Planning your dream retirement is not as simple as many advisors make it out to be. We listen to opinions and make assumptions. However, planning your retirement is not an exact science.
With the benefit of hindsight, how would I have planned my retirement? After ten years into retirement, my wife and I are still enjoying a very blessed retirement. But in the process we suffered some battle wounds – so to speak. Most of these we brought on ourselves, but some setbacks just happened.
Here are the most important components for planning your dream retirement as I see it:
If you start at age 25 to regularly contribute a modest amount to your retirement provision you have on average 480 months to contribute towards your retirement account. If you take the average period you'll need to draw from that retirement account, it comes to 240 months! Time, dollar averaging, free money and deferred tax are all factors that allow your savings to grow exponentially. During retirement all these factors are put into reverse!
Benefit from free money
Your employer's retirement plan would allow your contribution to the plan to be tax free. Often your employer would match your contribution. That's free money! And it is also not taxed. Neither is the income earned by your savings in the plan taxed. Understand the dynamics and make sure you mine this source of free money to its fullest.
Make retirement provision your priority
There are always serious contenders for the position of priority in your financial planning. A home, education for the kids, holidays, and perhaps a holiday home, taking care of aging parents. But the sooner you make retirement provision the priority during those precious 480 months, the better chance you have of achieving your retirement targets.
This is bitter medicine! In our consumer oriented society, it is difficult to cut excessive consumption out of your budget. The way to go is to understand and practice minimalism. To rather spend on timeless quality objects than a new object ever so often.
Set your targets
Set the target for your retirement date as well as the net worth you want in your retirement portfolio at retirement. Rather over-provide. As mentioned before, when you start withdrawing from your retirement provision, the diminishing rate is exponential. So, set also your target for your rate of withdrawal. Your target date for retirement should also be the date, if it didn't happen sooner, that you'll be debt free.
Sell unproductive assets
During the run up to your retirement date or early in your retirement, sell any assets that's not providing a net passive income. If you can get a fair price for it, sell it. We are often emotionally attached to our assets and always believe, even in an economic bubble, that we'll get a better price if we wait. But if you don't get a regular income from employment anymore, maintenance and taxes turn these assets into liabilities. Your home should not be regarded as an asset, because you live in it and it is a running expense. So, in a way it is productive. But if it is too large for your requirements in retirement, do consider selling it and get something more suitable.
Track your spending
Even if you stopped consuming and retirement provision is your priority, it is a good idea to budget and to track your spending. This is even more important during retirement to make sure your rate of withdrawal from your retirement provision accounts is within the targets you have set.
Make ample provision for medical care
Even if you have a healthy lifestyle with no apparent health problems, make ample provision for medical care. I certainly under-provided. In my pre-retirement planning I projected our healthy state into retirement and beyond. When I look at our own experience, and the experience of retired colleagues and friends, I know that we under-provided for medical care.
There. My list of components for planning your dream retirement contains all the elements I neglected. Don't make the same mistakes!
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