Got a minute? Then I've got a retirement plan for you.
1:00: Picture your perfect retirement
Start with the easy stuff -- pick a temperate locale that will serve as the setting for your post-employment, Jacuzzi-soakin', catnap-takin' golden years. Answer this basic question: When do you want to retire? How many years away is that? (OK, that's two questions, but at least the math is easy.)
0:55: Price it out
Sure, it's easy to see yourself living the retirement high life. Figuring out what it will cost to actually do that is another thing. If you start pricing it out now, you won't experience sticker shock when your old ticker isn't as strong. Don't think of this as a lugubrious budget -- consider it a "pre-spending spree." Robert Brokamp offers a rundown of average retirement expenditures in "How Much Will You Need to Retire?"
0:43: Face reality, but "pretty it up" a little
After you pick yourself up off the floor and take a hit from your daughter's inhaler, revisit that figure you just calculated. Remember, you have a few years to come up with the dough. Plus, some of that tab may be picked up by Social Security, your pension, or other sources of retirement income. Do some fancy math and break down the gargantuan number to a more reasonable monthly sum. Think you can invest that much on a monthly basis? (That was rhetorical, by the way.)
0:36: Hide your assets from yourself
How do I manage to sock away 15% of my monthly pay? By hiding it from my greedy self. It's easy to siphon money from your current, less mature self to your future, more refined self: Have your contributions taken directly from your paycheck and put in your 401(k) (or other work retirement plan), and/or have money automatically transferred from your bank account to your retirement accounts.
0:24: Juice your returns
Index investing, like the SPDRs (AMEX: SPY ) exchange-traded fund or Vanguard Total Stock Market Index (FUND: VTSMX ) , allows you to essentially bet with the house for a very low cost. Doing so means that you at least match the overall returns as measured by that particular index (in the case of SPDRs, it's the S&P 500; Total Stock Market tracks the overall returns of the entire stock market). Historically speaking, that's 10% average annual returns. That's cool. But what if you did better? Consider a strategy championed by our resident dividend guru. Dividend-paying stocks tend to be quality companies with defensible moats that generate growing free cash flow. And these aren't granny stocks we're talking about, either. Perhaps you've heard of ExxonMobil (NYSE: XOM ) , Coca-Cola (NYSE: KO ) , and Johnson & Johnson (NYSE: JNJ ) ? If, in 1980, you had purchased $2,000 of each, today you'd be sitting on a portfolio worth close to $360,000 by deferring taxes and reinvesting dividends. And when you retire, you can decide to take the cash dividend each quarter and buy each of your grandkids Xboxes.
0:19: Keep as much as possible away from Uncle Sam
Take advantage of accounts such as IRAs, 401(k)s, SEPs, and XYZPDQs (OK, we're kidding on that last one) that offer tax savings. More for you, less for Uncle Sam. Contribute the maximum allowable amounts that you can. If your employer matches the contribution you make to your plan, make sure you grab that free money.
0:11: Put the plan into action
Now that you know what you have to do, go out and do it. Open that IRA, boost the contributions to your 401(k), cut back on your spending, increase your portfolio returns -- whatever you think you need to do to retire in the style to which you aspire. Yes, do it now.
0:05: Retiring soon? Show-off!
If you're 10 or fewer years from retirement (you lucky devils), you have a few extra considerations. In particular, start thinking about things like safer investments, withdrawal rates from your retirement accounts, and taxes. Let the Fools at Rule Your Retirement check your math and offer a shoulder to cry, er, lean on.
More inspiration for saving for the future:
- Extreme Retirement Makeover
- 5 Ways to Idiot-Proof Your IRA
- Thanks for the Retirement, Gramps
- Oops, I Forgot to Save for Retirement!
- 9 Retirement Killers
- Coffee? Tea? Annuities?
- Note to Self: Plan Retirement
Fools, now is the time to open your hearts and wallets to worthy causes! Please support our five Foolish charities atwww.foolanthropy.com.
Dayana Yochimis a fan of the quick fix. Hence, her 60-Second Guide to War and Peace and the Complete Works of Ziggy, which she regales friends with every happy hour. But that's not the point. She owns shares of none of the companies mentioned in this article. However, Coca-Cola is a Motley Fool Inside Value recommendation.