Retirement is expensive. It is expensive because the longer we live, the more years we’ll spend in retirement than saving for it. The other way to put it is that we are likely to have spent more years retired than working.
The task, hence, is big. Not to mention the fact that there are other discretionary goals to plan for in the interim like paying for college, buying a home etc. I call them discretionary because there are a few ways to pay for them but none for retirement. We must save and invest our way out of it. And the sooner we start, the easier that task gets.
But that’s when mistakes get expensive. We all make money mistakes because that is how we learn. But avoiding them, especially when early in our careers, could deduct years from our time to financial independence. Because mistakes are compound interest in reverse.
But assuming you have the investing part figured out, how do you know if you are saving enough towards retirement? A rough outline on how to find that out…
You start with an estimate of your first year’s expense in retirement and assume you are buying a growing annuity at the time that accounts for inflation and a planned life expectancy of say 100 years. You then bring the value of that growing annuity that you’d buy when you first retire to the present using a reasonable discount rate (rate of return you expect to earn when working). You then subtract from it the money you have already saved. That difference is your savings goal. You have now till you retire to meet that savings goal.
But once you are meeting that goal, you can then grant yourself permission to spend. You can spend on college, never a guilt there. You can splurge on vacations. You can buy nicer cars and nicer homes. You can spend on anything you desire…and all guilt-free.
Because you already took care of the biggest expense you’ll likely ever face.
Thank you for your time.
Cover image credit – Markus Spiske, Pexels