Regardless of your stage in life, you’re never too young to plan for your retirement. With most people retiring at 60 or 65 and the average life expectancy at 78 to 80, the average length of retirement is about fifteen to twenty years. That is a lot of time to decide the kind of retirement you want.
The rule of thumb states that you need a retirement income of about 70% of what you earned before you retired to maintain your pre-retirement lifestyle. While rules of thumb can be helpful, they say little about the retirement you want. Or how to get there.
Retirement will look different for every one of us. We don’t all want to play golf six months of the year. And, if longevity runs in your family, you could be looking at a retirement of 30 years or more. With that in mind, it pays to plan for your retirement. Here are the steps to creating a great retirement.
An effective retirement plan starts with a clear vision of the kind of retirement you want. What can you picture yourself doing during retirement – Spending more time with the grandkids, traveling, working part-time?
Are you hoping to do the items on your bucket list? Hot air ballooning in the Serengeti or sailing the Galapagos Islands? Or maybe retirement will give you the time to complete a novel. It is a chance to do all the things you had put off for years, such as fixing up the house.
Write a list of things you’d like to do during retirement.
How much is it going to cost?
Once you have an idea of the kind of retirement you want, now you can research how much it’s going to cost—traveling twice a year? Local or international trips? Bali or Hawaii? Maybe traveling for you would involve an RV. Would you want to buy an RV and travel throughout the country or rent one for the occasional camping trip?
Considering living in Mexico for six months of the year? How much is that going to cost?
Depending on how you anticipate living out your retirement, one vision may require an income of $50,000 per year, and another may require more than $100,000. To get an accurate picture of what your retirement will cost, look at your current expenses.
Many of your current expenses will remain well into retirement. Such as food, annual visits to the dentist, and car insurance. Now, add to your current expenses the amount you anticipate for the vision you have for retirement.
How Long Do You Have to Save?
Once you know how much it will cost you to maintain your retirement, you will need to calculate what you will need to save towards that vision. Many online calculators can help you calculate the amount needed to save towards retirement.
How long do you have till retirement? The more time you have till retirement, the more you can benefit from the effects of compounding. And the earlier you start saving, the better.
Your Sources of Retirement Income
In planning for your retirement, you need to know all your potential sources of income during your retirement.
Public pension system
In the US, the Public Pension Plan is Social Security. And in Canada, it’s The Canada Pension Plan. Your retirement amount from Social Security (retirement benefit) is based on how much you paid into Social Security while working and the age at which you claim benefits.
The estimated average Social Security retirement benefit in 2021 is $1,543 a month. The most an individual retiree can get — is $3,148 a month.
Similarly, for The Canada Pension Plan, the amount an individual can receive is determined by the length of time a person has been working and their income while employed.
A defined contribution plan is when the employer and employee both make regular contributions to the program. A defined benefit plan is predetermined by a formula based on the employee’s earnings history, tenure of service, and age, rather than depending directly on individual investment returns. Many governmental and public bodies and a large number of corporations provide defined benefit plans.
Your employers’ human resources department will be able to provide you with information about their pension plan and an estimate of what you can expect at retirement.
More seniors are returning to work in retirement. With increasing life expectancy, this phenomenon called unretirement is growing in popularity. Many seniors return to work for non-financial reasons. But continuing to work in your sixties and seventies is another source of income.
Registered Retirement Saving Plans include vehicles like IRAs, 401(k)s, and annuities in the US. A survey by Pension Rights Center found that 66 percent of retirees in America currently receive income from these types of financial assets.
The greatest advantage to these plans is that they allow you to grow your retirement investments while not paying tax on the growth until you take the money out. You can hold many types of investments, such as mutual funds, ETFs, bonds, and stocks.
Financial Assets in non-registered accounts
These savings comprise of after-tax money you’ve put away that is not in any registered retirement account. You have greater flexibility with the money you have saved outside of any retirement plan. Flexibility to withdraw funds without the same tax implications as a retirement plan.
Some retirees are choosing to supplement their income with a reverse mortgage, also called a home equity conversion mortgage. Designed for older homeowners, it is a loan secured by the equity in your home. The loan is paid back once the house is sold.
This is different from simply taking equity out of your home through a refinance. It is important to read the fine print if you are considering this option.
Pay off debt
Generally, your earning capacity is diminished at retirement. Planning for your retirement should include a plan to pay off as much debt as possible while you’re still employed unless it is a tax-deductible debt you are carrying.
At some point in your retirement, you may consider downsizing. If you live in a city that has experienced an explosive increase in real estate prices, a substantial amount of equity lies in your home. Should you downsize to access the equity in your home? That depends on your other sources of retirement income.
