Starter Guide to Financial Planning
The Risk Of Starting Your Retirement Planning In Your 40s
The ultimate goal for most people after working for decades would be to stop working and do the things they love. The only difference between the time you retire and when you have retired would most probably that you do not have any more working income.
Thus, the only way for you to fund your retirement is to save the money that you have earned during your retirement years.
READ ALSO: The Importance Of Nominating Your Insurance Policy
Knowing your expectations
Everyone must realize that savings are deferred spending. You save now so you spend it on a later time. In this sense, you are saving a part of your income now so you can spend it during your retirement.
Let’s make an assumption that you are now 40 and earning $5,000 a month.
You want to have at least $6,000 per month when you retire.
You also plan to retire at the age of 65. And you want your retirement fund to last for at least 20 years.
By knowing what you want and aim for, it is easier to start planning backward.
Retiring at 65
From the graphic above, you can see that you have only 25 years to save up for retirement. At the same time, from that money, you will be spending the money for only 20 years.
It seems like time is on your side. 25 is a bigger number compared to 20. But it is not as simple as it seems.
You do not put aside the whole lump sum of your salary for your retirement fund. You still have your daily expenses, mortgage, other loans and any expenses on your dependants. After all that, you might only have 10% of your salary left to put aside for retirement.
Therefore, even you have more years to save; you might need more time to reach that retirement goal of yours.
READ ALSO: Breakdown Of Your Expenses During Retirement
What is the magical number?
Since you want to have $6,000 per month when you retire, and you want that to last for 20 years, you would need to have $1,440,000.
Yes, that is indeed the magical number.
We would not be factoring any inflation or any variable that would affect the income you need as you age.
How much must I save to reach $1,440,000?
Looking at the timeframe that you have, it does look like you do have to put aside a good amount of savings. Lets breakdown the numbers.
This is simple maths. And the total amount divided by 300 (25 x 12) months.
After knowing the amount, you will then realize that you do have a problem. You are only earning $5,000 a month but at the same time, you need to save $4,800.
That Is already a huge problem when you start on your retirement planning in your 40s.
Nonetheless, let’s discuss how we can overcome this problem.
Understanding the problem
By the graphic above, you will realize that the amount that you save is simply not enough for your retirement goal.
Saving 20% of your for 25 years will not get you at least 120% of your salary when you retire.
Savings:
20% of current salary: $1,000
Monthly Retirement Income:
120% of current salary: $6,000
Let’s do the maths.
$1,000 x 12 months x 25 years=
$300,000
As stated above, you would need $1,440,000 for retirement. You would only have $300,000 at the end of 25 years after saving 20% of your salary.
Therefore, just saving would not solve the problem.
You would need to multiply your savings.
How do we solve the problem above?
First, you can save more than 20% of your income.
Say for example you decide to double your savings (40%), you would still not have enough. You will end up with $600,000.
You would need to save actually almost all of your income to reach that goal. But that is not a possibility. You still have other things to spend on right now in your life.
Secondly, you can reduce your eventual retirement income goal.
By doing that you will need to spend lesser during retirement. That might not be a good idea if you do not have sufficient insurance coverage.
When you age, your health will deteriorate. Therefore, you do need to set a good amount of money for healthcare.
Lastly, you need to invest.
If you cannot put aside more than 20% of your money, you have to make that 20% “grow”.
READ ALSO: Buy Term And Invest The Rest: Do You Really Know What You Are Doing?
Let’s talk more about investing
If the first two options are not something that you are leaning on, you then have the third option.
Nonetheless, you have to take note that this is the riskiest amongst all three. As investing involves the risk of losing your money.
You have to be willing to lose $100 in order to earn $100 extra.
Say, for example, you invest and your annual rate of return is 6%. For you to reach $1,440,000, you would need to invest $2,187 per month.
That is a huge difference comparing to saving $4,800 per month. You are halving the amount that you need to put aside.
READ ALSO: Here Is What You Need To Do Before You Start Investing
Investing may not be a choice anymore
With the high cost of living, it is impossible for you to reduce your spending. And also the amount that you earn is not enough to put aside for a future date.
Thus, investing might be one way for you to solve your retirement problem.
Nonetheless, you should know what is investment objectives, time horizon and risk profile as well before you jump into investing your own money.
Hope that this article was useful. Do share it with your family and friends. Till next time.
Disclaimer:
I am a financial adviser but I am not your financial adviser. Therefore, what is posted on this website, are my opinions and NOT to be taken as financial advice. Information provided might be relevant at this period of time but may be irrelevant due to alterations to rules, regulations or policies. The information provided is true to the best of my knowledge, but there maybe omissions, errors or mistakes.
