It’s difficult for me to believe that forty years of my life have passed. In twenty-five years, I’ll legally be allowed to apply for a pension. I’m not interested in retiring, but I am concerned about securing my future. My goal is to live comfortably—own a primary residence and three rental properties, fly business class and eat at restaurants whenever I desire. I also need to have a nurse around the clock, in case I’m physically disabled in retirement.
Everyone’s definition of a comfortable retirement is different, but all of us should prepare for it. But what does that entail?
Draw up a Plan
Without a plan, you’re like a ship out at sea without a crew, swayed in every direction and at risk of becoming a derelict. Most people nearing retirement who haven’t reached their goals, in most cases, failed to plan.
In fact, most people who are poor money managers are terrible planners. They either don’t plan at all or don’t stick to their plan. The captain of a ship steers it in the direction of a predetermined destination. In the exact same manner, you need to navigate your life on the path that will lead you to your desired retirement.
Start with the End
Above, I mentioned my ideal retirement. I know exactly what my real estate portfolio should consist of and the entertainment I want to enjoy in retirement. You need to know the exact net worth you want to have and the different assets that should be in your portfolio.
Once you have that figure, divide it by the number of years until your retirement. Then divide that figure by twelve so that you know how much money you need to invest monthly to reach your retirement net worth. Of course, I didn’t factor in compound interest in this equation—that will be a bonus you’ll enjoy.
If your monthly figure seems unattainable, you need to analyse your cash flow statement.
Income and Expenses
Instead of a budget, which usually consists of forecasted figures, I prefer a cash flow statement because your financial situation should be compiled using actual figures. You should constantly look for ways to increase your income. That entails striving for promotions or, if that’s not possible, searching for higher-paying jobs.
In the meantime, add another stream of income by working part-time at night or on weekends. You should never rely on one income because it can stop flowing.
But…
Increasing your income takes time. You need an immediate solution. One area of your finances you have complete control over is your expenses.
Analyse your cash flow statement and eliminate all the expenses you don’t need for survival and reduce the ones that are essential. The goal is to have as much money as possible at the end of the month to pay off your debt. You’ll be amazed at the amount you’ll be able to dedicate to your retirement when you’re debt-free.
Debt is the number one enemy of financial freedom. Make adjustments to your monthly expenditure so that you fast-track your debt-free journey. It took me six years to become debt-free, and it’s the best feeling ever.
If you don’t have debt, you’ll optimise your savings and investments by decreasing your expenses. Ideally, you should increase your income and decrease your expenses. The other streams of income will eventually flow if you work on them, but start with the expenses immediately.
Motivation
Your retirement may be twenty, thirty or even forty years away. That’s a long time to remain disciplined. It’s easy to become demotivated a few years into your journey, especially when you perceive to have made an insignificant change.
Small steps over several years equate to one giant leap. If you want evidence of that, compare your finances at the beginning of the journey to the numbers after a few years. You’ll be gobsmacked at how much debt you’ve actually paid off or the amount you have saved. Remember: if you have more than $1,000 saved, you’re doing better than 60% of American households.
Reflect on the number of loans you’ve paid. Even though my personal loan made up the bulk of my debt, I rejoiced when I paid my credit card, vehicle loan and overdraft. Paying off one loan, irrespective of the balance, excited me because it showed me that I could pay off the next loan if I stuck to the plan.
What to Invest in?
The only time I would invest my money if I’m in debt is if the remaining loan is a house mortgage. I’d pay off any other debt before thinking about investing. Besides maxing out my 401k, hopefully with matching employer contributions, I would invest in a Roth IRA.
One of the key differences between a Roth IRA and a traditional IRA is that the former’s contributions are taxable. I prefer to be taxed on the contribution as opposed to the withdrawal because the earnings can be significant throughout the decades, so I don’t want to be taxed on a higher amount.
A part of my savings will be dedicated to an exchange-traded fund (ETF) that tracks the S&P 500.
But I can’t be cash-strapped, so I have, at least, one year of savings to cover my expenses, in case my income stops. As I near retirement, I will increase the savings balance to cover my expenses for five years.
Final Thoughts
One of the main reasons people don’t enjoy their retirement is that they failed to plan or didn’t stick to the plan. Start immediately with the goal in mind and work backwards to the current day. By drafting a plan, you’ll know exactly what you need to do immediately.
The sooner you start, the better. A comfortable retirement will require a significant amount of money, and you don’t want to make the mistake of believing that there’s plenty of time left. Just look back at how quickly the last ten years have passed.
Make a plan. Execute it. Enjoy your retirement.
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