When do you want to retire? When can you retire?
These questions often have very different answers, and there are many reasons why, but it often comes down to a lack of financial security.
Learn more about financial security, how to set financial goals, and strategies you can implement to retire when you want to.
Understanding Financial Security
“Financial security” is often thrown around but rarely clearly defined.
Simply put, financial security is the ability to afford your expenses and reach your financial goals. It means you’re both in control of your finances and spend less time worrying about money. When you reach financial security, you can expect:
To make more confident financial decisions
Be in control of your debt
Have the ability to reach your short and long–term goals (like saving for retirement)
Build and maintain an emergency fund
Paying off high-interest debt, for example, is a great way to boost financial security because you can spend less time worrying about astronomical interest rates holding you back from reaching your goals. With the debt burden off your shoulders, you can focus on living a fulfilled life.
Assessing Your Current Financial Situation
To reach the euphoric state of financial security, you must conduct a financial inventory—a fancy term for listing income sources and expenses.
Your primary income will be your full-time job, but remember to include passive income streams such as dividend stocks, high-yield savings accounts, or real estate investments.
To best manage your expenses, divide them into two categories: fixed and variable expenses. Fixed expenses, including rent or mortgage, car payments, or insurance payments, don't change month-to-month. Variable expenses are less predictable and can be challenging to plan for. Expenses such as groceries, utilities, gas, personal wellness, and veterinary emergencies can fluctuate, so it’s critical to have a budget so you don’t overspend.
Net worth is also an excellent indicator of financial health. It is simply your assets minus your liabilities. An asset is anything of value that can be converted to cash, including stocks, bonds, or other investments. A liability is anything you owe, such as a loan.
Once you understand how much you have after paying your liabilities, you will clearly understand your financial situation.
Setting Financial Goals
Where do you see yourself in 5, 10, or 30 years? How can you get there?
Setting financial goals involves understanding what you want and planning to achieve it. Break down goals into short—and long-term time horizons to get started.
Short-term goals can be achieved within a year or less. They aren’t month-to-month necessities but are still considered to be relatively immediate. Short-term goals include:
Creating an emergency fund
Paying for your wedding
Decreasing high-interest credit card debt
Remodeling your kitchen
Long-term goals are more significant, big-picture items that can take 5-10 years to reach. Your long-term goals will typically involve more money and strategy to achieve. Some examples include:
Building a retirement fund
Paying off your mortgage or buying a home
Funding your child’s upper-level education
Starting a business
As you determine your goals, you need to prioritize them based on urgency and importance. If your credit card debt impacts your financial security or retirement goals, paying off that debt will take precedence.
Determining Retirement Needs
Like your financial goals, your retirement needs will be unique to you. How do you picture your retirement lifestyle? Do you plan to travel, downsize, or start a business? Your lifestyle choices will significantly impact how you budget and prepare for retirement.
It can be daunting to see how much your life will cost in retirement but don’t forget to factor in potential sources of retirement income, such as:
Social security
Pensions
Investments
HSA Savings
Bonds
Annuities & Certificates of Deposit (CDs)
Employment
Calculating Retirement Savings
How much money do you need to retire? It’s a simple question that can have thousands of different answers. A great place to start is with a retirement savings calculator.
Retirement savings calculators require you to input details about your retirement, including your current age, annual pre-tax income, current retirement savings, monthly contributions, and estimated monthly budget in retirement. These numbers will calculate how much income you’ll have in retirement and whether you’re currently saving enough.
However, each of the hundreds of online resources has different assumptions. They will default to a specific retirement age, life expectancy, and inflation rate, so they may not be 100% accurate.
One rule of thumb you can use to estimate your retirement savings is the 4% rule.
The 4% Rule
The 4% rule is a guideline used to estimate how much money you can safely withdraw from your retirement savings each year without depleting your nest egg.
It suggests withdrawing 4% of retirement savings in the first year, adjusted annually for inflation, to last at least 30 years, with an additional safety margin for market fluctuations and longevity. But it’s essential to remember that this is just an estimate and that withdrawal rates should be adjusted based on your circumstances and needs during retirement.
Most importantly, don't be afraid of change. Your retirement savings strategy will likely need to adjust over time to account for your risk tolerance and how close you are to retirement.
Strategies for Saving and Investing
The best time to start saving for retirement is yesterday. Saving for retirement early empowers you to build a solid foundation for a secure, comfortable, and fulfilled retirement.
There are many different retirement savings vehicles to consider, including:
401k
IRA
Roth IRA
HSA
Simple IRA
Pro tip: Look for investments that harness the power of compound growth. Compounding allows your money to grow, even when you can’t contribute. Think of it as generating interest on interest.
As with all investments, don’t put all your eggs in one basket. A diversified retirement portfolio will help you reach your retirement goals faster and live your golden years in bliss.
Retirement Isn’t a One-Size-Fits-All Approach
The path to financial security is different for everyone. Your goals, values, and dreams are unique, and you may have some “baggage” to drag along. But our approach at Emergent Wealth Advisors strives to ease those financial burdens for a promising future.
If you’re ready to achieve financial security and reach your retirement goals, get in touch with our team.