A 5-step financial timeline for retirement
How soon should you start saving for retirement? Answer: The earlier the better. And there are figures that confirm that.
Suppose, at the age of 25, you put aside $3,000 a year (about $58 a week) into a tax-free retirement fund for just 10 years at 7% growth. At the age of 65, your $30,000 would have grown to $338,000.
Or, suppose you put off investing in your retirement until you were 35 and, under the same conditions, saved $3,000 a year for 30 years. At the age of 65 your $90,000 would have grown to $303,000.
That’s a huge difference.
Let’s admit that most of us aren’t that into thinking about retirement so early in our lives. And that’s despite the current growing interest in FIRE—Financial Independence, Retire Early—that’s encouraging people to attempt to retire as early as 35.
However, I suspect that if you’re reading this that’s a signal that you’re already too old to consider a really early retirement—at, say, 35.
Hopefully, you’re already putting funds aside for retirement—whether that be employer funded (like superannuation in Australia) or self-funded.
Retirement countdown for finances
There is a well-recognised process leading up to retirement. What follows is an adaptation of a number of countdown steps for finances before retirement that I used in my book Retirement Ready?
There are five suggested financial steps as you prepare for retirement.
Step 1: 15 years before retirement
You should have a financial plan that includes retirement before this, but if not, this is the time to get serious about creating your plan. You will probably need a financial advisor to help you understand how to get the most out of your money.
Your financial plan is intended to help you understand how much money you can expect to have if you follow the plan. That allows you to work out your future—particularly what you can do, realistically.
Having set your financial plan there should be an annual review of the progress you’ve made. You do need to know how your plan is working—or not—to adjust the plan.
Step 2: 3 to 5 years before retirement
Pay off debt. Becoming debt free begins with high-interest credit card debt—actually, paying off credit card debt every month at whatever stage of life is recommended.
If you have a mortgage, this is the time to work out what you’re going to do with it. You probably won’t want to be paying off a mortgage in retirement. Is this possible? If you have other investments, should the mortgage have priority or not?
Again, you should probably talk to your financial advisor about this and any other concerns you have about your finances. You need to know how much income you can expect from all sources in retirement. This is when you should begin to think more seriously about what you want to do in retirement—and how you plan to fund these activities.
Step 3: 1 year before retirement
Set up your income stream—or streams. When you’re retired you’ll need a regular payday. Unless you’re a self-funded retiree, you may have some funds in superannuation or investments, which could be supplemented by a pension.
This is when you work out how it all comes together and whether you’ll need or be eligible for an aged pension. If possible, plan in your retirement to keep enough money in an accessible account to cover expenses for three to six months in case of emergencies.
Finally, work out if there is any advantage in having non-urgent medical treatment before retirement—things like dental work and optometry. And what about holiday time and long-service leave you have accumulated? What do you want to do with them?
Step 4: 3 months before retirement
If you’re eligible, take the necessary steps to sign up for the pension so it begins to flow when you do retire.
Step 5: Your last day at work
This step is financial in the sense that it’s the day of your last pay packet. It’s also the time to turn off your countdown clock (yes, there are many apps for that). You’ll want to say goodbye to people you have appreciated in your workplace. If there are farewell speeches, be gracious in response.
Tomorrow you start living your new life.