How To Craft Your Retirement Strategy

Planning for retirement can seem like a daunting task. That’s one reason many Americans avoid this critical life task. But while charting your post-career course does require time, effort and commitment, it’s not a crushing burden. The happiest retirees spend about five hours per year planning for their retirement, based on research I did for my book, You Can Retire Sooner Than You Think.

If you don’t have a retirement strategy in place, I urge you to implement one as soon as possible – like today. Time plays a powerful role in financial planning and investing. Make sure it’s on your side.

Here are some tips for getting started. As you will see, successful retirement planning boils down to crafting a vision for the future, developing a strategy to achieve that vision, and doing what is necessary – today, tomorrow and in the years to come – to see it through.

Know what you want. The first step in successful retirement planning is to decide how you want your retirement to look.  Will you travel the world?  Buy a beach house?  Spend most days reading and gardening in your current home?  This vision doesn’t need to be overly detailed and may change over time but having a sense of what will make you happy in post-career life is the cornerstone to a successful retirement.

Figure out what you need. Once you have a vision of retired life, you can get a sense of how much money you need every month to support that lifestyle, and how much you need to save for retirement.

My Fill The Gap (FTG) strategy provides a powerful way to answer those questions. FTG consists of three steps:

First, calculate your income: This part should be fairly simple. Take all of your guaranteed income streams (from sources like Social Security, rents, and pensions) and add them together, after you make an adjustment to account for taxes. If you know you’ll be getting $3,500 per month (after taxes), then this number is your “take home income.”

Next, determine your monthly spending: Tally up all of your monthly expenses. You can use Excel, Quicken, or just a good old-fashioned pencil and paper. Let’ say your monthly expenses come out to $5,000 per month.

Finally, subtract your take-home income from your spending need. Here, we have: $5,000 – $3,500 = $1,500. So, the $1,500 figure is the perpetual gap you need to fill. Remember that it will need to be adjusted over time for inflation, and as your spending adjusts.

Your nest egg will ideally fill that gap. According to the well-established “$1,000 Bucks a Month Rule,” someone who retires at the typical age of 62-65 needs $240,000 in savings for every $1,000 a month they need to Fill The Gap. (This assumes a 5% annual withdrawal rate.)  So, in the above scenario, the retiree would need $360,000 in savings to meet their monthly needs.

Prioritize saving. Life is expensive. There are so many competing demands for your dollars. Saving for retirement must be at the top of this list.

Take advantage of any employer-sponsored retirement plans (401k, 403b, etc) that may be available to you. Contributions are auto-debited from your paycheck and are made pre-tax, so they reduce your taxable income.  They also grow tax-deferred, so you won’t pay taxes on the gains until you withdraw the funds. Make sure you are contributing to the company match.

Budgeting can also help ensure you find enough money to save for retirement. An effective budget will show you where your money is actually going and identify places where you can reduce your spending, allowing you to save more.

As part of the budgeting process, take a hard look at your personal debt. Credit card and other consumer debt payments can cause serious drag as you try to build savings momentum. The sooner you pay down those balances, the faster your retirement accounts will grow.

If you are still coming up short on savings, consider increasing your income by working overtime, getting a new job, buying a rental property or taking a second job and earmarking that money for your retirement nest egg.

Track your progress.  Review your progress at least once a year to make sure you are on track. As part of this process think about how both recent and looming events in your personal and professional lives might impact your plan.

Planning for retirement is a vitally important task, on par with choosing a career and making decisions about marriage and children. But once you have woven retirement planning into your daily financial life it becomes a very manageable task; one that can have a huge payoff.

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