New Parents: Planning for Retirement

It’s easy to put your retirement on hold when it feels like every paycheck includes another unexpected expense along with a slap in the face. But it is important you do not stop planning for retirement.

What is my Retirement Goal?

To me retirement is equally about being financially secure for a peaceful state of mind AND for my kids to not worry about me for their peaceful state of mind. The last thing I want is to burden them in their 20s & 30s worrying about how I will pay for everyday expenses and the occasional trips and entertainment.

My goal is to retire from my corporate job by 50 years old. I want the financial freedom from 50 to spend time with my family, focus on my physical health, and minimize everything that may cause stress to my mental health (easier said than done). My ultimate goal (if I am so lucky to achieve) is to not care how much I spend on my trips and entertainment.

Where will you live?

Where you live is equally as important as how much you save. Depending on location you will either need more or less of your final retirement number.

I plan to spread the months across 3 places to make certain expenses more affordable (and to just not be bored). A home in a major city close to our kids (our main home where we will live most of our days), a home in a warm and quiet area (where we can spend our days outdoor and get fresh air), and lastly an apartment overseas where my wife and I grew up (close to family, mountains to hike, and where the cost of health care and food is simply much cheaper).

I do prefer condos today and possibly for retirement but that can change. If it does I will reassess my target and budget accordingly.

How much do I need to save?

Using a simple retirement calculator if I want $100,000 yearly in retirement till 85, need to save $1.9 million by 50 years old. That means, each year I need to save $78,000 (almost as much as I will be spending in retirement).

Another scenario using a different mindset and same calculator. If I build a strong passive income portfolio producing at least $5,000 profit monthly than I will only need to save a total of $750,000 in my retirement accounts (or target to save $22,000 each year).

My Personal Strategy

My target is to save between $20,000 – $80,000 a year towards retirement. I plan to attack my retirement planning in two fronts:

Passive Income Portfolio: main source of income and will be used for everyday expenses. Target is to build a portfolio that yields 60k a year through rental real estate, bonds, CDs, and (maybe) annuities.

Capital Gains Portfolio:  secondary source of income. My target is $1.9 million and I plan to max contributions in the following order:

401k: used for (worst case) every day expenses or (best case) when I need more than what I receive passively for travel, gifts, entertainment, and healthcare.

HSA: used for all medical expenses and drained till zero before tapping into other accounts.

Roth IRA: used for large one-time purchase (ie. a new car, new home, emergencies)

Traditional IRA: used exactly as we would our 401k. In fact, any time we switch firms I transfer my 401k plan into our traditional IRA account.

Brokerage Account: used for emergencies once all other accounts have been drained to zero. We do not have this account yet.

5 Steps when Planning for Retirement

  1. Visualize your Retirement

    Start by actually imaging and visualizing how you plan to spend your days. Do you want to travel the world? Do you want to work part time? Spend time with family? Live abroad? Where do you want to live? Thinking about how you will spend your retirement will not only open your eyes to how much you need to save but inspire you to continue planning for retirement.

  2. Understand How much you need?

    Now that you visualized your retirement understand what you need to make this a reality. Check how much you need to save and plan ahead where your money will come from. You can start by calculating how much you need by using a simple calculator.

  3. decide Where to put your money?

    After visualizing your retirement goal and understanding how to make that a reality you will know how much you need to save and decide where to save it. You should know where your retirement income will come from and plan accordingly.  Will you invest for capital gains using taxable brokerage accounts, 401k, or IRAs? Or do you prefer your passive cash flow using annuities, bonds, or rental real estate income? If a combination of both, start building your portfolio today and determine your waterfall approach to which accounts you will save in first, second, third and so forth.

  4. Automate your savings

    Finally, automate your savings. Start with any amount you are comfortable with and set an automatic recurring withdrawal on a weekly or monthly basis. Pick an amount you will not notice missing and only increase the amount after you really forgot about those withdrawals.

    In additional, know in advance when you will receive extra cash and plan to put those towards your retirement goals as well. Tax returns and year end bonuses are good examples if you are lucky enough to receive. My company pays bi-weekly so we budget towards 2 paychecks a month. However, twice a year we get a 3rd paycheck that month so we put them towards retirement.

  5. Revisit Planning for retirement

This last step in important. I think every 3-5 or so years you should revisit steps 1 through 4. Environment, health, job, goals, economy, savings, and even your mindset can all change who you are and how you view your future. It’s important you revisit your plan and make the necessary changes to ensure you are on track towards your target.

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