If you have been self-employed most of your adult life you may not have planned, or funded, a retirement account. And, if you are 50 years old and do not have rich relatives or a hefty inheritance coming your way, you are in trouble. That’s ok, you are a survivor, there is no need to panic – but there is every need to create a clear plan of action and then execute it. Here is your action plan:
Step One: You really do not want to count on social security but you may have to, so the first step is to visit their website and find out how much you are entitled to.
Step Two: Determine your monthly needs during your retirement years. If you do not already have a personal budget, use this free retirement calculator.
Step Three: Now take your monthly needs and multiply them by twelve to get your annual needs (if you use the free retirement calculator this calculation will automatically be completed for you). Now you know the annual income you will need for a comfortable retirement.
Step Four: Determine when you want to retire, when you no longer want to “have” to work. How many years between the age you want to retire and your current age? That is how long you have to create your retirement account.
Step Five: Now you must pick a reasonable, but more importantly safe, rate of return for your retirement account. You can get this from your financial advisor or read Tony Robbins book on Money or use 5% which is what I suggest you do use. The last thing you want is to run out of money at 85 with 10 good years of living left in you. Now, divide the rate of return you just picked into the annual amount you determined in step three (if you use the free retirement calculator this calculation will automatically be completed for you). Now you have the amount you need to have in your retirement account (see example below).
Step Six: First, deduct any savings you currently have from the total you determined you needed in step 5 (you are really lucky if you have some current savings because it makes a big difference). Then, using the same annual rate of return you determined in step five and the number of years until you retire that you determined in step four, you can calculate the annual contributions you must deposit into your retirement account. If you use the free retirement calculator this calculation will automatically be completed for you, otherwise you will need to use a calculator that can calculate payments and annuities.
- Step one equals $2,000 per month at age 65 (I personally would not count on this income).
- Step two equals $6,000 per month ($4,000 per month if you count social security income from step one).
- Step three equals $72,000 per year ($48,000 per year if you count social security income).
- Step four equals $1,440,000 ($960,000 if you count social security income) when you use a safe return of 5% per annum.
- Step five equals 20 years if you want to retire at age 70 and are currently age 50. This means you have 20 years to save up $1,440,000 ($960,000 if you count social security income) in your retirement account. I bet you are wishing you would have listened to all the smart people when you were 20 right about now.
- Step six equals $29,000 per year if you have $0 savings and count your social security income.
Bottom line – start planning.
Next week I will show you how to make the extra money you will need.