This post is featured in the Carnival of Personal Finance hosted at Stumble Forward
I’m not sure what your take on retirement is, but I am sure that you have already thought about what you would like to do when you do eventually get to that point in your life. Most people see it as an opportunity to be able to do whatever they like without needing to work, something to look forward to. Personally I do think it is something to look forward to, but I also see the concept as a little antiquated. Why someone would want to wait until they don’t need to work anymore before getting to do what they want is beyond me, I’d rather be doing it now!
The Retirement Conundrum
Unfortunately for those people that do not actively pursue wealth creation strategies, the wait for retirement is a long one. If you rely on a government prescribed superannuation in Australia, then you cannot access your retirement fund until the age of 65. This means a very long time working and thinking about what you will do once you finally get there.
On the other hand, there are those people that are so keen to stop working and start doing whatever they want, they try to short cut the process. These people are often extremely frugal and achieve “retirement” by lowering their cost of living to a point where their required income is minimal. If you can do that and genuinely enjoy your standard of living, then good for you. However, if you are that determined to stop working, I’d say you probably want to review your occupation and perhaps try doing something you enjoy instead.
I don’t think that there is anything wrong with working, so long as you have a reason for doing it. If it makes you happy then it’s really not that hard at all, especially when you get paid to do it.
Work can get in the way of your plans however, which is why people think they need to retire before they can go and do what they want. Personally I believe that the best thing to do is to find a work/life balance and that is what Money Cactus is about, but if you are determined to be done with work forever, then here is the worlds most simple retirement plan.
A Simple Retirement Plan
The easiest way to secure your retirement is to save until your savings produce more than you can spend.
That is it!
Pretty simple right? A little too simple you think? Ok, lets take a look at the process:
- You need to get your bills to a manageable and predictable level (budgets do help here). Generally this means paying off or significantly reducing the debt on your home. Alternatively, you could rent or down size and get to where you want to be a lot more quickly.
- You need to create income streams that are reliable. Generally some diversification is a good idea, but not too much. If you like shares, spread your risk in the market, but not to a point where your gains are hardly realised. If you like property, try buying in different states or try different types of housing to help ride any bumps along the way. If you want to try creating passive income on the Internet, then you will probably find that it isn’t too passive, but at least you can be mobile and working for yourself.
- Build in contingencies for holidays, emergencies and inflation. Yep unfortunately today’s dollars are not the same as in a few years time. This is why your income needs to exceed your need.
- Build up some marketable or useful skills that will get you work if you need it every now and then. Face it, a bit of extra cash is always good and you will probably want a holiday from your retirement at some point!
- Start with the end in mind. Set your goals and work backwards to right now. The amount of time this is going to take really depends on how focused you are and how much stuff you need, or want.
This might seem like a overly basic model, but really that is all there is to it. Here is a really simple graphic, to further demonstrate my point.
As you can see, your needs may grow over the years (and likely will with inflation), but so does your income as your money works for you. I think that the best contingency is to start with a nice buffer so you never have to worry about needing money. After that point, you shouldn’t ever catch up to your income, unless your needs (or wants) change significantly.
This model will get you to retirement as quickly as you like. It may not make you filthy rich, but depending on your what you want to achieve in life, that may not matter to you at all.
Personally I’m a fan of this model, it can even work as a staged approach whereby your growing income begins to replace days out of your working week one at a time – how do 3 or 4 day weekends sound as a starting point? Granted these things prolong the ultimate goal, but like I said, I’d rather be doing what I want right now than have to wait any longer than necessary!
Image by doug88888