Navigating Retirement: A Guide Through the Financial Cosmos

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Tue Feb 06 2024

Navigating through the financial cosmos.

Just like planning for an intergalactic trip through the cosmos, planning for retirement can feel a bit overwhelming. For example, planning a trip to traverse the galaxy will require you to answer questions like how far away your destination is, what route you’ll take to arrive safely, and how many provisions you’ll need. Well, retirement planning is really not all that different. In fact, you'll ask yourself many of these same questions.

In this article, I’m going to offer an in-depth look at how you can prepare for your journey through retirement in four simple steps:

  1. Establish Your Timeline
  2. Determine Your Retirement Number
  3. Pick Your Spaceship
  4. Create a Plan for Your Journey

Step 1: Establish Your Timeline

Before setting out into the unknown, you need to create a detailed timeline of when you want to retire. Do you want to retire in 5 years? 10 years? 30 years? Determining the age at which you want to retire is the starting point because this lets you know how much time you have to save and invest.

For the purposes of this guide, we’ll consider “retirement” as any point where you have enough money coming in to outweigh your expenses. This can mean that you’ve either saved up a hefty lump sum or have built up passive income streams. This is the definition that followers of the “Financial Independence Retire Early” (FIRE)  movement adhere to. For these people, retirement starts the moment that they have enough income to cover their expenses (without actively working). So, if you only spend $3,000 per month then you only need to generate $3,000 in income to officially “retire”. If you have a desire to retire early then you may want to do some more research on the FIRE movement.

But, if you aren’t concerned about retiring early then I’ll just assume you’re comfortable retiring in your 60s. In fact, we’ll stick with the government-mandated retirement age of 67. This is the age when you can start collecting your full social security benefit (for anyone born in 1960 or later).

From here, you can do some quick mental math to determine how much time you have to save for retirement. For example, if you’re 30 then you have 37 years left until retirement (67 - 30 = 37). But, if you’re 45 then you only have 22 years (67 - 45 = 22) left to save and invest.

Step 2: Determine Your “Retirement Number”

Once you’ve established your timeline, it’s time to determine your retirement number. This is the amount of money that you’ll need to comfortably retire. Again, your “retirement number” can simply be the amount of money that you need to generate each month in order to pay your expenses, per the F.I.R.E doctrine. But, another strategy to determine your retirement number is the Rule of 25.

Rule of 25

To get an idea of how much you might need to fund your retirement, take a look at your annual expenses and then multiply them by 25. You can get an idea of your annual expenses by looking at your banking statements from the last few years. So, if you tend to spend $50,000 each year then your retirement number is $75,000 x 25 = $1,875,000. 

But, you will most likely be able to count on Social Security to cover a portion of your retirement expenses. Yahoo Finance suggests that the average Social Security payment is $1,781.63 as of February. So, the average recipient will receive $21,379.56 annually. But, you can use this calculator to get a better idea of your payment.

So, if you spend $75,000 per year and receive an average social security benefit then your new retirement number will be:

  • $75,000 - $21,379.56 = $53,620.44 

  • $53,620.44  x 25 = $1,340,511

Again, this calculation lets you know that you’ll need to save roughly $1,340,511 to be able to safely withdraw 4% each year and safely pay your expenses. However, this is just an approximation because your expenses will shift during retirement.

Determine Your Retirement Expenses

Think back to your interstellar trip. Along the way, you’re going to have to pay for extra food, fuel, and repairs to your ship. In this sense, your expenses will fluctuate each year that you’re out in the Great Nothingness of space. The same is true for retirement. 

There’s really no way to predict what your expenses will be like 10 years into retirement. But, there are a few key expenses that you should be prepared for:

  • Housing costs: Rent, a mortgage, or eventual long-term senior care

  • Healthcare costs: Both short and long-term healthcare costs

  • Necessary expenses: Day-to-day living expenses such as food, clothing, transportation

  • For Fun expenses: Expenses like traveling, eating out, going to the movies, spending money on your kids/grandchildren, etc

  • Emergencies: Home repairs, ER visits, car repairs

  • Possible life insurance

I won’t lie to you – planning for all of these expenses is a bit of a crapshoot. I say this because you can never be 100% certain of what’s going to happen in the future. The year 2020 was a great example of this. 

With that said, it’s always best to hope for the best and plan for the worst. To be on the safe side when planning for retirement, it’s usually best to bump your expenses up a bit and plan to spend more than you think you will. 

Consider using a retirement calculator to get a more detailed idea of how much you might need.

Account for Inflation

Another critical step is to account for inflation when planning your retirement. Inflation is the slow but steady rise of prices over time. I won’t get into the nitty gritty of what causes inflation in this article. But, just know that prices will steadily rise over time. For example, here is the price of a McDonald’s Big Mac over time, according to Axios:

  • 2002: $3.98

  • 2010: $4.75

  • 2020: $6.32

When looking at the price of just one Big Mac, inflation obviously won’t break the bank. But, this slow rise in prices is happening to everything you buy. So, your $200 weekly grocery bill will slowly rise to $210, $225, $250, and beyond. The same goes for your morning coffee, lunches, car insurance, rent payment, and essentially everything else that you buy.

You’ll want to factor inflation into your retirement and consider the fact that things will be more expensive once you’re 10 or 20 years into your journey through the cosmos.

Step 3: Pick Your Spaceship

OK, now that we’ve established your timeline and retirement number, it’s time to get to the most important part of your planning process: how you’ll fund your retirement.