Your home is, however, part of your retirement plan. There may come the point where you may not be able to manage a home. And may want to use the equity to pay for long-term care.
To ensure their retirement funds go further, a significant number of North Americans are retiring abroad to places with a lower cost of living. Mexico, Costa Rica, and Panama are popular destinations with retirees. Some of these countries have generous immigration policies to attract foreigners.
There are numerous things to consider if this is part of your retirement plan. Would you buy a property there or rent one? What are the rules around immigration, homeownership, and health care coverage?
Maybe, your intention is not to move permanently but to live part of the time in a different country. Again, health care coverage is a serious consideration as you get older.
Health care should be a significant part of your retirement plan. While employed, you may have benefitted from coverage through your employer. In retirement, this may be reduced or stopped altogether. And what about long-term care? How will you plan for this?
Reducing Investment Risk
Retirement Planning should involve reviewing your investment portfolio to reflect your changing income needs. If you intend to draw from your retirement investments, you should move to a more conservative mix and reduce the portion of your assets in risky securities. You do not want to be in a place of having to sell off your investments during a prolonged market downturn to maintain your lifestyle.
Bringing It All Together
Retirement will look different for each person. And retirement is much more than money, With a clear vision of how you’d like it to be and what it’s going to cost, retirement could be the best time of your life. Get the help of a financial advisor to put together a retirement plan for you. You’re never too young to start.
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Through one on one coaching, webinars, online courses, and public speaking, Jennifer empowers individuals and businesses to achieve the outcomes they desire. For a consultation, please email her at email@example.com.
Most of us were never taught good financial habits. But we all long for financial freedom. It’s really not that hard to achieve! And it is not some get rich quick scheme. Here are ten habits to achieve financial independence!
1. Know where you are at & know where it’s going
In order to know where you are headingyou actually need to know where you are at this point in time. Get a clear picture of where you are right now in terms of how much you own in assets and how much you owe in liabilities. This is your net worth!
Do you spend more than you earn? Keep good records of your expenses, savings, and investments. I can’t tell you how often I’ve heard of people still being charged a monthly fee for a gym membership that they canceled years ago!! The gym never stopped automatically debiting their accounts.
Check bank and credit card statements to ensure that there are no mistakes or evidence of fraud. Knowing where your money is going is also a helpful way of stopping leakages.
Do you know your credit score? You may be able to get your credit report annually at no cost. It’s a good gauge of how you are able to manage debt.
2. Set a budget and stick to it
There are two approaches to this. One is to decide on the kind of life you want and how much it will cost to maintain that lifestyle and then making enough money to pay for it.
The second idea is to look at how much you earn and live within your means! Budgeting, much like dieting does not work with everyone. I have seen it work very effectively with some people and not with others. But it is worth a try! Be realistic and stick to it.
3. Pay yourself first
Most people spend all that’s in their bank account. To achieve your financial goals, pay yourself first. Have a portion of your income automatically transferred from your paycheck to your investment or savings account.
You don’t miss what you don’t see and in no time, you will get used to not seeing or using this money and therefore not spending it.
The power of compounding works both ways — for accumulating wealth as well as growing debt! If you are not in the habit of paying off your revolving credit facilities, the high interest on it ensures you end up paying two or three times what you originally owed.
5. Evaluate your success regularly
Have a friend with healthy financial habits become an accountability partner. Even better yet work with a financial advisor to keep you on track.
6. Cut down on compulsive shopping
Do you spend on things you need or on things you want? Do you have a clear idea of what that difference is? Are you an emotional spender, shopping when you are depressed or lonely? Before spending, ask yourself, “Does this get me closer to the life I want?”
7. Practise being intentional with your money
Aside from living within your means do you question where your money goes? What are your ethical guidelines for the purchases you make? What are your financial goals for 3, 5, and 10 years from now? Do you have them written down? You are more likely to achieve your goals when you write them down.
8. Build an emergency fund
Life happens even to the best of us. Everyone should have saved up enough money up to about 3 to 6 months’ income to deal with emergencies like car repairs, job loss, or short-term illness. This will prevent you from using your credit card and getting into debt when an emergency arises.
This money should be in a savings account and not in the stock market! You don’t want to have to access the money for an emergency and see it has lost 50% of its value.
9. Work with an advisor you trust
It is very important to find an advisor with the proper accreditation who has your best interests at heart. While this is not a financial habit, it is proven to add value to your overall financial health.
Interview a few before settling on the one you can trust. A good advisor can create a portfolio generating a return higher than one you would have achieved doing things on your own. One of the qualities to look for is an advisor who listens and understands your needs.
