Seven Questions to Answer Before You Retire
As you no doubt know, tomorrow is Melbourne Cup Day.
That means thousands of Melbournians will take today off. They’ll enjoy a nice long four-day weekend.
Well, I decided to join them. I’ve taken the family away for the weekend to a spot along the Victorian coast.
So far we’ve relaxed, been to the beach, gone for walks, read books, and stayed indoors to avoid a couple of brief rain showers.
It’s on these relaxing days away from the office that I think the most about what I’d consider the perfect retirement. I think about question like when and where do I want to retire? And what do I want to do when I’ve retired?
Maybe that’s something you think about too? Or maybe you haven’t thought that far ahead yet. Either way, I thought I’d share a few of my ideas with you in today’s Pursuit of Happiness…
The mistake most people make when they’re thinking about retirement is that they think about it the wrong way.
One thing they do is to decide it all sounds like too much hassle. So they ignore it and just enjoy themselves now and forget the future.
The alternative is they become a full time retirement planner. They save every single penny. They don’t spend any money above basic subsistence spending, and wagging their fingers at the wasteful youth.
But first, can you see the problem with the two scenarios I mentioned above?
The first is obvious. It’s great to have fun and be carefree. But it’s not so much fun when you’re hunched over in the state-run nursing home, not knowing the time of day…a lifestyle (if you can call it that) these people may have to endure for 20 or 30 years.
The second is the opposite. And in some ways, it could be worse. In this scenario I imagine the scrupulous saver who scrimped and saved every day of their life…they bought the cheapest car, went to bed when it got dark so they didn’t have to pay for lighting, wore five jumpers to avoid paying heating bills, ate the plainest and simplest food, and never wasted a cent by going on holiday.
But, their scrimping means that by the time they retire they’ll have saved a fortune. So, what do they do with the money now?
Nothing, because in this scenario, as they wrote the cheque to buy the Porsche, the excitement caused a heart attack…and they never got to enjoy the money they had spent nearly 50 years saving.
OK, I know that’s a bit dark. And it’s not very cheery. But I’m trying to make a point. And sometimes it’s best to use extremes to make that point.
Don’t Waste Half Your Life
That’s really important. Remember, the aim is that by the time you finish full-time work, you’ll have a tidy nest egg that will last for as long as you need it.
While I’m on the subject, that’s another important point. Think about what profession or industry you are in. Is it a role you can keep doing after the official retirement age?
Is it a role you could easily do part-time? Or could you take those skills and apply them to another role? Could you use your skills to start a business, or buy a business?
Think of it this way: if you earn X dollars before you retire, could you get by earning half that amount in a part time role for a few years? If so, it could mean you wouldn’t have to draw down on your retirement savings, and the part time work may suit you better than complete retirement.
(By the way, back in my broking days, one of the guys I worked with celebrated his 80th birthday while I was there. I hear he didn’t hang up his broking boots until he was 83. He’d been in the game for 65 years. That’s right, 65 years. He enjoyed it so much he was happy to keep going. It’s an important point; if you’re happy doing something, why not keep doing it?)
But most importantly, aim to set your retirement plans on your terms, not on someone else’s terms (least of all the government’s terms).
Getting back to my point. It’s important to remember the purpose of savings. Savings mean sacrificing current consumption in favour of future consumption.
In other words it’s a mistake to think that consumption is bad. Consumption is good. Consumption is (generally) your reward for producing goods or services that are demanded by other consumers or producers.
Therefore it’s only reasonable that you should get to enjoy what you’ve earned. You shouldn’t feel guilty about spending your money…which you earned. The key is to find the right balance between current consumption and future consumption (savings).
And just as you should be realistic about your current spending, you should be realistic about your future spending too. That’s why you need to think about the following questions…
Seven Questions to Answer Before You Retire
For most people, retirement will mean exactly the same lifestyle, except with more leisure time. That should make it easier to work out your likely living expenses.
For instance, if you have a mortgage today, odds are it’s currently your biggest monthly expense. But by the time you retire, hopefully you’ll have paid off the mortgage. Straight away that’s a big expense you won’t have to cover in retirement.
If you rent today you’ll need to figure out what you’ll do in retirement. After saving thousands (potentially hundreds of thousands) over your lifetime by renting instead of taking out a mortgage, at what point (if ever) will you decide to buy a home?
Other expenses such as food, clothing, heating, electricity and communications may not change much. You’ll still need to eat, buy new clothes, keep yourself warm, and so on.
So you can make a simple calculation today. Add up all the expenses that you would still expect to have in retirement. In other words, deduct any mortgage repayments, school fees, travel costs for going to work, and any others that are applicable.
That’ll give you a rough figure of your future expected basic living costs in today’s dollars. You then need to figure out what you’d like to do in retirement and how much extra disposable income you’ll need.
All this can seem daunting, and even premature — especially if you’re still a long way from retirement. But in reality, it’s not that difficult to figure out if you keep a regular budget of your income and expenses.
(I’ve just crunched the figures for my home budget, and between my wife and I we would only need one-quarter of our current income in retirement to have the same non-work lifestyle.)
And if you use the ‘booster’ strategy that I explained last week, you can boost your returns further.
Of course, all these numbers assume you’re planning on living out your retirement in Australia. Many retirees here and overseas are opting for the ex-pat option. That is, upping sticks and living permanently or partially overseas.
You only have to look at the living costs in some European, Asian and Latin American nations to see that this is a real option in retirement.
After covering the basics in recent weeks, I’ll start to cover the concept of an international retirement lifestyle in coming weeks.
PS. In last Wednesday’s Pursuit of Happiness I mentioned that I would ask for your help in a special project this week. I’m still working on finalizing the project so I’ll let you know as soon as I can. I’m really counting on your support.
From the Port Phillip Publishing Library
Special Report: After the Bust
Daily Reckoning: A Deflationary Conclusion to China’s Bubble
Pursuit of Happiness: Tax = Theft