for it.
Retirement Planning in Your 20s
Retirement seems so far away when you’re in your 20s. Allocating savings towards something that’s 40 years away might feel impractical – especially when you may be starting a career that doesn’t pay a high salary, or you’re burdened with school debt.
- Save a little, but save today: This is best way to make sure you’re balancing your needs today while still planning for the future.
- Pay yourself first: Save what you can afford and set up this method so you’re automatically transferring an amount your comfortable with to a savings/investment account that you won’t touch.
Ideally you want to put away 10% of your income in your 20s.
It may seem like a lot but I guarantee you that 1) you won’t miss it because you will adjust very quickly to spending only what you have, and 2) you’re building a habit of discipline that will serve you well over time.
You’ll be much further ahead saving just a little from each paycheck now rather than starting later and having to put away much more money. The longer you’re invested, the more money you’ll make because the returns you earn will grow exponentially.
Retirement Planning in Your 30s
Before you know it, your career is taking off, you’ve bought your first home, and you start having children. Once again, your savings goals are competing with such things as paying down a mortgage and kid’s expenses.
At this stage you ideally want to be putting away 15% to 20% of your savings towards retirement. It may feel tough to do but there are a few strategies to make it easier.
- Enroll in your company retirement plan: Your work may have a private pension plan, and if it does, it’s very likely that the company will match your contribution up to a certain amount. This is free money! If you’re struggling to put away 20%, then consider this as a way to make up for any shortfall, or better yet, an additional way of racking up savings.
- Get aggressive with your investments: This is the time in your life that you can afford to invest in assets such as equities that are likely to generate better returns. Even with the volatility in markets, over the long-run the trend is more often than not upwards, and you have time to really make the magic of compounding work with you. A diversified portfolio skewed towards growth in your 30s can generate a sizeable amount of wealth by the time you’re ready to retire.
- Continue to pay yourself first: It’s easy to think that you’ll save more when you have more money, but the reality is that most people just end up spending more. Up the savings and automate it so it’s “out of sight out of mind”.
Retirement Planning in Your 40s
This is probably the most important decade in preparing well for retirement.
Much of what you do in your 30s will still apply in your 40s, and if you’re fortunate, you’re nearing the peak of your earnings potential which will no doubt help in achieving your retirement goals.
If you haven’t started saving for retirement until now, this will be a crucial period to ramp up savings – anywhere from 20-25% of your income.
- Prioritise Expenses: You’re likely to juggle a number of choices – do you pay for your children’s university tuition and if so how much? Should you renovate your home? Buy a new car? Or get aggressive in paying down your mortgage?
- Create a financial plan: If you haven’t done so already, it will help you in making the right choices, ensure you’re managing expenses effectively, and keep you on track for retirement.
Retirement Planning in Your 50s
This will be the time to closely examine your retirement plan and check whether your current savings and investments will realistically be able to fund your desired lifestyle. Doing this in your 50s gives you time to make adjustments if necessary.
- Visualise your retirement: Do you plan on staying in your current home or downsize to a smaller place? Do you plan on travelling? Will you move to another country? What sort of leisure activities will you do?
Based on the above you can get a rough idea of your expenses. Note that while most people believe they’ll only need 70-80% of their current income to fund their lifestyle, more often than not, people tend to spend at least the same amount if not more.
- Use a retirement calculator to run projections: There are many online that will give you a broad sense of whether your savings will be enough to generate the type of income required to fund your desired lifestyle. However, almost all of the online retirement calculators make assumptions and aren’t personalised enough to give you an accurate reading. As someone who did these calculations for clients for several years using sophisticated models, my strong advise is to find a financial planner who specialises in this area. When it comes to numbers, now is the time to “crunch it” rather than “wing it”.
- Re-adjust your asset allocation: It may be tempting to take more risk with your investments to make up for any shortfall in savings, however your 50s is not the time to do this, especially if you’re a few years from retirement and relying on income generated from your portfolio. You’ll want to rebalance the allocation of your investments to ensure there’s a portion that’s in safer assets and some that’s able to generate income.
In conclusion, doing a pulse check once a year as to whether you’re on track or if goals have changed will help in preparing you for retirement. When you know where you are and where you’re going, it’s much easier to make adjustments along the way such as saving more, reviewing your investment strategy to see if you can improve returns/income potential or adjusting your retirement age.
After all the years of hard work, you’re certainly entitled to a happy retirement!