When you blast off for an inter-galactic journey, you’ll need to pick your spaceship. I’m not sure when the last time you traversed the cosmos was, but not all spaceships are created equal. Some are built for long distances, some are built for navigating asteroid fields, and others are built for comfort. When it comes to retirement planning, your spaceship will be the investments/assets that you choose to fund your lifestyle during retirement. And, just like your spaceship, all assets have different benefits and downsides.

These are the most common ways to fuel your retirement:

  • Retirement Plans: Plans like an Individual Retirement Account (IRA) or 401(k)s offer a tax-advantaged way to invest for retirement. There are lots of resources out there that can help you learn more about these plans. But, the main thing to know is that they’ll let you invest money for the long-term and save money on taxes.
  • Personal Investment Accounts: You should also consider opening your own investment account. Doing this will give you more control over what assets you can buy, how you invest your money, and when you can access it. But, the downside is that you won’t get any tax benefits
  • Fixed-Income Assets: Buying assets like bonds, life insurance policies, and annuities can be another way to fund your retirement.
  • Other Investments: Outside of common assets like stocks and bonds, you can also invest in real estate or a business that can provide you with income during your retirement.

Choosing the right mix of assets is a highly personal decision that will depend on your timeline and retirement number. This is because all of the assets listed above come with different returns and risks. So, the assets that are best for you will depend on how much time you have left to invest as well as how much money you need to save for retirement.

However, the most common path to get started saving for retirement looks something like this:

  1. Open an IRA and start “maxing out” your annual contributions (the government limits how much you can contribute each year).
  2. Once you max out your IRA, open a brokerage account and start buying index funds that track the S&P 500. These are diversified funds that track the total return of the stock market. 
  3. If you’re on the younger side–we’ll say under 40–then you should invest more heavily in stocks. But, if you’re 40 or above then you might want to consider switching a portion of your portfolio to fixed income assets.

If you have additional questions then it might be a good idea to employ the help of a financial advisor. They will be able to provide you with a more personalized plan. The plan that I just laid out is the equivalent of telling you to hop on the Intergalactic Interstate. But, a financial advisor may be able to help you find a better road to reach your destination by using back roads.

You can learn more about different ways to fund your retirement by checking out this article!

Step 4: Create a Plan for Your Journey

OK, we’re finally at the final step of the planning process! By this point, you should have an idea of your timeline, retirement number, and the assets you want to invest in. Now, it’s time to put everything into motion.

You can create the most detailed financial plan of all time that accounts for every tiny detail. But, if you don’t turn this plan into action then you won’t actually make any forward progress toward reaching your goal. By, “turn this plan into action”, here’s what I mean:

  1. Establish a monthly investment plan: Reverse engineer your retirement number to determine how much you should save each month. So, let’s say you need to save $1,000,000 and have 30 years to do so. This means you’ll need to save $2,777 per month. In reality, you won’t really need to save this much since your investments will grow over time. Again, an advisor will be able to offer more insight. Additionally, many platforms that offer IRAs and similar investment accounts usually offer projections for how much your investments will grow over time.
  2. Commit to your plan: By this point, you know how much you need to save to reach your retirement goals. Initiate your plan and stick to it! I recommend setting up an automatic transfer that deposits money from your checking account to your investment account on a weekly, bi-weekly, or monthly basis.
  3. Monitor and adjust your plan over time: Your plan will (and should) adjust over time as your circumstances change. For example, if you receive a raise then you might want to double down on your monthly contribution. Or, on the flip side, if you lose your job then you’ll likely need to scale back your investments for a brief period.

As a rule of thumb, you should evaluate your retirement plan once a quarter. But, if that seems like too much, then at least shoot for once a year.

General Tips: Navigating Retirement

Just like encountering an asteroid field or an unidentified spacecraft, there will always be some danger along your journey. With retirement planning, this danger will be in the form of unexpected expenses that make it harder to save. With this in mind, here are a few general tips for navigating retirement:

  • Maximize your investments: When in doubt, try to ramp up your investments as much as possible. In other words, if you set up an automatic contribution of $100 per week, try to double that most weeks. Maximizing the money that you put towards retirement can take a lot of the burden off later in life. 

  • Minimize bad debt: Many forms of debt can eat away at your income and make it more difficult to save for retirement. This is because bad debt collects interest and grows over time. In particular, credit card debt should be avoided. As of the third quarter of 2022, the average credit card debt per borrower stood at a notable $5,474, up $617 annually, according to Dollargeek. Spending too much money with a credit card could be keeping you from focusing on your primary goal (saving for retirement).

  • Use an extra job to fuel your investments: If you ever feel like you can’t squeeze any more money out of your paycheck, consider taking on an extra job to help fund your retirement. Find a job, gig, or side hustle that you can work for a few hours each week. Then, put 100% of the money that you earn towards your investments.

OK! We’ve officially reached the end of the planning process. In this article, we discussed a four-step plan to tackling your retirement planning

  1. Establish Your Timeline: When do you want to retire? This question lets you know how much time you have to save for retirement.
  2. Determine Your Retirement Number: This lets you know how much money you need to save/invest to live comfortably in your golden years.
  3. Pick Your Spaceship: Choose the assets that you want to invest in to fund your retirement.
  4. Create a Plan for Your Journey: Put all of the above into practice! Remember, a goal without a plan is just a wish. To help turn your retirement dreams into reality, you need to create a consistent plan and stick to it.

We hope that you’ve found this article valuable when it comes to learning how to navigate the financial cosmos that is retirement. If you’re interested in reading more, please subscribe below to get alerted of new articles as we write them.