Retirement planning isn’t a cut and dry scenario for many of us. Sure, we might want to be retired at 65 or even 60. Some of us might even dream of an earlier retirement. My point is that there is the scenario we might want for our retirement, and then there’s reality.
To ensure that we’re prepared for any number of situations that may befall our financial future, having considered a variety of retirement scenarios can better prepare us for potential pitfalls.
Of course for many, early retirement might be the dream scenario. But what comprises early retirement and at what age? Is early retirement stopping your current work to do something you love or to try opening a small business, or is it stopping all work for good? Does early retirement come at 40, 50, or even 60?
Sitting down and discussing with a significant other at what age early retirement might come and how to achieve it can help better organize this sort of scenario. Setting forth timeframes, monetary goals to achieve, deciding whether part-time work is necessary, determining what sort of retirement you want (travel, at home, near family, etc.), considering hobbies and costs, and reviewing expenses, income, and investment performance (both current and future), can help build the scenario that fits early retirement best.
An average retirement
For many people, an average retirement might fall in the 65 age range, rely partially upon Social Security, and involve a mixture of travel, entertainment near home, and time spent with family. Even planning for an average retirement can be difficult though, but coming up with the right retirement scenario can help get you on track.
To do this, consider tracking a variety of income and expense aspects of your personal finances. Tracking such items can help you determine things like lifestyle (personal) inflation rates, how investments are performing and what returns they provide, how much of a need you will have upon a pension or Social Security, and overall net worth.
With such information in hand, it’s easier to compare your expenses as they will appear in retirement with your overall income. If you know that you’re retirement account of $300,000 is returning an average rate of 5 percent ($15,000) annually, plus you have another $20,000 a year from Social Security, but your expenses are $40,000 annually, then you may have to draw down upon savings to make up the $5,000 difference.
In a working retirement scenario though, it could be very much different than a regular or early retirement situation. In a working retirement, even if it’s only working part-time, there may not be such a reliance upon savings, retirement plans, and entitlements. However, there are other aspects to consider in such a scenario.
First off, if you’re counting upon work income to supplement retirement income, should a health or economic issue alter the amount of money that work provides, it could leave you in a tight financial situation. Also, if you’re self-employed or have a small business, there could be a variety of extra expenses – payroll, taxes, inventory, office supplies, office rent/lease/mortgage, etc. – that accompany your work.
Therefore, having a backup plan should that work suddenly become economically unfeasible or should income drop off can help protect a working retirement future.
And whatever retirement scenario you decide upon, it’s important to remember that backup plans for a variety of situations can pay off with added protection, and that combining certain scenarios (i.e. an early working retirement, an early average retirement, or a an average working retirement), could help reduce some of the risk that can accompany putting all your eggs in one retirement basket.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.