It starts with a dream, the dream of a secure retirement. Yet like many people you may wonder how you can achieve that dream when so many other financial issues have priority. Besides trying to pay for daily living expenses, you may need to buy a car, pay off debts, save for your children's education, take a vacation, or buy a home. You may have aging parents to support. You may be going through a major event in your life such as starting a new job, getting married or divorced, raising children, or experiencing a death in the family.
How do you manage all these financial challenges and at the same time try to "buy" a secure retirement? How do you turn your dreams into reality?
- Start by writing down each of your goals on a 3"x 5" card so you can organize them easily. You may want to have family members come up with ideas. Don't leave something out at this stage because you don't think you can afford it. This is your "wish list."
- Sort the cards into two stacks: goals you want to accomplish within the next 5 years or less, and goals that will take longer than 5 years. It's important to separate them because, as you'll see later, you save for short-term and long-term goals differently.
- Sort the cards within each stack in order of priority. Make retirement a priority! This needs to be among your goals regardless of your age. Some goals you may be able to borrow for, such as college, but you can't borrow for retirement.
- Write on each card what you need to do to accomplish that goal: When do you want to accomplish it, what will it cost (we'll tell you more about that later), what money have you set aside already, and how much more money will you need to save each month to reach the goal.
- Look again at the order of priority. How hard are you willing to work and save to achieve a particular goal? Would you work extra hours, for example? How realistic is a goal when compared with other goals? Reorganize their priority if necessary. Put those that are unrealistic back into your wish list. Maybe later you can turn them into reality too.
We'll come back to these goals when we put together a spending plan.
Beginning your Savings Fitness Plan
Now let's look at your current financial resources. This is important because, as you will learn later, your financial resources affect not only your ability to reach your goals, but your ability to protect those goals from potential financial crises. These are also the resources you will draw on to meet various life events.
Calculate your net worth.
This isn't as difficult as it might sound. Your net worth is simply the total value of what you own (assets) minus what you owe (liabilities). It's a snapshot of your financial health.
First, add up the approximate value of all your assets. This includes personal possessions, vehicles, home, checking and savings accounts, and the cash value (not the death benefits) of any life insurance policies you may have. Include the current value of investments, such as stocks, real estate, certificates of deposit, retirement accounts, IRAs, and the current value of any pensions you have.
Now add up your liabilities: the remaining mortgage on your home, credit card debt, auto loans, student loans, income taxes due, taxes due on the profits of your investments, if you cashed them in, and any other outstanding bills.
Subtract your liabilities from your assets. Do you have more assets than liabilities? Or the other way around?
Your aim is to create a positive net worth, and you want it to grow each year. Your net worth is part of what you will draw on to pay for financial goals and your retirement. A strong net worth also will help you through financial crises.
Review your net worth annually.
Recalculate your net worth once a year. It's a way to monitor your financial health.
Identify other financial resources.
You may have other financial resources that aren't included in your net worth" but that can help you through tough times. These include the "death benefits of your life insurance policies, Social Security survivors benefits, health care coverage, disability," insurance, liability insurance, and "auto and home insurance. Although you may have to pay for some of "these resources, they offer financial protection in case of illness, accidents, or other catastrophes.
Planning for Retirement While You Are Still Young
Retirement probably seems vague and far off at this stage of your life. Besides, you have other things to buy right now. Yet there are some crucial reasons to start preparing now for retirement.
You'll probably have to pay for more of your own retirement than earlier generations. The sooner you get started, the better.
You have one huge ally - time. Let's say that you put $1,000 at the beginning of each year into an IRA from age 20 through age 30 (11 years) and then never put in another dime. The account earns 7 percent annually. When you retire at age 65 you'll have $168,514 in the account. A friend doesn't start until age 30, but saves the same amount annually for 35 years straight. Despite putting in three times as much money, your friend's account grows to only $147,913.
You can start small and grow. Even setting aside a small portion of your paycheck each month will pay off in big dollars later.
You can afford to invest more aggressively. You have years to overcome the inevitable ups and downs of the market.
Developing the habit of saving for retirement is easier when you are young.
Part 2 coming next week: Envision Your Retirement
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