Peter Pays Paul

A goal without a plan is just a wish.
– Antoine de Saint-Exupery

The Coming Train

Many of us have the goal of retirement. For some it is a small cloud of smoke on the horizon and for others the roar of the approaching train is growing and the locomotive ominous. Will the train of retirement be cramped and unbearable or will you be able to ride it comfortably into your sunset years?

Wishful Thinking

All of us hope for the latter option. We desire to enjoy retirement and do many of the things we could not do before. Maybe it is a trip to Europe, a vacation home, more time to fish or golf, more time with family, and the list is endless.

For a lot of people retirement is just a wish. They never plan for retirement. Few people even know what retirement looks like. They never stop and think what do I want to do in retirement? What kind of lifestyle do I hope to live? How much retirement income will I need to accomplish those goals?

How much income is available for the duration of retirement? Many planners recommend a withdrawal rate of between 3% and 5% of principal per year of retirement. This means that if you have $100,000, financial advisers recommend that you could withdraw $3000-$5000 in your first year of retirement. Does $3,000 plus Social Security meet the needs of your retirement dreams?

Setting a Destination

If we use a 4% withdrawal rate, our calculations are easier. We can multiply your present salary by 25 to achieve the necessary amount of accumulated wealth to retire at the same income. So if you make $50,000 annually you would need $1.25 million in accumulated wealth to replace your present income. If you earn $100,000 annually, $2.5 million dollars is the recommended savings to replace your current income. In Contra Costa County the median household income was $82,641 according to the Bay Area Census website. At that income level it would require $2,066,025 of investments to sustain a 4% withdrawal rate.

(Side-note: These calculations do not take into effect inflation. For every year until retirement your annual income should be increased by a factor of 2%-4% annually to negate the effects of inflation.)

The destination (number) should be in your mind. Now that you have it, how do you get there? You need a financial plan that will assist you towards your goal.

Developing the Strategy

The first part of your strategy should be a budget. You need to plan how you are going to spend your money this month. Spend less today in order to enjoy a better tomorrow. This is the process of delayed gratification. Put off an immediate reward for a greater reward in the future, namely retirement.

The second part of your strategy is your accumulation and growth plan. This is the longer-term plan. Hopefully, it involves a strategy that takes place over multiple years to accumulate and grow your wealth. This part of the plan should take place with a coach or adviser that will help you prepare, show you the pitfalls, and provide encouragement along the way.

Choosing an Investment Vehicle

If you are a baby-boomer, the retirement train will soon overtake you. Do you have the wealth to ride it comfortably?

There is hope, wealth can be built with the help of a solid plan and creativity. You may be wealthier than you think, if you own your home. You must choose a vehicle that will help you to arrive at your retirement destination quickly and comfortably.

One of the benefits of real estate is leverage. The wise use of leverage can dramatically increase your return on investment if done with a professional.

Don’t leave your retirement up to wishes on a star. Make a plan, get some help, and achieve your goal. Too much is at stake to leave it to chance. Take an active role in making your dreams come true.

Strategy Links

Below is a list of links to various resources that discuss developing a retirement strategy.

• Jeff Brown has some wonderful articles on what a good plan involves.
• The Financial Planning Association has a retirement planning checklist available.
• The National Endowment for Financial Education also has links to various resources and planning articles.
• Yahoo! Personal Finance has a retirement calculator to estimate your retirement savings needs.

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