The Basics of Retirement

By Michael Peterson
In April 12, 2005

We’re all concerned about how to save money for the future. Whether you’re a Baby Boomer who’s been hit hard by the bear market or a young adult looking to retire in 35 years, there are simple ways to start organizing your ideal retirement plan.

“Plan” Isn’t Just a Noun, It’s Also A Verb

No matter what your age, detailed planning is a must for you to achieve the retirement of your dreams.

Put away 10% of your income every month. You might want to start by writing down your current budget and finding places to eke out extra dollars–think of that $2 donut you get everyday on the way to work. It will become much less appealing to you when you realize that you could save an easy $500 per year just by eliminating that one tiny expenditure. The idea with this plan is to deprive yourself of a few luxuries now, so that you won’t live deprived in the future.

Calculate your retirement income. When planning for retirement, start by calculating the funds that you’re sure to receive–pensions from jobs, past or present, trusts you are due to receive through legal documents, and to an extent, Social Security. Be aware that Social Security may diminish over time.

Another part of this plan is to count on your retirement lasting a long time. Regardless of your family history or notions about longevity, if you plan to retire at 65, you should plan your retirement for 25 years, just to be on the safe side.

Invest.Investment is always risky, but you have to keep in mind that risk pays off with solid planning over an extended period of time. In our current market, it’s best to follow the mantra of common sense: sell high and buy low. Believe it or not, many financial analysts claim that now is the best time to invest more money in stocks. As our bear market makes its recovery, you will make more money later off of investments you can buy cheaply now.

On the other hand, it’s critical to balance that risk with security, too. Your grandmother’s advice of “waste not, want not” couldn’t be more true when it comes to planning and saving for retirement. You should always keep two to three years worth of earnings as cash or low-risk bonds, saved away so that in the event of a temporary market fall, you can spend secure money instead of threatening your stocks further. It’s advisable, however, to keep it not under the mattress but in a CD, money market fund, or short-term bond.

Along with “safe” funds from pensions and cash, and “risky” funds from stock investment, you may consider purchasing annuities. An annuity works a bit like life insurance, only in reverse. You pay a lump sum to an insurance company, who then doles it out to you in monthly payments for the rest of your life. This investment sounds very attractive, but be aware that it carries a significant depreciation with it, by way of inflation. The annuity, however, can be a good choice for those in good health who want to benefit from a fixed, monthly payment.

You Don’t Need a Crystal Ball, Just Wise Preparation

When you begin to plan for retirement as a young adult, there are many factors to consider–education, family, home, career, financial risks, and most importantly, life transitions.  All of these elements of life contribute in some significant way to the accomplishment of a retirement plan. Will you be repaying loans for yourself or your children? How will the value of your home affect your retirement options? What if you change jobs? How might the market fluctuate over 30 years? These are all important questions you should ask yourself when you set out to plan your retirement. You may not have answers for all of them now, but knowing that decisions and transitions throughout your life will affect your future is tantamount to understanding how to plan effectively for your golden years.

Put your personal computer to use—it’s not just for email.Start playing with financial planning software (most are available for a free trial downloaded from the Internet) to see where different asset allocations will drive your retirement funds. In other words, use these programs to alter the numbers on different investments you plan to make, and take a look at how it pans out over a projected period of time.

Alternative Solutions

If you run into financial problems near to or within your retirement, there are still options to help you get along.  For one, use the value of your house to your advantage: Sell your home for cash and downsize. Another option is part-time work. It may not be the most appealing, but think of it as an opportunity to find something you really enjoy–perhaps something you always wanted to do, but didn’t, earlier in life. Finally, keep your budget tight to ride out the storm.

Enjoy You Retirement Years- You Earned It

As you plan for retirement, don’t forget to dream big. You must set goals for yourself in order to accomplish them, and why not raise the bar? The earlier you start, the more likely you are to retire in your dream home, whether it be a cabin in the mountains or a bungalow on the beach. Remember, it’s never too late to start planning for retirement.  The more detail and effort you put into your plan, the more likely you are to realize your dreams.

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.