Whether you call it retirement or financial freedom, how you prepare for it is the same: save early and often. Just how much you need depends largely on your future lifestyle and how much it’ll cost.
One way to get a rough idea of how much you’d need is to paint a picture of your retirement. With this information as a guideline, you can then use a few tools to calculate how much you’d need to save and invest regularly to reach your goal.
Here are a few questions to help you get started:
The cost of living depends on what country, city, and neighbourhood you live in. Having a sense of where you plan to live will help you estimate the day-to-day expenses you’ll have when you retire.
On top of where you want to live, another factor that strongly influences how much you need to save for retirement is the lifestyle you want. Retirement looks different for many people.
While someone might want to live quietly, another person might want to travel the world 6 months a year. And depending on how extravagantly or simply you want to live, you’ll need to account for the associated expenses and include them in your retirement plan.
Just because you’re retired doesn’t mean you won’t have more dreams, goals, and ideas. That’s why some people prefer the term “financial freedom” rather than “retirement”.
Maybe you want to turn a hobby into a business or learn how to golf. These things cost money, so you should account for them when you’re estimating your retirement expenses. Even if you don’t have a specific project in mind, still account for “play money” as you decide your savings target for retirement.
This is one way you can leave a legacy for your loved ones. If you plan to pass on some assets to your family or contribute to a cause you care about, include this amount in your retirement savings target.
In retirement, you won’t need to contribute to your retirement portfolios. And, you’ll also probably have paid off your mortgages and other loans. If you’re paying taxes, they’ll also likely be lower since you’re not earning an active income. You can subtract these expenses, and perhaps others, as you estimate your monthly retirement expenses.
Once you have a sense of how much your dream retirement lifestyle will cost you, you’ll have to consider a few more factors:
It’s definitely not pleasant to think about the health problems that come with age. Still, it’s better to be prepared for how much it might cost.
Setting aside funds for out-of-pocket medical expenses saves you from having to dip into funds meant for your other retirement expenses. Health insurance premiums increase with age, so include that in your expenses, too.
Once you estimate your monthly retirement expenses, you’ll need to adjust that estimate for inflation. Inflation is generally about 2% per annum. In other words, a dollar loses 2 cents per year in its purchasing power.
So if you base your retirement savings target on today’s value of money, you’re going to find yourself with not nearly as much spending power as you want. There are plenty of inflation calculators online, and if you use StashAway’s goal-based investing portfolios, we calculate inflation automatically for you.
The next question is, how many retirement years do you need to pay for? Asking yourself how long you want your retirement savings to last sounds morbid, as well as imprecise - after all, none of us knows when we’re going to die. But, the reason you’re asking is so that you know how early you can retire based on your savings plan and expected lifestyle.
If you want to retire at 50, you can estimate how long you’ll live by referencing your country’s life expectancy while considering other factors, like your health. This indicates how many years your retirement savings should last you - just make sure to add a buffer to cover any uncertainties. Knowing how many years you’d need your money to last can help you decide whether to retire sooner with maybe less in savings or later with more in savings.
To have the retirement you want, you need to set a specific goal. There are plenty of tools out there to calculate your expenses and inflation for financial freedom retirement, such as StashAway’s own goal setting function.
Once you have your target amount, you’ll need a savings or investment plan to get there. That’s where our Retirement Portfolio in our Goal-based Investing comes in. We’ll calculate your retirement savings target for you, account for inflation, and tell you how much you need to save and invest each month to reach your target.
If your target amount and savings plan seems daunting, you may need to adjust the lifestyle you’re aiming for. Of course, you’re never locked into the lifestyle you envision now; you may decide to live elsewhere or do different activities. And that’s OK.
Planning and saving for your retirement now is really about buying the freedom of choice. You can choose what to do with your money and your time later on.
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StashAway Management (DIFC) Limited (registration number CL 3982) is established in the DIFC pursuant to the DIFC Companies Law. Its registered address is Unit 1301, Level 13, Emirates Financial Towers, P.O. Box 507051, Dubai International Financial Centre, Dubai, United Arab Emirates.