For most people, the magic number for retirement is a million. It doesn’t matter the currency. Maybe it matters about inflation. When you ask most people what they expect to save up for their retirement, they would either smile and say they haven’t thought about it, as much as they can save up, or if they are young, will say something in the lines of “I am young, I have more time”. But time is not really anyone’s friend when it comes to retirement, pensions, and personal finance. The time is never right to save a certain percentage of your income. Yet, you have to do it and be disciplined at it if you want a much better future for yourself and your children.
Anyone who imagines their future will in some way think about their retirement. In recent times, people are redefining what it means to retire. Some prefer to work till they move on to the next world because of the passion they have for what they do. Also, others want to retire before the traditionally accepted retirement age and enjoy the spoils of their exploits as a youth. All that is well and fine, but the singular thing you cannot avoid in your plan for retirement is cash, and a boatload of it. If you are retiring and hoping never to return to work, then you might as well have enough to take you as long as you live.
Retirement doesn’t have to be scary. All it needs is some good old boring financial planning better known as retirement planning. Most people look for a magic number such as a million or a certain multiplier. You may even go ahead and use an online calculator. But one thing about retirement planning is that it is extremely personal and not a one size fits all thing. No one can tell you how much you need until they have sat down with you.
Therefore, not all retirement plans are the same. The best way to determine how much you need to retire comfortably is after you have a financial advisor or a much more specialized professional in retirement planning. One of the best ways to ensure a good retirement is earning as much as you can in your days of strength and saving up as much as you can. While this will help you get your retirement fund up, you need an estimate of just how much you need to retire, given your personal circumstances. And for you to arrive at such a figure, we would say it depends on a lot of things.
What is Retirement?
Retirement is when a person stops active work and is no longer considered part of the workforce. By leaving work, you forfeit the related benefits such as the remuneration that you received during your active workdays. This means the most important part of retirement is getting your finances together before taking the big step.
While there is often a retirement age depending on the country such as 60 in Ghana and 65 in the USA, you can retire at any time before that official age and it all boils down to whether you can fund your expenses. Some people rush into retirement at an early age only to return to work after their cash flow dries up.
Planning is crucial to prevent having to return to something you thought you had left behind. Due to the importance of retirement, there are lots of options and mandatory contributions to be made if you are a formal worker. People in the informal sector can register with various pension schemes to secure their future.
In Ghana, there is Social Security and National Insurance Trust (SSNIT) that is mandated by the law to provide pensions services to the people of Ghana. In the US, there are pension schemes, 401(k), and other alternatives for citizens to secure their retirement through consistent contributions. These are what the vast majority of people use for their planning and would depend heavily on them when they retire. All plans have rules surrounding them and how to benefit most from them, make sure to go through all paperwork to fully understand your opportunities and risks.
What is Retirement Planning?
Retirement planning involves the careful strategizing of your source of funding (mainly) among other things for your retirement days. While there are other things to think about when it comes to your retirement such as where to stay, whether to buy a house or not, whether you will travel or not, and other interesting things, it all almost always hinges on the weight of your pocket: YOUR MONEY. For this reason, retirement planning is often centered on savings, investments, and other ways to increase your bank balance and add various sources of income to supplement your personal savings such as pension plans and investments.
How Much Do You Need to Retire?
The widely accepted amount you need to retire is a million, in your currency. In the case of Ghana, it would be one million Ghana cedis. Yet again, this is what is considered the amount the average person can retire with. But as already pointed out, retirement is never the same for any two people and you will need to put much effort into finding your own number. This means going through retirement planning. While you should work with a qualified retirement planner, you can always do your planning. When you start to think about the amount you need to retire, it is important to consider some factors that MUST be accounted for in your plans. These include;
Factors to Determine How Much Money You Need To Retire
These are not exhaustive of all the factors you need to consider when planning your retirement
Your Current Age
Perhaps the most pervasive factor when it comes to retirement planning is your current age and the age at which you want to retire. Striking both ages together will give you just the amount of time you have left to make your retirement dreams come true. The kind of decisions you would take if you have 15 years left to go on retirement is not the same as if you have 35 years left. And most people who are just entering the workforce, have time, but the best time to start planning is when you start working. That way, you can have the best of options and time on your side to put your plans together, create extra sources of income and fill up your pensions savings. Time Matters a Lot in Retirement Planning
What Would You Do During Your Retirement Days?
Your retirement days are some of the best days you will ever have. If they are going to be good as you want them, then it is smart to plan them as well. While the main reason for this kind of planning is for you to figure out how much you need to save, it also helps you to have something to anticipate. Retirement is not just about going out of the workforce to sit at home. It involves having fun, enjoying life, and passing on your wisdom to the younger folk coming up.
Estimated Social Security as A Starting Point
The starting point is mandatory social security is always the first line of action. And if you are in the formal sector, you will see that there are automatic contributions towards your retirement. This is because every government wants its senior citizens to have a good life. It is often constitutional to make such contributions and you can not opt-out of them. So it makes sense to start from them. Now depending on your salary and some other factors, you will be a beneficiary of some allowance from the constitutional body every month during your retirement. In Ghana, Social Security and National Insurance Trust (SSNIT) is in charge of that and you will need to be registered and meet their requirements in terms of a number of contribution months and other factors to benefit fully from the scheme.
