Thinking about retirement can feel overwhelming. Knowing the first steps can ease a lot of anxiety. There is no “one size fits all” plan and getting yours started will relieve a lot of stress and guilt.
It all begins with the constant barrage of ads telling you to save for retirement. Fidelity wants you to follow an imaginary green line. ING (or whatever they are now) wanted you to find your number and carry it around in a case. Your grandmother wants you to save for a rainy day.
They’re not wrong. Planning for the future prepares you for the surprises of life. My whole business is about helping you set goals and organize your life. The difference is how guilty or anxious you end up feeling.
Running My Mouth
While having coffee with a friend (let’s call her Sally), I was running my mouth. I was describing how it was ridiculous that someone close to 50 years old hadn’t saved for retirement. Sally looked down as her face dissolved into a look of guilt. I realized I was being a jerk and apologized.
Sally confessed she was almost 50 years old and hadn’t saved for retirement. She felt embarrassed. Sally built a business and raised a family, but she never got around to saving for retirement. I also found out Sally’s business was booming, and she owned a couple of pieces of real estate. One house was even a beach-front property.
Hearing about Sally’s assets was great news! Sally assumed she wasn’t saving for retirement because she didn’t have a 401(k) or IRA. From my perspective, she was doing a fantastic job, and I said so. Sally looked confused so I explained further.
Retirement isn’t about how many shares of stocks or mutual funds you own. It’s about finding a way to get a check in the mail every month for the rest of your life. Instead of trading your time and energy for a paycheck, you can do what you want, and the money shows up.
The best way to reduce anxiety or guilt about money is to start a plan to fix it. Your situation won’t change overnight, but life is easier when it goes according to plan. Here are six steps to getting started on your retirement plan.
1. How long will you live?
One of my favorite books of all time is The 7 Habits of Highly Effective People by Stephen R. Covey. The second habit is to “begin with the end in mind.” For retirement, the end you should think about first is your ultimate end. Death isn’t fun to think about but guessing how long you want your financial freedom to last is important. To guess how long you will last, consider your family history and current health. Your genetics and daily habits can predict your life expectancy the best. Life insurance companies do it, so why shouldn’t you?
2. What day would you like to retire or be financially free?
If you would like to retire tomorrow, I salute you. Wanting to be financially free at 30 years old is hard but not impossible. There is a popular blog by Peter Adeney called Mr. Money Mustache. Adeney retired in his mid-thirties without having millions of dollars. He attributes his success to frugal living and early investing (starting in his twenties). Adeney’s family wanted to retire early and become financially free. They did it by figuring out how to produce the income they needed instead of what society suggests. What day would you like to retire?
3. How much income do you need to be free?
Daniel Kahneman is a psychologist who won a Nobel Prize in economics. In 2010, Kahneman and Angus Deaton studied the link between happiness and income. They found you become happier as you start to make more money. Yet, once a household makes around $75,000 per year, happiness levels start flattening out. Let’s say you rank your happiness on a scale of one to ten, one being unhappy. Your happiness can go up from a five to a seven when moving from $37,500 to $75,000 per year. But your happiness might not go up from a seven to a nine when going from $75,000 to $150,000 per year. Money can buy happiness, but there seems to be a limit. In today’s dollars, how much would your family need each year to be happy?
4. With the investments you have now, can you produce the income you want?
You may already have real estate you are renting out or have some money in a 401(k) or IRA. The rule of thumb is to withdraw 4% of your investments each year as your retirement income. The “4% Rule” is only a guide and not set in stone. Add up the value of your investments (stocks, real estate, Beanie Babies, etc.) and divide by 25. If the answer matches your number from step three, you may be on the right track. Remember, retirement is about finding a way to get a check in the mail every month for the rest of your life.
5. How much more will you need?
This step goes back to my conversation with Sally. If you are like most Americans, you don’t have enough saved up to be financially free right now. To retire, you can do the reverse of step four. Take the income you decided on in step three and multiplied it by 25. The large number you calculated is a rough idea of how much in assets you need to own on the day you would like to retire. In regards to my friend Sally, it turns out the value of her business and real estate was a big enough number. She was saving for retirement and didn’t even know it.
6. Did you account for inflation?
Inflation is necessary for a growing economy, but it’s a drag on your retirement funds. The price of goods goes up over time. It’s important that your income keeps going up for the rest of your life. Pensions and other government programs, like Social Security, do get the cost of living adjustments. Unfortunately, you’ll run into trouble if those increases don’t keep up with rising costs. With your investments, make sure you plan for the income you receive to go up each year.
These six steps will get you started on your full retirement plan and help you feel less anxious. As my friend Sally learned, don’t let society make you feel anxious or worried. Get your plan started today.