After you’ve set your goals, and taken stock of your situation with a cash flow analysis, you can determine the steps necessary to accomplish your goals. You do this by putting yourself in situations that will add to your success. This might be visiting an advisor for financial help, a travel agent for information about a destination, or joining clubs and associations that will teach you what you need to know for your goal.Â
Financial planning really only involves 3 steps:
- Figure out your goal
- Access your current situation
- Determine steps to get you where you want to be.
Most people just save and wait until they’re a few years from retirement and then ask me, can I retire? Planning gets you headed in the right direction right from the start. A basic example would look like this:
Goal – Retire in 8 years at 67 on $65,000/yr income
Current Situation – Investments, $500,000
Steps – To Be Determined
You could retire at 67 under this scenario if you had $1 million in investments and social security. In order to do this have to save about $22,000/yr and earn 6%. This would give you a little more than $1 million at 67. Using the general 4% withdrawal rule of thumb, you could expect $40,000 income from $1 million dollars (1,000,000 x 0.04 = $40,000). Social security income of about $25,000/yr, plus $40,000 income from a $1,000,000 investment portfolio should, in theory, give you $65,000 worth of income in retirement.
This is an overly simplistic example. The 4% withdrawal rule of thumb is based on research that suggests a 60/40 stock to bond portfolio, which in theory should give you the $40,000 income over about 30 years. Factors such as inflation, investment returns, and even increased life expectancy can alter your plan. So it’s important to revisit your plan every now and then.
The more factors, the more complicated your plan. When to take social security, IF you have pension income, what your spending habits are, all can change your outcome. But it’s still better to have a plan and change it, than to wait until you’re 66 and ask “can I retire?”
You can find some basic planning software online at Bloomberg, FINRA, SmartMoney, and many others.
