The process of preparing for retirement presents a bit of a paradox. The longer interest is allowed to accumulate on a sum of money the larger the sum will grow (particularly if additional amounts are added) Consequently, saving for retirement is most effective when started early in life, but this is the time when people are generally the least interested in doing so. Saving for retirement is least effective when started later in life, but this is the time when people have the greatest amount of motivation to do so. Once a person is convinced that it is to his advantage to begin investing for the future then the next step is to revise their personal budget to include a retirement fund category. Let’s take a look at how a person might go about incorporating this in with their monthly expenses.
This will help an individual know how long he has to save, and in turn, roughly how much he will need to put aside each month.
It is impossible to project completely accurate totals; however, a close ballpark figure should be attainable. This is done through a careful examining of all current expenses to determine if they will still be applicable, as well as, adding on any additional costs. For example, many retirees experience an increase in “entertainment expenses”. Since they have an increased amount of free time, they spend more money on hobbies, travel, etc.
It is important to realise that 10, 20, or 30 years from now the cost will be higher in accordance with inflation. Failing to adjust for this factor could lead to a severe shortage of funds.
Once you know how much you need and when you need it you can calculate how much you will need to save between now and then.
When calculating how much you will need to save each month, resist the urge to assume that you will average a 18% (or any other number on the high side) annual return. This may happen occasional, but chances are very strong that you will not average this return over the course of the investment. Choose a more conservative percentage because it truly is better to be safe than sorry. If it turns out you make 18% then great, you’ll have extra money in your account.