10. Start now…
The most important financial habit is to decide, as soon as possible, that you want to start now.
Dealing with debt has been a story many of us are familiar with. Too many of us have more debt than we are comfortable with. The numbers confirm this. This year, the Federal Reserve Bank of New York reported total household debt at a record of $14.15 trillion.
Recently, we have seen a silver lining. Due to the COVID-19 pandemic, there is less spending. The debt in this previous quarter has actually declined. Credit card balances fell by $76 billion, the steepest decline in the history of the data. This is great news!
Your credit score is calculated using the information in your credit report. Your credit report comes from your history of how well you were able to repay your loans. Lenders, landlords, and utility companies look at your credit score to see if you’re an acceptable credit risk. A high credit score means you are an acceptable credit risk. And you may qualify for a lower interest rate on some credit facilities and loans.
A low credit score may disqualify you from getting loans. Keeping your credit clean is very important to ensuring good financial health, much like your doctor’s health report and history.
What makes up your credit score?
Credit scores range from 300 (just getting started) up to 900 points in Canada, which is the best score. According to TransUnion, 650 is the magic middle number – a score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit. Order your credit report from both credit reporting agencies – Equifax and TransUnion – at least once a year for free (when requested by mail, fax, telephone, or in-person).
What affects your credit score?
Numerous factors determine your credit score.
Pay all of your bills on time. While this seems obvious, about 1 in 4 adults in the US are late paying their bills. This is according to the NFCC’s 2015 Financial Literacy Survey, sponsored by NerdWallet. Being late on bill payments or having your account sent to a collection agency hurts your credit score. As much as possible, automate bill payments through your bank.
Serious delinquency happens when you often miss payment deadlines on various credit facilities. It can lead to your credit history being put on the public record of collections. The severity and frequency of derogatory credit information – bankruptcies, charge-offs, and collections will lower your credit score.
Avoid maxing out your credit. Try not to run your balances up to your credit limit. Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent. So, if you are going to keep a balance, it is better to keep a balance of under 30% for two of your credit facilities instead of having one with no balance due and one with a balance of 60% of the credit limit.
When a lender or business checks your credit, it causes a hard inquiry to your credit file. Avoid applying for credit unless you have a genuine need for it. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself.
There are two types of Credit Bureau file inquires: “hard inquiries” such as an application for new credit, which will lower your score; and “soft inquiries” such as requesting your own credit report, and businesses checking your file for updates to your existing credit accounts for approving credit limit increases. These will not appear on your file or lower your credit score.
Too many inquiries may indicate financial difficulties. It could also be that you’re moving to a new city and will need to apply for a new mortgage, a new electric/gas account, cable, phone, and other utility accounts. These “inquiries” into your account will deduct points from your score, so you may take a rather large hit, points-wise on your credit rating for moving houses. Inquiries for non-credit purposes (such as utility companies and car rentals), will cause your credit score to drop without adding points for having credit in good standing, as with a credit card that you pay off every month. Be careful to only apply for credit you really need.
Length/history of Accounts
A longer history on your credit accounts earns you more points on your credit score. A longer history on your credit accounts earns you more points. Avoid closing your accounts if you may need them in the future. Good credit history is built over time. It is common practice for people to hop from one credit facility to another – whatever is on offer at a lower interest rate. Each time you open a new account affects your credit score. If done often, this practice of transferring balances from one financial company to another will affect your overall credit score adversely.
Variety of Credit Accounts
A healthy credit profile has a balanced mix of credit accounts and loans. Having a mix of credit products (credit card, retail store card, a line of credit, car loan, etc.) will mean more points on your file than having only one type of credit, such as only credit cards. For revolving credit, try to limit two credit cards (one for a back up) – use one for online purchases. You may want this at a low limit (limits the impact of online fraud) and the other for in-person purchases. And then also have a line of credit.
Too many accounts
We do need to have a few credit facilities. Keeping too many open will lower your score. Avoid taking up on the countless offers by credit card companies that come through the mail, online, and stores. They are enticing. From low-interest rates to Airmiles and Cashbacks, the credit market is highly competitive. Select one or two that meet your household needs and ignore then rest.
Credit Bureau Errors
Credit bureau reporting errors such as an incorrect date of birth or social insurance number do happen. And they hurt your score. Check your credit score regularly, about once every one to two years, to ensure no reporting errors. It does not cost anything to get a credit report once annually.
Identity theft is when someone uses your personal information such as your name, address, and social security number to seeks credit. According to The Federal Trade Commission, as many as 9 million Americans experience identity theft each year. Check your credit report annually to see that there has not been unexplained activity on your profile.
