How to start on the right path to retirement

Most of us have a vision of when we want to retire and how our retirement may look, but we rarely have a plan to attain it. Which seems silly when you really think about it. But thinking about how a plan makes sense in other aspects of our lives, like taking a holiday for example, so it makes sense as to why a plan for retirement is vital.  

For example, when you start thinking about a holiday, you can’t just get away with daydreaming about laying on a beach or skiing down snowy slopes. You’ve got to put the time in to decide on a destination, pick dates, organise time off work, book the flights and accommodation and then decide on an itinerary. It takes time and effort to create a plan to get that holiday you’ve been dreaming of. 

So, why not do the same for retirement? Decide on a destination (target income you want), pick the dates (when you want to retire) and then decide on an itinerary (the path you are going to take to achieve it). Let’s explore this in more detail for how we can apply this to retirement.

Step 1: Decide on a destination – setting the target income you want for retirement

If deciding how much income you want for retirement seems hard to decide now, to make it easier let’s start with your cost of living now. Then you can work backwards by thinking about what will change once you retire. Spending on things like groceries, clothing, and utilities may not change that much. Whereas something like commuting may be less because you’re no longer commuting to work, but holiday travel costs may go up, along with health, hobbies, and insurance costs due to having more free time.

Try and work it out now – take your current cost of living and add it all up. Will your primary place of residence be paid off, or will you still need to make payments? If so, factor those costs in. Don’t forget to add in entertainment and social costs, cost of utilities, groceries, and other costs that make up your current lifestyle. Finally, spread it over annual costs and that becomes your base annual income you will need to survive. You can then add in the other extras you may want, dining out, travel, hobbies, etc. This then becomes your target annual income.

Now to work out the asset you need to have at retirement to achieve that target annual income, most consider 3% to be a safe withdrawal rate (SWR) from your total assets. So, if your annual income target is $60,000 / year then the calculation is:

Target wealth value = Desired Income / SWR (3%)
e.g. $60,000 / 3% = $2,000,000

That may seem like a big number for most, but it is very much achievable if you start soon enough and take advantage of compounding growth.

Step 2: Pick the dates – when you want to retire

Choosing your retirement age is something you might have control over or it may be forced, for some due to health issues they may need to leave the workforce early, or for others who need to rely on the pension, that date will likely be when then turn 67 and qualify for the government pension.

The best way to work out a date for retirement age is to again work backwards. With your goal in mind and knowing your target income, break it down into years and months, then all you have to aim for is the much smaller targets you set for your self along the way and not the big one that may not seem achievable now.

Think about all areas of your life that you can refine to help you achieve your planned retirement age. Ensure your super fund is working for you and add as many self-contributions where you can. Look into the many investment routes available with both stocks, property, and money to see if any of these can help you achieve your retirement age sooner if your goal is to retire early and not rely on an age pension. With a little homework, there are many ways to help achieve a retirement age that’s at a younger age than you think possible.

Step 3: Decide on an itinerary – the path you are going to take to achieve your retirement goals

Deciding on your path to reach your retirement goals is where most people get stumped, so much so that they often don’t make a choice, delay getting started or don’t stick to their plan long enough due to a lack of patience. But by making a plan and sticking to it, you can help your retirement plan come to fruition when you want and with your target income goal.

If you don’t think you can achieve these goals on your own, reach out to a financial advisor who can help you understand what’s achievable and the steps to make it happen. There’s no shame in seeking financial guidance, it’s a smart and effective way of getting to retire sooner than you think. Or take a quick and free online consultation to see if you’re ready for retirement.

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