*Disclaimer*: the opinions expressed in the Retirement Planners article and on the Frugal Fun Finance website are for general informational purposes only and are not intended to provide specific investment advice or recommendations on any financial or investing products. Any financial advice should be provided by a licensed professional.
Introduction – Retirement Planners
Retirement planners.. retirement… pensions… what do you think of when you hear these phrases? If you’re like me, an image of a grey-haired couple sitting on their couch and reading a book may come to mind. Or maybe you imagine a grandmother chasing her grandkids at the cottage on a warm, sunny August afternoon.
What do these two images have in common? The people you imagined probably are quite a bit older than you. You don’t image yourself with much in common with them because they’re a lot older.. right? While retirement may be a long ways away, there are several reasons why it’s important to look into retirement solutions and get planning now. How can you do that? Retirement planners and calculators can help you:
- Determine how much you currently have saved
- Figure out how much you need to save per month based on three factors: amount currently saved up, time horizon and risk tolerance level.
There are two meanings to the term ‘retirement planners:’
- A retirement planning specialist to help you plan your financial journey
- Retirement planners in the form of creating your own roadmap to help you track and meet your goals.
In this article, I’ll go over the second type and why personal retirement planners are important for everyone.
Let’s dive into using retirement planners to help you save up for your future.
What is Retirement Planning?
Before we can get into how to create a retirement plan, let’s define what retirement planning is.
Simply put, retirement planning is the process of thinking about how much you’ll need to save for retirement and how to go about achieving your savings goal. This process takes inventory of:
- Your age
- Your current net worth including how much you have saved and invested in stocks, bonds, ETFs and other assets
- Whether or not you own a home
- How much you’ll be able to put away (save per month)
- When you want to retire
- Your risk tolerance when investing in stocks, bonds, ETFs and more
Retirement planning is for everyone – not just for middle-aged couples or those a few years away from their retirement age. In fact, the earlier you include it in you and your family’s overall financial plan and execute it, the better off you’ll be. I’ll get into why that is a little bit later in this article.
Why is Using Retirement Planners Important?
Let’s face it – us humans age! We’re getting older and older every day. One day – whether it’s five, ten or twenty years down the road – or more, you won’t be able to work anymore. Human beings are living longer and may have the capacity to work longer. However, our increased longevity also means we’ll need to plan to have funds saved up to cover a longer period of time.
While many countries’ governments offer financial support in the form of annuities and pensions – a predetermined amount of money paid to you based on how many years you worked, your age and your income while you worked – it’s not a great idea to rely on this as your sole income source during the golden years.
Why? For one, the amounts are often not enough to cover all your expenses. Additionally, government pension payouts may stay flat for years even if the cost of living rises. If your government decides to keep the payment amount the same, outside of lobbying for change, there’s not much you can do to change this decision!
While you can’t control everything that happens to you, proactively saving and investing for your retirement in addition to your regular financial planning routine provides the peace of mind that you’ll have funds to cover what pensions don’t.
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Creating a Personal Retirement Plan
Step 1: Where Are You In Your Retirement Journey?
Now that I’ve defined what retirement planning is, it’s time for you to take inventory of where you’re at.
How Much You Have Saved + Your Age
Before you decide on how much you need to save, when you’ll save and what you’ll invest in, check your bank accounts and investing statements for the balance on each.
How old are you? If you’re 25 and are just starting out with investing for retirement, you’re going to have a different plan than someone who has no retirement savings at 45. Why is this? Well, there are a few reasons.
The first major reason is that because you’re younger, you have the opportunity to take advantage of compound interest. A 45-year old has less time to save, so he or she will need to save a larger amount of money to reach retirement. Confused? Understandable. Let me break it down to you by giving you an example showing the difference between starting to save at 25 years old versus 45 years old.
For simplicity’s sake, at the beginning of your retirement savings journey, you have $0 saved up in both situations. When you start investing for retirement, your average annual return is 7%, compounded monthly. For the sake of this article, when I say “saved up,” I mean money saved in an investment account, rather than a regular savings account. Saving versus investing your savings carry different potential returns. You’re still saving the money, but it isn’t sitting in a cash savings account.
Starts Saving at 25
In this example, let’s say that you have $0 saved up. Understandable – any spare cash you had went towards paying off your college student loan. You’ve just paid off your debts. Congratulations! Now, you’re thinking about the next steps. You might ask yourself, “How can I put my savings to use in the best way?” If you’re thinking of investing it for retirement, you’re thinking smart!
Let’s say that starting at age 25, you invest just $400 per month for 40 years at a 7% rate of return.
At 65, you’ll have over $1,000,000 – $1,049,925, to be exact!
Now, let’s look at the second situation – if you start saving at 45 instead of 25.
Starts Saving at 45
If you start investing $400 per month for 20 years at a 7% rate of return, you’ll have just $208,370.
Logically, you might think you’d have half the amount as your 25-year-old self, but this isn’t the case due to compound interest. Compound interest differs from simple interest. With compound interest, you’re making interest on your interest. Your cash and the interest is re-invested, causing a snowball effect. The longer you have the money invested, the longer you’ll have for your money to grow.
What if you want to play catch-up and start saving $1,200 per month? You’ll be shocked to find out that after 20 years of saving $1,200 at a 7% rate of return, 65-year-old you will only have $625,111 saved.
