What are your retirement goals? Have you actually taken the time to consider retirement? Retirement is one of those things that everyone should be thinking about. Even if you are just finishing high school or college. Retirement is something that happens after your working career, but it will never come if you’re not working towards your retirement goals during your working career.
Have you ever considered the idea of retiring early? Or is that something you know will never happen? A lot of people don’t even think they will ever retire, let alone retire early.
I think anyone CAN retire early, it just takes a lot of planning and dedication to reach your retirement goals. The biggest problem with planning for retirement is most people just don’t put the plan in motion. They may have ideas to start investing and putting money away but they never actually do.
One reason people love to procrastinate is that they think they need millions to retire. This number just seems too big. People think they will never reach it so why even bother? However, there are two things wrong with this thinking. One is that you definitely don’t need that much money to retire. Second, making one million dollars over the next 20 or 30 years is actually not impossible.
It does take some planning and understanding of what your retirement goals are and also realizing the steps required to reach those goals. But with a solid plan put into motion, you will reach your retirement goals with the help of compounding interest.
What is Compound Interest?
When your money earns money from interest and then that interest earns interest and so on, that is called “compound interest”. What makes this so amazing is that eventually, your money will start earning more money than your putting into it. At first, you will get small amounts of interest and that’s why people don’t commit to it. After a few years, however, that money starts to grow exponentially.
expected returns from the stock market are about 10% annually. We also see a 2-3% inflation rate every year so that averages to about 7% returns. With that number in mind here are some numbers showing the power of compound interest at work.
- Invest $1 a month for 30 years and you will have $1,220
- Invest $10 a month for 30 years and you will have $12,200
- Invest $100 a month for 30 years and you will have $121,997
- Invest $1000 a month for 30 years and you will have $1,219,970
This chart shows the last scenario. Investing 1k a month for 30 years at 7% interest. As you can see, your contributions are far less than the total. Compound interest accounts for 70% of the total. Click here to run your own numbers through the same investing calculator I used.
Now that you see how much money you could make through investing, the next question is, how much money do I need to retire?
Realistic Retirement Goals
The important thing when trying to reach your retirement goals is to set realistic ones. Like I’ve said before, you don’t need millions of dollars saved to be able to retire. You don’t even need half of that! Not everybody needs the same amount of money saved up at retirement.
To figure out how much you need, you’ll have to analyze your spending habits. You’ll need to figure out how much you spend each month and then calculate your yearly spendings. Once you have that number, you can figure out how much you’ll want to save to reach your retirement goals.
When you retire you may decide to put most of your money in safer investments. You can probably expect anywhere from 2-5% annual returns from these types of investments.
With this in mind, what should your retirement goals be? I will give you my example. I think I’ll need to make about $30,000 a year from my investments before I consider retirement. If I’m to expect about a 2-5% return per year then I will need between 1.5m-600k. So if I save about 800k for retirement I could live happily and never run out of money.
Of course, this is with fairly safe investment options. If you put your money into ETFs and Dividend-paying stocks you could see much greater returns and need less money to retire. Your retirement goals and mine will be much different.
So How do you Reach your Retirement Goals?
First, you need to decide how much money you need every year to survive.
Next, take that number and divide it by about 5%. That’s the average you could expect to earn per year, with a diversified portfolio of stocks and bonds, leaning more towards bonds.
The number you get is how much money you need to retire – your retirement goal. Now how do you reach your retirement goal? Easy! Use an investment calculator and plug in some numbers. Expect about 7% returns, adjusted for inflation, and then put in your current age and what age you’d like to retire. Then put in how much you can contribute per month and see what your results are.
If the numbers are off, then you may need to find a way to contribute more or make do with a lower cost of living or retire later. It’s up to you how you achieve your retirement goals, the important thing is to have a plan, and set it in motion.