Retirement is a tough subject to think about when you’re young, but that’s the best time to do it. Some researchers estimate that you need to replace 80 percent of your income before you can retire. This might be good for many people, but you can also make your own personalized plan.
If you are spending most of your paychecks and saving 10 percent of your income every month, then the 80 percent income replacement ratio rule is probably good enough for you to retire when you’re 65. However, if you take charge of your retirement planning early on, you’ll open up opportunities for other retirement possibilities.
First of all, it is possible to save more than 10 percent of your salary. You don’t have to spend the rest of your income. If you don’t want to follow the conventional retirement path, then it’s a good idea to save more. Some people save 30 to 50 percent of their income. This is not impossible. By keeping your cost of living low, you can limit your expenses and supercharge your investments. If you save a large portion of your income, then it becomes possible to base your retirement target on your expenses instead of your income.
The next step is to come up with your own retirement plan. Here is an example:
Phase 1: Pay off debt.
Phase 2: Save and invest in retirement funds like a 401(k) and Roth IRA.
Phase 3: Invest in taxable accounts to grow your net worth.
Phase 4: Build your net worth until you hit a comfortable number. This is where keeping your cost of living low will come in handy. You can use that number to calculate your replacement income target.
Phase 5: Convert the taxable portfolio to income generating investments. This will enable you to have some income for semi-retirement.
Phase 6: Semi-retirement. Once you have a comfortable nest egg and some investment income, then you are free to pursue alternatives other than holding down a full-time job. For me, it’s being a stay at home dad and blogger. For you, it could be photography, art, rocking out as a DJ, cooking or whatever suits your fancy.
Phase 7: Full retirement.
In this plan we progress from paying off debt until full retirement. Your plan may be different from this. Everyone should sit down and figure out their phases of retirement. This gradual transition into retirement can help you to better enjoy the journey. There is no need to jump straight from working full time to retirement.
Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.