Retirement used to be simple: add together your pension and social security, and bam! There’s your retirement income. If you needed more, you could just pull a little extra from a self-funded 401k or IRA, or maybe just a simple savings account.
As with all things in the 21st century, retirement planning has changed. You might be surprised that the first question to solve isn’t where your money comes from — it’s what do you want in your retired life.
For example, if you have a family that knows they’re going to be downsizing and hitting the open road for 10 years, that will be a very different financial plan compared to someone who wants to maintain status quo and only go on vacation every two years. The planning to make your retirement a reality can’t be an afterthought, so it will be crucial to know your wants in the very beginning.
You can start by narrowing your idea of the perfect retirement. If you are married, make sure you and your partner on the same page. Maybe you’re a homebody and they are an adventurous spirit. You’ll likely be making some compromises on what retirement means for each of you.
You will also need to know the basic equation: Income – Expenses = Lifestyle. By establishing your budget, you can create and plan for that lifestyle. Sit down and discuss your expectations of where you see retirement taking your family. After that, you can get down to the number-crunching to make it happen.
If you create a budget where you have the same income as you had while working, but had the desire to take big family vacations, where does that leave you? Or what if you do the opposite? You spend big in the beginning to accomplish the bucket list, but then struggle to make ends meet afterward. Sound like an ideal retirement? Probably not. Neither is a scenario anyone wants to find themselves in.
You’ll learn early on is that there is a process to all of this, and it’s got to be followed. Imagine retirement as a fork in the road, with the paths leading off into the different lifestyles you can have. You can’t pick a path without being sure of your choice.