Lifestyle You Expect to Live
Your lifestyle will determine the majority of your expenses. The point of lifestyle is very important and at the same time very personal. No two lifestyles are the same. It would take you to know just how much your lifestyle is costing you and what it would take to maintain it over your retirement.
Cost of Living and Inflation
Cos of living is important of any budget. This makes it a critical part of your retirement planning. The cost of living is often associated with the physical or geographical location where you live. This means careful consideration must be given to where you plan to live during your retirement. The cost of living supports the lifestyle you intend to live.
Where You Want to Live
Where you want to live is a major decision. It not only affects the lifestyle choice, but it also affects the cost of living and if you intend on traveling overseas, inflation and other factors can also easily affect your plans. Most people would love to travel and see the world.
According to experts, most people usually take such trips within the first two weeks of retirement. While it is great to go on such trips, it said that the average travel costs about $20,000 for US citizens. This could be more or less depending on the nature of your travels.
The general rule of thumb here is to plan all such travels and factor them into your savings and investments so that you do not spend retirement money on luxurious trips only to return to an empty balance or a balance that would have you out in the workforce after a few years of retirement. This is why retirement planning is crucial since the slightest of mishaps can destroy most of your planning and send you into debt.
Your Health Needs
Health is one of the largest costs pensioners face. With old age comes natural conditions, as well as lifestyle, catching up with us, the costs of care and medication should be a major factor to prevent emergencies.
Dependants
Ideally, your children and other dependants should be independent. However, you may still have one or two dependents by retirement. Your dependents should feature in your planning and determine how much you need to retire. In a situation like this, it is important to have extra sources of income as well as investments to support you and your dependents.
Methods to Use to Determine How Much You Need to Retire
There are rules of thumb that can guide you at each age range to help you plan how much you need to have saved up for your retirement. These are popular methods and usually involve saving right from the beginning rather than starting with only a few years left to retirement.
1. The Final Multiple.
With this method, you are required to accumulate an estimated 10-12 times of your current annual income (adjusted for right before retirement).
2. The Pacing Angle
Use your current age as a yardstick for determining your retirement savings. Take your current income (with current age in mind) and multiply it. By age 30, accumulate the equivalent of your current income. By 40 years of age, you should have accumulated the equivalent of 3 times your current income. And by 50 years of age to 60, accumulate, you should have accumulated about 10 – 12 times of your income. This method helps you view the final multiple methods in a long-term manner that allows you to know at each age point just how much you need to be putting aside for retirement.
3. Seamless Transition
The seamless transition method, instead of multiples, aims at helping you not only retire but also maintain your lifestyle even in retirement. To achieve this, replace a huge chunk of your pre-retirement income so that you can maintain or have a similar retirement lifestyle as you had during your years of active work. This is much more tasking but it is worth it if you want to maintain a certain lifestyle. This method should ideally involve more than a pensions program. You could have businesses, investments, and other sources of income that shield you from inflation and other unforeseen expenditure which inevitably always pop up.
4. Just Make A Milion
Here you, make a million. But that wouldn’t be your magic number. While a million is the magic number for most Americans and could be extended to Ghana, retirement planning is personal and will require some effort to estimate how much you should retire with to live a comfortable life.
5. Online Retirement Calculators
There are lots of online calculators online that you can use to “estimate” the amount you need to retire. Now, these calculators can only accurately predict the amount you need if they have details about your life and your retirement plans. Most of them just dont have such sophistication. It is advised to speak to a financial advisor who is qualified to take you through your retirement planning. They can offer you the best of advice and also help you create other sources of income, save money and take advantage of all the benefits you can enjoy before and during retirement.
Questions to Ask Yourself Before Starting Your Retirement Planning
1. At What Age Do I want to Retire?
It is advised to have 80% of pre-retirement income as the amount you plan to spend. This also means you would have to cut down on your lifestyle. If you intend to upgrade or maintain your lifestyle, you might have to go higher than 80%. Also, you need to estimate the age to which you will live up. This is going to be a tough one. You easiest way to get this is to look at your family life expectancy as well as the national life expectancy to estimate yours. This is important as it will matter as you grow old and your finds begin to dry up, perhaps even faster due to unforeseen costs and health.
2. Where Will I live For My Retirement Years?
Travel is often common in the first few weeks of retirement and costs a ton of money. It is okay to go on such trips if you have them already planned and budgeted for. This will prevent eating into money that you would need later on in your retirement
3. How Much do I Expect to Spend?
This will determine just how much on a high level how much you need to save. If you currently spend over 5,000 a month, you should e planning that amount if you intend to maintain your current lifestyle during retirement.
4. How Much Do I Expect to Make Monthly?
Being on retirement doesn’t mean you cannot make money. You may have a thriving business, some stocks, and investments that pay you, and basically other sources of income. The best time to work on extra sources of income is during your active days.
Benefits of Retirement Planning
- Retire When You Want
- Retire With Peace of Mind
- Benefit From Tax Exemptions
- Help You Make Decisions
Conclusion
There is no magic number anyone can give to meet your personal retirement needs. To ensure that you are comfortable during your old age, be sure to plan, save and have extra sources of income so that you can leave the best of legacies.
