Sunday, January 13, 2013

Key Elements to Our Retirement Planning

We still have at least 30 years before we hit full retirement age, but this doesn’t mean that we aren’t planning for our golden years now. Sure, there are plenty of things that can happen between now and retirement, and which could affect our retirement situation, but this doesn’t mean we can’t plan and prepare in the meantime. Therefore, I’ve laid out a list of items that are key elements to our retirement preparations.

Understanding Income vs. Expenses
I’ve made a real effort to better understand both our income and expenses, as having a good grasp upon these elements can be critical to successfully planning for our retirement future. I’ve been tracking my expenses for over 15 years now, and more recently, I’ve made a further effort to get a handle on my wife’s side of discretionary spending as well.

When it comes to income, as a self-employed individual, I’m pretty much forced to track these numbers since I’m responsible for reporting taxes on this element of my finances. My wife’s income is easy to follow since it derives from a single employer at a fixed hourly rate.

Determining Annual Savings
By comparing income to expenses and noting the differential on a regular basis, I can determine whether we’re heading in the right direction when it comes to our retirement savings. With my tracking for both these areas in place, it become quite simple to subtract annual expenses from income and get a grasp upon whether we’re putting enough away each year to successfully fund our retirement.

Watching Asset Growth and Gauging Investment Returns
I also use an asset tracking sheet that I update monthly to watch asset growth (or decline) and gauge our investment returns over time. Seeing our overall progress toward retirement is important as it can not only tell me whether we’re on track or not, but I can see what our assets are returning. This information can be a critical gauge in deciding how we will use these assets in retirement, the kind of income they can provide, and whether their returns will be enough to provide amounts that will be able to sustain us in retirement.

Knowing Inflation and Our Inflation
I know what the government reports to us as our national inflation rate, but that doesn’t mean that this rate correlates exactly with our personal inflation rate. Since I’ve been gauging expenses for some time now, I can get a better feel for what our own family’s true rate of inflation is upon the products that we pay for and the things that we utilize regularly.

Over time, this rate runs at about 3 percent, but more recently it has been higher compared to where the government is quoting inflation at around 2 to 2.5 percent in 2012 due to things like tax hikes and health insurance premium increases.

Knowing this rate helps provide us with a more exact picture of what our future expenses will be when it comes to our personal situation as opposed to just using a national average that may incorporate or leave out critical elements of our regular spending.

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