Retirement brings mixed emotions to a lot of people. Some are dreading the day they have to retire fearing the worse. They do not know what to do with their time because they were employed for most of their life. That routine they have developed, practiced, improved and for some, perfected will now be a thing of the past. They will wake up one day with nothing to do.
For some, they can’t wait to retire. They have been building their retirement fund for the past decades and are eager to enjoy the fruits of their. They are already making plans on what to do next and places to go and people to visit. They are doing their homework and making sure that they have enough to get them through retirement.
Whatever your outlook is, it is quite important to know how much you need to set aside for retirement. Because like it or not, there is no stopping time and retirement years will come. The best thing to do prior to it is to ensure you have a comfortable ride and that you can tackle whatever life bumps come your way.
Knowing the right path in retirement preparation means knowing the correct things to do and knowing the mistakes to avoid in retirement planning. They might overwhelm some but knowing them early gives you a chance to address them early in life way before retirement wakes you up in the morning.
Income replacement ratio for Retirement
News.morningstar.com recently shared three ways of looking at income replacement ratio for the retirees. This can help you gauge the most optimum method in saving for retirement. Income replacement is simply what a retiree will hope to save from income by taking away expenses that will not apply to retirement. A sample of these could be childcare, retirement savings (since you are already retired), weekly food expense in the office and other items you should not be paying for when you retire.
100% is the default of most retirement tools but the more acceptable ratio is 80%. This means that around the time you retire, you should be able to take out 80% of the existing expenses you have at present. The ideal is the lower the ratio, the better because it is easier to replace. According to the article, the three income replacement ratios are:
- The ratio increases over time for higher earning individuals. As they earn more, they spend more making their income replacement ratio bigger. This is in stark contrast with the lower earning individuals who make the same over a long stretch of time. Their ration pretty much stays the same over a long period of time.
- Adding unearned income. Counting your 401(k) and various profits from investments including principal payments on a mortgage is another approach but will still put it at 75% at most. This approach still puts the wealthier segment with low ratios.
- Modest approach. Living a frugal life means saving a great deal during working years. This helps lower down the ratio because you already made some sacrifices pre-retirement. Saving and living a frugal lifestyle yields a lot of benefits including a manageable ratio for your income replacement.
Retirement should be looked at with excitement because it ushers in a new chapter in your life. But the same amount of excitement should be devoted as well to preparation. Preparing for retirement is very important because it will dictate how you will live off your retirement years.
USAtoday.com published a checklist of what to look out for prior retirement. This will help you plan better in order to have a more pleasant retirement:
You want to retire?
People get mixed reactions when asked if they want to retire but it is a valid and useful question. Asking yourself now can help you come to a realization if you really want to retire now. Retirement is something new and should still be looked into with great caution.
There are retirees who have been successful making their time count by putting up a small business centered on their hobby. This gives them the chance to do something they love and earn from it as well. There are those that are putting in more time in civic-related duties helping out in the community or in church.
But for some, they were caught unprepared and lost in what to do. They got used to waking up every morning preparing for work, driving to work and spending the next 8 to 9 hours in the office that they can’t fill up their day with activity. They just resolve to sitting at home and doing nothing.
Before retiring, you need to ask yourself if you already want to retire. Putting in a few more years of work just to prepare and condition yourself for retirement can be a good thing. It can also help you put in more funds in your retirement chest. The more you save for retirement, the more funds you have to use in retirement.
Can you afford retirement?
The next logical question is if you can afford retirement. Before putting that white corporate flag up, do the math and see if you have enough to be comfortable during retirement. You do not want to be in a situation where you are already retired only to find out you need a few more thousand in your retirement plan to keep you afloat. You will then be forced out of retirement just to augment that gap.
Plan for investment
Investing retirees are finding better use for their money. They are making their money work hard for them instead of just letting it stay in the bank earning a small interest. But you should proceed with caution when investing because one wrong move and you could lose everything you worked hard for.
Getting in a bind and having to look at borrowing from your retirement fund is not a good sign. You should always have options when something does not work out. Have other sources of funds or have other activities lined up in case your first options does not work out.
It is best to also look at how you would live your retirement in terms of expense. Your lifestyle can largely dictate how far you can stretch that retirement fund. Know what expenses you will most likely incur such as utilities, food, medicines and other items. Check how much you have and see how long it would last.
Planning on trips will play a big part as well in maximizing your fund. Know where and how often you plan to make trips. Either for vacation, to see places or see family, know the frequency and cost so you can factor it in your fund.
Where to live?
Retiring in a place where you know a lot of people can extremely help you as you grow older. Familiar faces makes the day go by easier. It also gives you more options as you can invite a lot people in your planned activities. This can be community outreach programs and other activities.
But there is a growing trend known as tiny house movement. As you retire and the family moves out, you would not have that need to maintain a big house with a lot of rooms. It will also be costlier on your part to maintain a big house. This is the reason why some retirees are optioning to live in smaller houses. They are easier to maintain and would cost less in terms of utilities and other expenses.