Retirement Planning: From the Start
Have you ever made sourdough bread from a starter before? No? Me neither. BUT we’ve both seen them on instagram. Your retirement account is the sourdough. The more you feed it regularly, the more it will grow. The initial contribution is the starter, your per paycheck contribution is the food.
In a very quick 10 steps, you can analyze your finances easily to actually plan for retirement.
Have you reached an age where your HR office has reached out about your contributing to your retirement but it seems daunting?
It all starts with your paycheck. Below I will show you how to analyze where you are at in life too see how you can potentially have half a million dollars when you retire.
Think about this: when you retire, you may live for 20-30 years. What money will you be living off of?
Here are the 10 steps:
Get your last two paychecks, decide on a year you want to retire (60? 75?), get a piece of paper and a pen or a spreadsheet if you prefer
Estimate how much money per month and per year you will need to live off of when you retire (typically this is between $3-5k depending on where you live and lifestyle, medical needs, etc.,)
Open a retirement calculator online. I like NerdWallet.com because it shows you what you will make and what you should work to have when you retire (a projected amount based off cost of living)
Enter the information you know you have: current age, age you want to retire, annual rate, amount you currently have in ALL your accounts (previous companies and current)
Keep contribution to $0 right now. The amount shown projects what you might have at retirement age (conservative calculation from market trend)
Look at your take home pay, how much would 1%, 2%, 10% be from that amount?
Enter those amounts into the calculator and see how dramatic the amount changes
Now look at your budget
Calculate your fixed expenses (payments made every month like rent, pet insurance, utilities, car payments and insurance, etc.,)
Calculate your needs (groceries, household supplies, etc.). Bonus: Add 15% to this for buffer
The remaining amount is what you have left to spend on what you want
Take the 5% amount of your take home pay and see how much of a dent this puts on your remaining amount
Decide if you want to spend money on a pair of sneakers every month or have hundreds of thousands of dollars when you retire.
Example:
Susie Q currently makes $105,000 a year gross pay (not take home).
Step 2: Susie Q estimates she will need $3,500 a month in retirement ($42k annualized).
Steps 3-4: She opens the Nerd Wallet retirement calculator and enters her age of 38. She currently has $52,896 in retirement savings through various jobs which she rolled over into her current one.
Susie wants to retire at age 65 (which you can change if you want to retire earlier or later in the advanced details section).
Her grandparents lived to be roughly 88 years old so she’s estimating living until 90 to be conservative.
Now she goes back and sees what they project: $255,083 (she would actually need $1,904,052 to live on her projection of $3,500 a month). Keep in mind this is with a $0 monthly contribution.
Step 5: Now she looks at her take home pay from her last two pay stubs. Susie Q lives in CA where there are some major taxes so she takes home $3,098. Susie gets paid semi-monthly meaning 24 pay periods in a year so she multiples her take home by 2 to get her monthly take home which is $6,196.
She calculates 1% of = $61.96, 5% = $309.8, 10% = $619.6.
Step 6: She enters this numeric amount into the calculator and watches the numbers grow.
$62 a month = $313,030 in retirement
$310 a month = $544,821 in retirement
$620 a month = $834,558 in retirement
Step 7: Susie Q looks at her fixed expenses and pays $1,500 in rent, $250 in utilities, $120 in car insurance, does not pay a car payment, has one student loan refinanced at $312 a month, and $25 on subscriptions. This equals: $1,715 a month.
Step 8: She knows she typically spends $250 on groceries a month, $55 on household replenishments (cleaning products, toilet paper, soap, etc.,), $45 on pet food, $240 on gas. This equals $590 added to Step 7 equals $2,305 a month for needs and fixed expenses.
Step 9: Taking the net amount from her monthly pay, she subtracts Step 8 amount to get a remainder of: $793 a month for fun and savings.
Step 10: She calculates 5% of the net amount for the month and realizes that 5% of her net would be about half of her remainder but would result in half a million dollars in retirement.
If she were to put $155 per paycheck into her retirement account, she would have half a million dollars in retirement.
Ask yourself: Can I invest this money before it reaches my bank account into my future rather than spending on stuff that I barely use/want now?
