According to a recent report by Morningstar, Americans reported needing $1.25 million for a comfortable retirement. According to Francisco Faraco, a CFA Charterholder and career advisor extraordinaire, that sum isn’t nearly enough to retire in comfort, let alone luxury.
While it may take decades to raise a million-odd dollars, it only takes a few decades to spend them all, which puts a crux in the average American’s plans to rest after giving it their all.
Keep reading to learn how you can retire while saving up enough to travel and indulge in other luxuries.
Account for All the Current Variables
Before setting a target, assess how much you have left over after fulfilling other financial obligations.
Account for all variables when assessing your monthly financial obligations:
- Cash Inflow/Outflow: Assess your income, calculate your output, and see how much you can save monthly.
- Savings Account and Emergency Fund: If you don’t have an emergency fund, establish one now, but keep it separate from your savings. It would help if you only tapped into the former in case of a real emergency.
- Current Medical Needs: Do you have any health conditions that may continue long-term? Are you at a high risk of contracting a condition in the future? Assess their expenses now to account for them in your retirement plan.
- Current Debt: Calculate your current debt, including student loans, credit card payments, mortgages, and car installments. Make payment plans to pay them off as soon as possible, and divert those funds elsewhere.
Follow the 50/30/20 Rule
After assessing your current expenses and savings, you should ensure the latter adds up to an amount that satisfies a luxurious post-retirement lifestyle. Francisco J. Faraco recommends following the 50/30/20 rule for monthly budgets. In other words:
- Allocate 50% to essentials like rent, gas/commute, utilities, groceries, etc.
- Allocate 30% to non-essentials like vacation expenses, clothing, accessories, etc.
- Allocate 20% to savings.
Account for All Future Variables
When deciding your retirement savings, account for the following variables:
- Lifestyle: Will your retirement lifestyle be more luxurious than your current lifestyle? Do you plan on traveling? Account for both of these variables, and make plans towards achieving them.
- Social Security Distributions: Your social security benefits are determined by the age at which you decide to redeem them. Hire a financial advisor to plan these monthly payments for maximum benefits.
- Think Long-term: You can’t plan a luxurious retirement without playing the long game. Make long-term goals like buying a vacation property. Set aside a sum for other investment opportunities to grow your nest egg.
- Adjust for Inflation: Your medical bills, utilities, and other expenses will likely rise with inflation. Adjust your retirement target and payments for inflation.
- Investment Portfolio: You may want to adjust your securities as you near retirement. Your portfolio might be high-risk and high-reward now, but it must be more conservative and less volatile after retirement.
Be the Early Bird
Saving for retirement is something you should do regardless of how much you’re earning. Old age is a luxury in and of its own. Ensuring it’s luxurious takes a commitment that should begin as soon as you enter the financial world.
Start by maintaining your current lifestyle despite an income increase. You can put the extra money towards the savings account dedicated to your retirement fund and gradually see it increase.
Consider Retirement Savings Plans
Retirement savings plans like the 401(k) grow over time and come before taxes. If your employer offers such a retirement plan with or without company contribution, capitalize on it by using it as your nest egg.
Instead of a savings account, put your monthly savings into your 401(k) or retirement plan to make them tax-exempt. You can also roll your retirement plan into a different yet similar tax-exempt one once you leave your current employment.
Cede Control
An incredibly useful thing the younger generation is doing is it’s automating savings. They’re doing this to ensure a set percentage of their income goes into a savings plan regardless of unexpected expenses and the temptation of splurging on unnecessary products and services.
You can also make savings mandatory by joining an automated savings plan at your bank. Of course, there are other, less stringent ways to save for retirement, and no one knows them better than CFA Charterholder FINRA Brokercheck Francisco Faraco, who has previously worked for financial firms like Morgan Stanley. The above guide is a synthesized version of his approach to retirement plans.
About the Author
Luke Martín is a freelance financial advisor who likes making blogs after interviewing experts on various financial matters in his free time. He considers himself a work-in-progress career-wise because he has yet to find an employer who aligns with his values. Apart from freelancing and blogging, Martín enjoys reading memoirs and watching movies. He’s currently bingeing on the older Nightmare on Elm Street movies.