Changing your address too often
The length of time at your current address will affect your credit score. Moving frequently gives a sense of instability. The longer you remain at one address, the more points you receive.
Changing jobs/employers frequently
The longer you stay at a job, the higher points your credit score receives. Being perceived as having a secure job and, therefore less of a risk as defaulting on your loans.
Having no mortgage on your file
The Credit Bureaus assign certain points for those who have mortgages and those who rent and deduct points for those whose housing situation is unknown. As soon as you pay off the mortgage, the reporting account is removed from your file, which will actually remove points from your credit rating! Credit card and other credit account history will remain on your account even after being paid off and closed, but a paid mortgage does not benefit your credit rating. So although you own your own home outright, it does not benefit your rating.
Having no debt
This may be hard to believe, but not having any debt is bad for your credit score. Not having a history on your file for creditors to evaluate is seen as a risk.
The reason for the decline in the level of debt during the pandemic was the decline in the level of spending. Quarantined for an extended period of time people were limited to online shopping. No morning Starbucks lattes on the way to work at $5.00 a cup. No wandering into stores and picking up ‘stuff’ you did not need on the way back from work. Most people are unaware of how much their habits cost them over time. It’s called the “latte factor.”
It’s not what you earn but what you spend that determines your financial well-being. The “latte factor” coined by David Bach states that small amounts of money spent on a regular basis add up to far more than we can imagine. If you spent $2.10 on coffee a day, that will cost you $63 in a month, $766.50 in a year, and $22,995 over the course of 30 years. If you put that towards your debt or towards savings it will add up over time.
This can be for any daily habit or incidental purchases you are making. Look at your credit card or bank statements for the past six months. Where you can tighten your belt. Reduce the incidentals or the things bought out of compulsion.
Keep to a Budget
Budgeting allows you to know what’s coming in and what’s going out. It also allows you to be intentional about your money. Look at where your money’s going. Where would you prefer it to go?
Keep track of every expense, including the small ones.
Update your budget continually – by the month.
Plan for both fixed and variable expenses.
Implement the 50/20/30 budget.
Spend 50% of your income on essentials – housing, food & transportation. Use 30% on personal expenses like dining out, gym membership, and your cell phone bill. Save 20%.
Establish an Emergency Fund
Most people run into debt when they lose their job or are in between jobs. Build an emergency fund equivalent of 6 months of income to prepare for the unexpected. Events such as job loss, illness or disability, or the death of a spouse. When the unexpected happens, like a leaky roof, many people resort to using their credit card or line of credit. An emergency fund is the best to deal with unexpected expenses.
Getting out from under “bad” debt.
Target one card at a time – the one with the highest interest.
Ask your creditors for lower interest rates & transfer your balance (cautiously).
John and Jane both have $2,000 owing to their credit cards. Both cards require a minimum payment of 3% or $10, whichever is higher. Both are short on cash, but Jane manages to double her payment to $20 while John pays the minimum.
The interest rate on both cards is 20% on the outstanding balance. This means that part of the payment goes toward the balance, and part goes toward interest on that balance.
Here is the breakdown of the numbers for the first month of credit card debt:
Interest: $33.33 ($2,000 x (1+20%/12))
Payment: $60 (3% of remaining balance)
Principal Repayment: $26.67
Remaining Balance: $1,973.33 ($2,000 – $26.67)
Balance calculations are done every month until the credit card is paid off. In the end, John pays $4,240 in total over 15 years for the $2,000 in credit card debt. The interest portion over 15 years is $2,240.
Because Jane paid an extra $10 a month, she pays $3,276 over seven years for the $ 2,000 in credit card debt. Jane pays a total of $1,276 in interest. The extra $10 a month saves Jane almost $1,000 and cuts her repayment period by more than seven years! The lesson here is that paying twice your minimum or more can drastically cut down the time it takes to pay off the balance, which leads to lower interest charges.
Bringing It All Together
Your approach to your money starts with your mindset. What are your current beliefs about money? If you are deep in debt, you need to look at your subconscious beliefs around money. Your money story will change once you change your story about money. Listen to your inner dialogue around wealth and abundance.
The SMART technique initially developed to help corporations achieve their objectives, is an excellent way to help you set and achieve any goal, including your financial goals.
George T. Doran, a consultant and former Director of Corporate Planning for Washington Water Power Company, developed a goal-setting technique that goes by SMART, which stands for specific, measurable, achievable, relevant, and time-bound.
The SMART technique was initially developed as a strategy to help a company achieve its objectives. However, it is also an excellent guide to help you set any goal, including money goals.
Here is how to set achievable money goals the SMART way.
