John Labunski Dallas

John Labunski Financial planning for retirement: where to start?

In recent weeks we have seen how  planning our future retirement is a first-order necessity if we do not want to see our standard of living drastically reduced when the time comes to retire from the professional market.

Today we will try to synthesize in a series of steps how we can start planning our retirement without it being a complex task. In fact, you will be able to verify that it is actually a very basic budget exercise that is available to anyone.

The Steps to Financial Planning for Retirement

business. Be very clear about the necessary starting data to start the calculations . Specifically, we must start from the age at which we plan to start saving for retirement, the age at which we are likely to retire and life expectancy after retirement.

To illustrate the various steps with an example, we will start from the basis of a 35-year-old person who decides that from the age of 36 he is going to start saving for his retirement, which will possibly take place at the age of 67 (he is 31 years old to save the amount to be determined later). Life expectancy in United State is estimated to be 85 years old by then, so enough savings will have to be planned to supplement the retirement pension for 18 years.

  1. Set a goal for your post-retirement standard of living . All calculations will obviously depend on the standard of living you intend to have once you retire. Although what is desired by the majority should be to maintain an identical standard of living, it seems logical to think of a minimal drop in it, say, to 80% of the level that was had while being active, so that financially it involves less effort.

In the case of the example, let’s suppose that the gross annual salary of the person in question is €40,000, so their post-retirement standard of living at 80% will imply an equivalent gross annual salary of €32,000.

  1. Always take inflation into account . It should be remembered that we are making plans for many years to come (in most cases more than 40 years), so the effect of inflation on the figures with which we work has a very important weight.

In the example we will see it very clearly. Assuming an average inflation of 2%, a standard figure in most financial planning), those €32,000 equivalent annual salary will become the 31 years remaining for retirement in the not insignificant figure of almost €60,000. That is, due to the effect of inflation over time, the figure will have doubled.

Working businessman hand cup of coffee at office workplace desk

  1. Once we are clear about the amounts that we will need to cover in our years after retirement, we have to be able to calculate an estimate of the amount that we will receive as a public retirement pension, in order to calculate the complementary amount that will make us lack to be able to maintain that standard of living that we want.

Continuing with our example, we will assume that the person in question will receive the maximum retirement pension if they always remain in the gross salary range of at least €40,000 per year. This pension receives a rate of update slightly different from that of inflation (there is a state regulation to update pensions). Given the current panorama of the pension system, we will assume a minimum update of 0.5% per year to place ourselves in a pessimistic hypothesis. This implies that the first retirement pension of the person in the example will be around €42,000 per year. In other words, he will need about €18,000 a year to supplement that public pension and achieve the desired standard of living.

  1. In reality, what we need to know is the amount of total savings that we will need for those post-retirement years, because if the growth rate of pensions is below inflation, the trend will be upward.

In our specific case and with the aforementioned hypotheses, the total amount saved necessary to supplement the retirement pension will be around €500,000 (always in future money).

  1. To finish, we must determine our savings plan to achieve the necessary amount in the years that remain until our retirement, always considering a conservative average return on the capital that is being saved (although it is true that it will depend on our investment profile, You shouldn’t take excessive risks with retirement savings.)

In the case of the example, we will consider an average return of 3%. With that figure, and making the pertinent calculations, in order to accumulate enough to adequately complement the public retirement pension, the person in question would have to save approximately 13.50% of their annual gross salary each year, an amount that is not unreasonable considering take into account what may initially scare that half a million euros you needed.

Actually, it is curious to see how what we are actually doing is matching our current standard of living with the future , since following the example, having worked with an 80% standard of living with respect to annual gross salary, and considering that a We are currently going to allocate 13.50% of it to savings, what we are actually doing is placing our current real standard of living at 86.50%, so that we will barely appreciate that drop in level after retiring, because in reality will not mean 20%, but only 6.50%.

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