If you are a baby boomer, your retirement planning shouldn’t be complicated. You don’t need to have a degree in finance. There are a few simple steps needs to be done in your early working years and the rest you can figure out in the years before retirement.
When you are in your 20’s, finally out of school and start making money, your first financial goal is to save money. At that age, your priorities don’t include reading books about retirement planning. But we all know that if you don’t start on that road early it will get harder with each passing year.
Retirement looks like a distant future even in our 40’s. For many years my retirement goals were mostly vague because there were so many years ahead of my life.
But after I turned 50, everything has changed. I started to feel that the distant future begins itching much closer with every day. I know that many people get serious about planning for their retirement when they reach their 50’s. At this point in your life, you started to understand that you need to be more realistic about what lies ahead of you.
As baby boomers, we need to start preparing ourselves and our finances for the transitioning from the “far away retirement’ to the ‘around the corner”.
If you are a baby boomer, I want to share several steps you need to take to help you prepare for retirement:
Step 1. Start with your dreams
When you are in 5 to 10 years before retirement it’s crucial to decide what exactly you want to do in retirement. Your retirement is not far away anymore, it’s rather very close. The more details you can put into imagining the days of your retirement, the better job you will do preparing for that life. It’s important to decide first what your retirement dreams are, then you can move on making it happen.
Some people dreaming about traveling the world or buying a boat. Others are all about living close to the family, gardening, and volunteering. It’s important to remember that you can’t plan retirement without knowing what you want to do in it. I think it’s time to discover your passion. You’ll need to dig deep inside yourself to determine what excites you. You’ll have to have a reason to get out of bed every day.
Imagine in detail how would you spend your days when you stop working:
- What would be your daily routine?
- Are you planning to keep working part-time?
- Do you have any hobbies?
Did you think about where would you live? Are you planning to relocate to a different city or state? Do you want to live closer to your family or your friends?
How active are you? Are you healthy? What are you doing to stay healthy?
Answering these questions is important because it will help you to figure out how much your retirement will cost.
Step 2. Move from your dreams to your goals
The next step is to figure out what do you need to do to make your dreams come true.
Once you wrote down the list of your dreams, you can start working on your goals. Dreaming about retirement is not enough, you need to know if you have enough cash to support your lifestyle without regular employer paycheck.
Start by estimating how much money do you need to support the lifestyle of your dreams. Where you live and what you prefer to do will determine the cost of retirement.
- Have you saved enough for retirement?
- How many years you have to have to achieve these goals?
If you haven’t done any retirement estimates yet, I would recommend start playing with online retirement calculators. The online calculators will help you to see how much income you will have in retirement based on your current savings and investments. You can play around with decisions like your retirement date, the rate of return on your investments, rate of inflation and see how these things will affect your future income.
However, most online retirement calculators will give you only a broad overview of your retirement plan, because they are based on future expectations.
Don’t forget to include your Social Security benefits into retirement income calculations. It’s true that for most of the baby boomers the best strategy for maximizing our Social Security benefits is to wait until age 70. This usually results in tens of thousands more in lifetime income than retire at age 62.
Unfortunately, to follow this rule is not always happen in real life. Everyone has their own set of circumstances. But I would recommend looking at your Social Security benefits and see how the retirement age will affect your future income.
Step 3. Create action steps to make your goals happen
Be clear on your goals.
My goal is to retire at 67 and be able to spend $50,000 per year during retirement. Roman and I like to travel, and we want to spend our time traveling to the places we have on our retirement bucket list. Spending $50,000 while traveling the world might not be a realistic goal because we still need to pay our bills. But I like to dream a little. We can always change things later and modify our plan based on our retirement income.
If you are in the process of creating your detailed retirement plan, first you need to know how much it will cost you to live once you retire.
There are several options to calculate that number:
The most popular rule of thumb is to calculate a ballpark number. The estimate is often called “multiply by 25 rule”. This rule works as a guide to how much you should save before you retire. So, to determine how much money you’ll need in retirement, multiply your desired annual income by 25.
For example, you plan on withdrawing $30,000 from your retirement savings each year.