Setting money goals starts with a clear idea of what you’re hoping to achieve. And, instead of only focusing on the goal, be clear about the outcome you want.
If early retirement is one of your goals, be clear about the outcomes you want out of retirement. For example, is it to spend more time with the grandkids or traveling three months of the year?
Or maybe, you are thinking of early retirement because you hate your job. Early retirement may be the goal, the three scenarios with three different outcomes requiring three different approaches.
With that clarity, be specific. If it is a comfortable retirement that is your financial goal – what would a comfortable retirement look like for you? A debt-free after-tax retirement income of $100,000?
The goal should not only be specific; it should also be measurable. As in the example above, a comfortable retirement may mean different things to different people. So how do you measure comfort? But a debt-free after-tax annual retirement income of $100,000 is both specific and measurable.
A goal such as the down payment on a home is specific. To be measurable, you may first need to know the price range of the house you intend to purchase. Then, decide how much you want to out down towards the purchase – 10% or 20%? How much would that be in dollars?
Once you know the dollar value of your goal, decide if it is achievable. Take a look at all your sources of income. How much can you realistically commit regularly towards that goal? This is when you need to get honest with yourself.
If you are currently living beyond your means, you will need to take a close look at how you can reduce your current expenses. Look at your bank or credit card statements for the past three to six months, are there any “leakages” that you can plug? Such as unnecessary bank or credit card fees? Look at what you can eliminate or reduce these. For example, instead of eating out three times a week, decide to do it only once a week.
Decide on how much you can put away monthly or bi-weekly towards your goals. Automate your contributions. Use an app such as Vimvest to funnel extra cash to your goals.
Whether it is a long-term money goal like a comfortable retirement or a short-term goal such as a trip abroad, the Vimvest app can help you make projections on how much and how often you need to save to achieve your money goals. In fact, it is created to help you manage your money with your goals in mind.
Most of us have a long list of financial goals. But they don’t all take the same priority. You may want to retire comfortably eventually, but if you are in your twenties and just married, saving for the down payment on a home may take priority over saving for a comfortable retirement. And if you have young children with a specific time frame for when they will need post-secondary education, then saving for that purpose becomes a high priority.
To make your goals achievable, narrow them down to three of your highest priority. With finite resources, you must focus on what is of greatest urgency. And most aligned with your values.
You may have children and believe that by eighteen, they should be able to fend for themselves.
Saving for their education may not be a priority for you. It may not even factor in your list of money goals. A key element in setting money goals is ensuring that they align with your values.
Knowing when you’d like to achieve your goal is also essential. In investment planning, this is called your time horizon. Your time horizon determines where and how you save or invest to achieve your money goals.
Money used to fund short-term goals requires different investments than that needed for long-term goals.
Asset allocation is a strategy of investing different portions of money into varying asset classes. Depending on your risk tolerance, long-term goals require growth investments that generally produce a higher rate of return over the long term.
For a goal you’d like to achieve within the next two to three years, you would want the money invested in something safe. Not in something volatile that could cause your principal to drop substantially in the short term.
Set Your Money Goals the SMART Way
Financial planning is about planning for the future while also living in the moment. Setting money goals that are specific, measurable, attainable, relevant, and time-bound is a smart way to achieve them. Use Vimvest. And start now.
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By the time we enter adulthood, we are full of stories. Stories about what happened to us as children. How we were treated and what we were told about who we are. The times we felt rejected. The times we felt insignificant. Or, it could have been the times we felt loved, special, and cared for.
Many of these stories are unhappy stories. Tragic stories. Stories of trauma. And some are happy stories or stories of triumph. Stories of resilience. Whatever they were, they are stories that shape how we see ourselves. Stories that have come to define our lives.
We create our identity around our stories. We swear by them. They become the lens from which we carve our lives. But stories can also be tricky. Studies have shown that we are not always accurate in our interpretation of how things were. According to psychology professor Laura Carstensen of Standford University, we tend to remember bad memories more than good memories especially, when we are young. And we need to remember that the stories we tell ourselves are one-sided. They are subject to our biased interpretation. And are not necessarily the absolute truth.
This does not negate the truth or the effect these experiences have on you. The trauma you felt is real. The injustices are real. The effects are all real. The only problem is when we choose to define our entire life by these events. Where we are no longer the individuals who experienced rejection as children but we live as rejected adults. Re-telling the story activates the same emotional responses as when you first experienced the event.
Who Would You Be Without Your Story?
But who would you be without your story? Think about it. Who would you be without the stories of rejection, betrayal, and loss? This does not mean the story never happened. This is not about emotional bypassing. And no one can tell you how long you need to take to grieve or deal with your trauma.