Retirement Planning: What Are the First Steps?

When you’re new to investing and retirement planning, it’s difficult to know what the first steps should be.

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In this article, we delve into different aspects of determining how to proceed towards a healthy and prosperous retirement.

When Do You Want to Retire?

Everyone is different when it comes to retirement.

Some people wish to retire as soon as possible. They think that they have sufficient money and enough hobbies to keep them busy. Many are type-A personalities, which is how they got there in the first place. This makes it especially difficult to go from hyperactivity to minimal activity.

The rest of us are looking to retire at a traditional retirement age (65) or something close to it. The age is important because when needing to make your investments last longer, less should be withdrawn each year to avoid running out of money.

What Determines How Early You Can Retire?

It’s often thought that a higher income means you can retire sooner, and a lower income means it’ll happen much later. That’s only partly true. There are plenty of six-figure earners who still live paycheck to paycheck and rely on credit cards to survive a job loss.

It’s useful to appreciate that the average American has less than $1,000 in their checking account and most carry some form of consumer debt too. Having money to retire without a complete reliance on social security is unusual.

What determines how early you can retire is the savings rate as compared to what you spend (and also what you’ll be spending in retirement too).

For instance, when earning $59,000 (close to the average household income in the U.S.), how much you spend makes a huge difference. If you’re living in a low cost of living area, then it might be possible to get by on $2,000 monthly if you’re frugal. That leaves around 50% remaining to save (depending on your tax burden). Every year, you’ll be saving a year’s worth of future expenses. This puts you in a good position for the future.

Do You Want to Semi-Retire Instead?

One way to make retirement come sooner is to semi-retire.

Some people find it difficult to hold onto their job when they reach their 40s and 50s. Moving to a different, slower paced profession or switching to a role that just covers your expenses allows your retirement savings to grow on their own, untouched even when you are not adding to them.

This is known as BaristaFIRE, named after Starbucks workers. However, it’s possible to do any kind of work to cover your expenses while your nest egg grows. It’s not uncommon to find semi-retired people switching to freelancing or business consulting to keep busy.

How Much Is Needed to Retire?

Based on the Trinity Study and subsequent improvements, it was found that a 60/40 U.S. stocks and bonds portfolio mix lasted 30 years with annual inflation adjustments over every period studied during the past century.

Usually, 25 times the annual spending is required to retire but it depends on your expected investment returns, investment fees, tax rate, and how long you’ll need the portfolio to last.

To determine how much you’ll need, ask a qualified financial advisor for advice. Minneapolis financial planning is available from Berger Financial Group to figure out a precise retirement plan that will suit your needs.

Don’t be worried about taking the first steps to financial freedom. The sooner you get started, the easier it’ll be.

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