25 April 2024

Fund Your Retirement First

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The biggest pot of money you'll likely ever need will be your retirement nest egg. That money will have to provide for you from the day you stop working until the day you pass away. According to Social Security, an average 65-year-old man will likely live until age 84.3, while an average 65-year-old woman will likely live until age 86.6. About a quarter of all 65-year-olds will live past age 90.

Two easy rules of thumb explain why retirement comes first  

A decent estimate for the size your retirement portfolio needs to be is known as the 4% rule. By that rule of thumb, you can spend 4% of a well-diversified portfolio balance the first year of your retirement, increase your distribution every year to cover inflation, and be very likely to not run out of money before the end of your retirement. If you follow that guidance, you'll need to retire with about 25 times what your portfolio will need to cover in a typical year in order to have enough.

To wind up with 25 times what you expect to spend in a year, you'll need more than you can simply save under your mattress. Indeed, your money needs time to grow. That's where the second rule of thumb comes in handy, the "Rule of 72." That rule helps you estimate how long it will take your money to double, based on the rate of return you expect from your investments. Divide 72 by your expected investment return, and it will estimate how many years it should take for your money to double.

Between the 4% Rule and the Rule of 72, two things should be abundantly clear: You need a significant pot of money to retire, and the earlier you get started, the more your money can compound for you.

Here are three key reasons why budgeting for retirement right now matters: 

  • You can rent a place to live or borrow to buy a house. You can also take out loans or find creative ways to pay for an education. You can't borrow to pay for your retirement.
  • If you later find that you've over-saved for your retirement needs, you (or your heirs) can always pay off a mortgage loan or student loan with some of that extra retirement cash.
  • As important as vacations can be to recharging and enjoying life, there are ways to travel on a budget. Fit your vacations within the context of an on-track retirement plan, and you'll likely find you enjoy them more without the financial headache that overspending generally creates.

Start with your retirement -- then cover your other priorities
Once your retirement plan is on track, you gain the opportunity to turn your focus to your other financial priorities. As you do, you'll likely find that putting your retirement first gave you two huge advantages over those who don't: a lot more freedom on how to approach those other priorities, and the ability to approach them from a position of financial strength rather than worry.

The $60K Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could ensure a boost in your retirement income of as much as $60,000. And once you learn how to take advantage of these loopholes, you could retire confidently with the peace of mind we're all after.

Click here to access the full article on The Motley Fool. 

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