There are a few experiences in life that nearly everyone has in common, and one of them is retirement. But it looks different for every person. Failing to save enough can make this a stressful time instead of a relaxing one. But for the wealthiest retirees, appropriate planning and diligent saving make this a fun, adventurous era after decades in the workforce.
These individuals may all have different ideas about how to spend their retirement, but they also have several things in common. Here are four of them that you should strive to incorporate into your own retirement strategy.
1. They had a clear plan
The wealthiest retirees had a clear picture of how they wanted to spend their retirement, and they created a financial plan around that so they understood how much they needed to achieve their goal. This is always a bit of an estimate because no one really knows what expenses they'll have or how long they'll live. But if you figure on the high side, you stand a good chance of saving as much or more than you'll need.
Estimate the length of your retirement by subtracting your preferred retirement age from your estimated life expectancy. Plan to live at least until 90 if you're reasonably healthy. Then, multiply your estimated annual retirement living expenses by the number of years of your retirement, adding 3% annually for inflation. You can do this yourself or use a retirement calculator, which will also include your estimated investment rate of return. Your investments could see a 7% or 8% annual return, but plan for 5% to 6% to be conservative.
Your calculator should tell you the total amount you have to save overall and per month to hit your goal. Subtract from these totals any money you expect from a pension, Social Security, or a 401(k) match. Your company should be able to provide information on any pension or 401(k) match you qualify for, and you can estimate your Social Security benefit by creating a my Social Security account.
2. They saved early and often
Saving for retirement in your early 20s (or as soon as possible) will significantly reduce how much of your own money you have to set aside for your retirement because the money you invest when you're younger has longer to grow and ends up worth more than the money you contribute later in life.
To illustrate this, let's consider two people who aim to save $1 million by the time they're 62. One person begins saving at 22 and one begins at 32. Each sees a 7% annual rate of return. The person who starts saving at 22 must save $381 per month to hit the goal. This amounts to $182,880 over 40 years. The person who began at 32 must save $820 per month after missing out on 10 years of potential investment earnings. That comes out to $295,200 over 30 years -- over $100,000 more than the first person in this example.
Saving as soon as you're able to and making regular monthly contributions, even if you can only set aside a small amount, will help reduce how much of your own cash you have to put aside for your retirement. Set up automatic contributions to your 401(k) or IRA if you're able to. Otherwise, set reminders for yourself to save.
3. They didn't borrow from their retirement accounts
Borrowing money from your retirement account doesn't seem like a bad bargain, at least if you pay it back with interest. But the required interest rate might be lower than the rate of return you would've earned if you'd left that money alone.
Consider a $10,000 401(k) loan with a 6% interest rate. Over a 10-year term, you'd pay back $3,322, so that $10,000 would now be worth $13,322. But if you'd left the money alone and it had earned a 7% annual rate of return, that $10,000 would now be worth $14,203. That's a difference of $881.
Plus, you may have to divert your next few months of planned retirement contributions to pay back your loan, so your account balance won't be growing according to the schedule in your retirement plan. When you do pay back the loan, you'll have to recalculate your retirement savings goal to figure out how much more you need to save to make up for lost time.
4. They invested wisely
The wealthiest retirees didn't accumulate all of their money by making risky bets on little-known companies. Instead, they diversified their wealth among many assets and sectors and stuck to well-established companies whose businesses they understood. Those who didn't trust themselves to manage their money effectively put their savings in the hands of a financial adviser who could.
If you don't have the time or interest to learn more about investing, you're better off hiring professional help. Find a fee-only adviser, preferably one certified by an organization like the National Association of Personal Financial Advisors. Avoid advisers who earn commissions when you purchase certain investment products from them, since this can lead them to make recommendations that don't suit you.
You probably have some idea of how you'd like to spend your retirement, so create a concrete plan to get there if you haven't already. Try some of the tips above to get started.