Runaway Checkbook

 

Develop a "Plan to Retire"

 

Many people have retirement plans (ie. IRA's, 401K's, pensions), but very few people have a "plan to retire".  What I mean is that most people I talk to have no plan on how they are going to get to retirement.  More and more people I talk to say that they either never want to retire, or they do not think they can afford to retire.  Even if you do not want to retire, you still need to have a plan to get there because you may not physically be able to retire. 

 

People I talk to that work because they WANT TO are much happier generally than those that work because they HAVE TO.  I want to stay active and I love what I do, but I want to be ABLE TO retire. 

 

The first step in developing a plan to retire is to figure out when you want to retire and how much income you want in retirement.  The next step is to figure out how much you need to save and how much return on your investments you need to reach your goal.  The last step is to analyze your plan every year and make sure you are still on track.

 

The first step is pretty easy.  Pick an age when you want to retire.  You can always change it, so just pick an age.  The income I recommend people use is what they are earning currently.  In other words, look at your last tax return, and take your total income before deductions on the first page of the tax return.  Next, subtract the amount you save each year from your total income.  That result is how much income you lived on that year (including taxes).  Most people retire on less income than they were earning in the year prior to retirement, but my method is being conservative in your planning.

 

The next step is the hardest....saving money to achieve your goals.  Once you have the annual income you need, divide that amount by .05 (5%).  The result is the total amount you need to have at retirement to provide the income you need.  This formula is assuming you will earn 5% on your investments in retirement.  Once you have that sum, you need to find the "present value" of that amount.  This will require you to have a financial calculator.  If you do not have a financial calculator, then you can use the "Roth IRA Calculator" on Plan Ahead, Inc.'s website.  You will need to fill in the blanks until the "Roth balance at retirement" equals the total balance of your investments at retirement.

 

Once you have determined how much you need to save each year, then you need to invest your money.  You will need to regularly make these calculations to make sure you are on track to achieve your goals.  A really bad year in the stock market can affect your plan dramatically, and vice versa.

 

Remember, it is hard to reach a goal if you don't have a plan!