Most of us like the idea of retiring comfortably. In other words, we want enough income and enough of a financial cushion that we don't have to worry about money once we stop working and start enjoying our golden years. Regardless of when you want to retire, it's important to be in a position that brings you stability while simultaneously covering your most important, fundamental expenses.
As an average person, with average income, it may seem like an impossible dream to retire wealthy. While you may never become a billionaire, there is a path forward for you to retire comfortably – even if you're struggling to make ends meet currently.
How do you do it?
The Big Picture
The big picture is to make sure you have substantial financial assets to give you financial stability by the time you retire. In the United States, we have the Social Security system to provide consistent, stable income to retirees based on their contributions during their working years; however, this income sometimes isn't enough to cover all necessary expenses for retirees, and there's no guarantee it's going to remain financially solvent indefinitely.
The safest path forward is to accumulate as much wealth as possible, so you can use it to form the groundwork of your retirement and/or supplement your Social Security income.
These assets typically include:
·Stocks. Stocks represent tiny slivers of ownership in publicly traded companies, entitling the holders not only to dividends (which are distributions of profit), but also any capital gains that increase the value of stocks proportionally. Stocks historically perform very well, but they can also be somewhat volatile, making them risky, yet functionally necessary additions to any investment portfolio.
·Real estate. It's also a good idea to get some exposure to the real estate market, as it's seen as safer and more consistent than stocks. Owning rental property gives you access to consistent monthly income as well as potential property value appreciation. The only real problem is the effort it takes to manage a rental property, but there are ways to mitigate this. One option is to work with a Fort Worth property management company (or a company in your target investment area). Property management companies handle basically everything on your behalf, in exchange for a small percentage of your gross revenue.
·Bonds. People often round out investment portfolios with bonds, which don't offer exceptional returns but do offer considerable stability and consistency. They're a safe bet to hedge risk and minimize potential losses.
Of course, you can also consider alternative investments to diversify your portfolio even further.
The Four Percent Rule
For decades, many investors and advisors have recommended following the “four percent rule” as a rule of thumb for retirement withdrawals. Put simply, this rule dictates that you should withdraw no more than four percent of your total holdings each year as annual income. If you have $1,000,000 in assets, that translates to $40,000 a year.
Knowing this rule and working backwards, you should be able to ballpark how much you should accumulate in savings by your target retirement date. For example, if you know you're going to need $60,000 a year for a comfortable retirement, you'll need to set the goal of accumulating $1,500,000 in assets by your retirement.
This may seem like a lot, but it's perfectly achievable for the average person, assuming you start early enough.
Accumulating Wealth
Throughout your working years, you'll want to accumulate as much wealth as possible. This starts with saving as much money as possible each month. You can do this by increasing your earnings, such as by seeking promotions, asking for raises, or even taking on side gigs. But it's even more effective to reduce your expenses.
·Debt. Interest payments on debt can crush your financial future, so prioritize paying down your debts as soon as possible.
·Housing. Consider moving to a smaller house in a cheaper area of the city, as housing is typically your largest expense, and a move could save you hundreds of dollars every month.
·Transportation. Transportation changes, like relying on public transportation or riding a bike, can also save you a lot of money.
·Food and beverages. Cook instead of eating out; if you eat out regularly, this move could save you hundreds of dollars a month – and help you maintain healthier habits.
·Entertainment and subscriptions. Most of us can afford to lose half of our entertainment subscriptions without even noticing. Cut the waste and find cheaper ways to entertain yourself to save even more money.
Once you start saving money, and investing it into a diverse portfolio, you'll start seeing significant gains over the long term. Thanks to the power of compound interest, even small investments, when made consistently, can add up to massive stockpiles of wealth.
Using a compound interest calculator, you can investigate this effect for yourself. Compound interest introduces an exponential growth curve, turning even modest savings into nest eggs capable of supporting a comfortable retirement after just 20 or 30 years.
What It Means to Retire “Comfortably”
The advice in this guide should be ample to start the average person on a financial journey that eventually leads to a comfortable, and potentially early retirement. However, it's also important to recognize that a “comfortable” retirement looks different to different people. There is no universal retirement advice because everyone has a different vision of the retirement life they'd like to live, everyone has different circumstances, and everyone has different goals and levels of risk tolerance. What's important is that you find a strategy to follow that works for you and your unique needs.
