Many people think climbing up the mountain is the greatest challenge to a climb. However, getting down the mountain is something many people underestimate. A successful climb doesn't end at the peak; it ends when you get back home safe and sound.
Retirement is very similar in a lot of ways. Everyone gets excited to see you reach retirement, but staying retired with money left over is the true accomplishment.
There is an entire industry established to help people get ready for retirement, but oftentimes it leaves investors more confused. Retirement planning can be complicated and has many elements, but at its core it is really quite simple. Let's look at the three steps for planning a more confident retirement.
No. 1: Evaluate Expenses
This is absolutely the first step to retirement planning. You must get an accurate picture of your cash needs in retirement.
Too often the retirement budget starts with a pen and paper, projecting what people think they will spend when they're retired. These are dangerous projections, because they almost always underestimate one's true monthly outflows.
Every month there will be some surprise expense that folks dismiss because "I'm not going to have to replace my refrigerator every month." Wrong. While you might not buy a new refrigerator every month, other things will pop up. Graduation gifts, house repairs, the car you planned on driving for another five years, but the transmission just went out on ... and so on.
Instead of guessing what your expenses will be, find out how much you actually spend. It's much easier than you think.
Look at your checking account and add up the direct deposits that drop in every month. Back out any systematic savings, and that number you're left with is what you need to live off of in retirement.
This is one of those financial planning tricks that is both simple and effective.
No. 2: Add Up Income
Now that you know how much you will likely spend each month in retirement, it's time to replace your paychecks. The first thing you should do is find out how much money you will get from various sources. Here are some examples of the more common and obvious ones:
- Social Security: Get your most recent Social Security statement for up-to-date projections.
- Pensions: If you're lucky enough to still have access to a pension, ask your company for an updated income options breakdown.
- Rentals/Royalties: Do you have any other residual income that will continue?
- Insecure About Social Security? Use a Roth IRA Now to Maximize Benefits Later
- 3 Tragic Retirement Investing Mistakes to Avoid
- Avoiding the New Retirement Spending Spree
Copyright 2019 The Kiplinger Washington Editors