$30,000 x 25 = $750,000 – you need to have in your retirement savings
If you plan on withdrawing $50,000 from your retirement savings each year you will need to save:
$50,000 x 25 = 1.25 million
But keep in mind that this rule doesn’t’ factor in other sources of your retirement income like Social Security, pension or rental income.
The cost of living number: use your cost of living now (your current spending) and calculate 70% as for your future spending. So, if you are earning $100,000 a year, you should plan on living on roughly $70,000 a year to keep the same lifestyle. Statistics show that we will spend less money when we retire.
Once you go through all these calculations you may discover that you don’t have enough money saved to achieve your goals.
What to do?
The first step will be to increase your savings. How much do you save in your retirement accounts? Saving 10% might not be enough if you are 5 to 10 years away from retirement. You need to increase your savings by at least 20%.
If saving more money is not an option, the next step will be to start looking at your spending and see if you can spend less. Most people believe that saving and investing are the most important steps while preparing for retirement. However, your spending plan will determine if you are going to have a happy retirement. Think about it. You can make $75,000 a year in retirement, but if you spend $150,000, you are not going to stay retired too long.
Step 4. Look for downsizing opportunities
Downsizing can be a very scary word. Many people think that having fewer things means letting the world know that you can’t afford the “big life”. Home-ownership is special. We are emotionally connected to our home. However, our homes come with huge financial responsibilities. You have to pay for your mortgage and home insurance. You have to heat it in winter and cool it in summer. Home repairs, renovations, and yard work require money.
Is it time to downsize your home? If your kids off to college or grown and out of the house maybe you have more space than you need. Downsizing could be a positive thing if you move to a smaller home with less of a financial burden.
If you paid off your mortgage and own your home, you might consider renting it and moving to a condo or a smaller home in another part of the city or town. Being a landlord is not an easy task, but you can use rent as an additional source of income in retirement.
When you are moving to a smaller space, it’s always best to sell what you can’t take with you than to rent storage space. I have heard about many people who still pay for their storage units but haven’t open them for years. Don’t waste your hard-earned money on stuff you don’t need anymore.
Downsizing your transportation might be another way of finding more money in your pocket. If a sizeable chunk of your income goes into maintaining several cars or driving a luxury car, I would suggest downsizing or choose a different car so that you can save and invest more.
Many people choose to lease their cars because they want a new car every few years. Buying a good used car, rather than a new one for their image is always a good option. When you think about, the cost of buying would be less expensive than leasing it for the long run. Also, a car is considered as a depreciating asset and loses its value faster than you imagine.
Roman and I have discussed our downsizing opportunities and planning to sell our house and move to a smaller one, preferably condo. We also want to downsize from two cars to one. All these actions will save us a lot of money and eventually will allow us to spend more in retirement on our dream lifestyle.
Step 5. Take care of your health & review your healthcare options
Think about how big and small choices related to your health now will determine options for your future. What you eat, how you exercise or exercise at all, and other healthy choices will impact who you are in 10 or 20 years.
I have read many articles showing that baby boomers are in serious denial when it comes to their medical and long-term care costs. Yes, Medicare provides health insurance, but it doesn’t pay for all medical costs and it doesn’t’ pay for long-term supports and services at all. Many believe that they will only need about $50,000 to pay for their health care in retirement. Sadly, they are wrong.
We all know that medical insurance is essential even it can be expensive. A sudden medical emergency or serious illness can wipe out your savings. According to Fidelity’s new studies a 65-year old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement.
If you are not active or eat poorly, now is the time to build healthy habits. Being active, exercising and eating right can add more years to your life. Visit your doctor, get regular checkups and screenings so that if any problems get caught early you can do something about them. Taking care of your health now is important so you can live a long, healthy and happy life in retirement.
Putting it all together
There are many things to consider when you start working on your personal retirement plan. I read all the time about financial surveys indicating that many baby boomers are short on their retirement savings or lack any kind of planning for retirement.
Don’t be that person. Take the time for these 5 steps so you’ll be on your way to generating a solid retirement plan and feel ready for the retirement of your dreams.
Do you have a list of your retirement goals? Did you work on your retirement plan? Do you feel ready for retirement?