“More than anything else, what differentiates people who live up to their potential from those who don’t is a willingness to look at themselves and others objectively.” Ray Dalio
When it comes to money and, particularly when it comes to retirement, people can be very vague about what it is they want; “I just want to be comfortable”, “I want to travel the world”, “I want to relax in my garden and enjoy my grandkids”. If retirement is a long way away the concept of no longer having to get up and go to work and having no demands on our time, outside of the demands we make ourselves, can be an especially tough one to wrap our minds around. For those approaching it, retirement can be an exciting or a terrifying prospect. Exciting if you’ve worked a plan that has unfolded pretty much as you intended and retirement is going to be comfortable. Terrifying if you’re realizing that everything you’ve avoided thinking about for the past 30 years is about to catch up with you.
The challenge with retirement planning is that it is a long term process. The magic of compound interest means that your money will grow but the more time it has to do so the more dramatic that growth will be. For too many people, the fact that retirement is as distant as Timbuktu means that they don’t give it a second thought. 27% of Canadians aged 18-34 have nothing saved for retirement (BMO, July 2012) and too many people are committing their hard-earned dollars to maintaining their lifestyle and keeping up with mounting consumer debt rather than building wealth.
The good news though is that it’s never too late and there is always something that can be done to improve your situation. The key question is: Are you willing to take a look at where you are, define where you want to go and commit to a plan that will get you there?
Where do you stand?
If you have a Financial Advisor you trust they should be able to sit down with you and do a full financial review. If you don’t have an Advisor (or you’d rather do it alone) then Moneysense.ca has a great financial plan kit available online for free. Simply fill in the worksheets and it will give you a clear picture of your net worth, your investments and your current financial situation as well as the chance to define your retirement goals and current financial priorities.
Where do you want to go?
Every client I’ve met so far has had an entirely different view of retirement. For some it involves selling their home and traveling the world, for some it involves buying a cottage and enjoying a life near the water. Others intend to keep their home and stay local; enjoying their garden and their grandchildren. What does retirement look like for you? Where will your retirement income come from? How long do you plan to keep working? The age you plan to stop working and the lifestyle you desire in retirement directly influence your retirement goals; there is a world of difference in planning to retire at 55 versus 65. The important word to consider when thinking about retirement age is choice; at what age do you want to be able to choose to stop working? It doesn’t mean that if you pick 55 you have to retire at 55 it just means that you plan so that you have the ability not to work past 55 if you choose to. Take some time to think about what retirement means to you and how much it would cost you in today’s dollars to live that lifestyle. The cost to live the life you want is what will drive your retirement savings plan. Visualizing that life is what will keep you motivated and on track.
Commit to a plan:You can use an investment calculator (such as those available online at getsmarteraboutmoney.ca) to project what your current savings will look like at retirement. Factor in any passive income streams (eg: real estate or business income) then compare where you’re heading for with where you want to be. If you’re on track keep going. If there’s a shortfall, play with the numbers until you figure out how much more you need to commit each month (or how many more years you need to work) in order to reach your goal. Then take a long hard look at your situation. Is making that commitment do-able? If it is then do you want to do it? You have to feel good about taking action or you won’t stick to your plan! If it’s not do-able, then can you modify your goals? Can you cut back on your expenses or increase your income in order to meet your goals? Wherever you are, wherever you want to go, if you’re serious about achieving your goal there’s a way to make it happen – nothing inspires creativity like desire!
Life is unpredictable; the path we chart for ourselves may not be the path we end up traveling. A solid financial plan takes this unpredictability into account and is always evolving. Making a point of reviewing your situation at least every 12 months, or more often if a significant life event occurs, allows you to ensure that you’re on track and gives you the chance to tweak your plan as necessary.
Taking a financial snapshot gives you a glimpse of your current “big picture”. It helps clarify where you’re going and re-energizes you. It shows you where you’re doing well and identifies areas where you have challenge. Knowing where you stand puts you in control of your path and allows you freedom of choice. It’s never too late to make change but the more time you have on your side the less dramatic that change needs to be. Taking a regular snapshot also allows you to celebrate what you’ve accomplished and to feel good about the financial decisions that you’ve made. The confidence that comes from this will be the motivation you draw on when times are tough or you get discouraged. Too many of us are intimidated by finances and our own financial situation. Taking a long, hard look in the mirror may not be the easiest step to take but it’s one that can have a significant impact on building a strong financial future.
Over the next few weeks I’ll be looking at various ways you can use your snapshot as a foundation to set SMART financial goals and identify any limiting beliefs and obstacles that have the potential to hold you back from reaching them. When it comes to retiring happy, awareness is a great place to start.