It’s never too late to start investing for retirement. However, the longer you invest your money, the better. Start saving and investing as early as you can. Your money will have the chance to take advantage of time (your biggest asset) to compound and grow!
Step 2: Retirement Planners – What Are Your Retirement Goals?
Now that I’ve covered the important initial steps of determining your age and committing to saving enough money per month, you’ll want to determine how much you need to save. How do you go about doing this? Determine your retirement goals. If you’re younger, you may think that it’s difficult, if not impossible, to know how much money you’ll need. As you age, your lifestyle may change. Let’s get into this process in Step 3 (below).
Step 3: How Much Should You Save?
A good rule of thumb is to save 70% of your current income. Why is this? When you retire, you won’t be putting as much money towards saving. Additionally, if you have a mortgage payment, it’s assumed that you’ll have this all paid off by the time you retire. Since housing is a major expense, if your home is paid off, you’ll likely only be paying for maintenance and bills like electricity. However, if you’re like many young people, it’s unclear as to whether you’ll own a home in the future. If you’re unsure, it may be better to save 80%-90% of your current income level.
Another important point to think about is when you think you’ll want to retire. Some want to retire at 55 or even 50. Others may want to retire at 60 or 65. If you’re unsure, you may want to aim to save enough to retire at 64. Why? This is the average age that someone retires in the US.
All this being said, these are merely suggestions and tips on how to plan your retirement savings goals – not professional financial advice. Consult a professional retirement planner to help you determine how much you need to save based on your goals and current income level!
Step 4: Which Investments Should You Choose?
Now that you’ve taken inventory of how much you have saved and invested, your age and have a general idea of how much you need to save for retirement, it’s time to decide where your money should be invested.
Generally, most people invest in a diverse portfolio of stocks, bonds and ETFs. Depending on someone’s time horizon, a portfolio with more stocks in it may be best for someone who is further away from retirement. Why? Stocks carry more risk. If there is a market crash and you need to withdraw the funds in 3 years, you may lose a lot of money. Why? There hasn’t been much of a chance for the market to recover.
On the other hand, if you’re 30 years old, you have 30 or 35 years until conventional retirement age. You may feel more comfortable holding your cash in investments that may fluctuate in the short-term but have higher long-term returns. Those closer to retirement often hold more of their assets in bonds and other lower-risk investments. This is because they’ll need to withdraw the cash sooner to live off of.
With all this being said, contact a financial advisor or retirement planner for assistance and help to determine what works best for you. If you’re using a robo-advisor such as Betterment, SoFi or Wealthfront, you can contact customer support for assistance. Many platforms offer advice on how to choose the best portfolio for you and information on withdrawal policies, should you need the cash in an emergency (another article for another time!).
Step 5: Logging Your Progress
Last but not least, the final step of using a retirement planner in your life is to document your goals and progress! Similarly to tracking regular savings, you can pick a tracker or journal to keep a record of your long-term investing goals for retirement. Choose a beautiful template or planner to track and log your progress.
If you’re undertaking the process with a retirement planning specialist, save all the papers and documents you receive from them. Be sure to set aside some time each month to update your journal or tracker. Sit down and make any changes to how much you have saved up and the current balance of your assets.
A Retirement Plan That Changes As You Do
As you get older, you may see your income increase. As your income increases, adjust your investing level to match your current income level. This usually means increasing your contributions by the percentage your income increases. If your income rises by 10% and you were investing $500 per month, increase the amount by 10% to $550 total. Increasing your contributions can help offset any investment management fees. Additionally, contributing more over time will help shield you from inflation, a cost that can eat away at long-term returns.
Additionally, your life may change in other major ways. Maybe you just had a major expense and you’re a little bit nervous to keep investing in funds that carry higher returns long-term with higher risk short term. For example, investment funds that are heavier on stocks than bonds are more volatile. Consult your financial advisor and determine whether you: 1. should and 2. can adjust your portfolio to make it less risky.
Limitations of Retirement Planning
While retirement planning is incredibly important and should be undertaken by everyone, it does have its limitations – primarily for younger people. As mentioned previously, it can be quite difficult to know exactly how much you’ll need for retirement. If you’re a renter or if you’re currently single, what if you become a married homeowner one day? Hey, life happens – you never know what situation you’ll be in! For this reason, it’s a good idea to err on the side of caution.
In the case of retirement planning, aim to save on the higher end you think you’ll need. If your retirement savings estimate is $750-900,000, you could create a plan around having $900,000 in assets by the time you finish your last day ever at work.
Conclusion – Retirement Planners
Retirement planners are for everyone. Whether you’re a fresh college grad ready to invest, a middle-aged working professional, or someone nearing retirement, it’s never too late to create and maintain good habits. If you’ve already got a handle on retirement planning and investing, why not implement some other habits, like practicing frugality or trying out a no spending challenge for a month or so?
Once you build good habits in one area of your life, like saving and investing, the momentum will spill into other areas of your life.
Consult a professional retirement planner and create your own personal plan to keep and stay on track with your goals!
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Janita is a frugal living expert and owner of Frugal Fun Finance. With over five years of personal experience finding and trying out the best ways to make and save more money, she's eager to share her knowledge. Janita's strategies have helped her save thousands of dollars for funding investments and traveling to over 20 countries.
Janita completed training in personal finance at The University of Western Ontario and McGill University, two prestigious Canadian universities. Her expertise has been shared on GoBankingRates, Yahoo Finance, and NASDAQ.com.
