Starting from Zero: Build a Great Retirement Plan

Will you retire on time? Can you? The short answer is “yes” but you have to start out by having the right expectations.

Winning the lottery, for instance, is not a plan. The vast majority lose, of course. And people who do come by money suddenly often live to regret it. They tend to shed that windfall quickly and end up worse off than before.

Building wealth, however, is a constant reminder of the effort and the grind behind denying yourself the easy pleasure of consumption. Like the busy ants and the lazy grasshopper of the ancient fable, the real reward is knowing that you built something solid that will last and protect you in the long run.

If you don’t have a plan, take heart. It’s better to start, whatever your age, and get moving toward a real goal. The reason is compounding: The more time you give your money to grow, the more money you will have.

Compounding is a simple enough idea. Money you save today earns money in the form of interest. That interest joins your original investment balance and also earns interest.

Like a snowball rolling downhill, the interest piles up on itself, growing ever larger with each passing year. It’s a mathematical inevitability, assuming you save enough and invest prudently.

Let’s put the power of math to work for you. Here are the three initial steps to setting up a great retirement plan:

1. Choose a number, not a date

This is the major first mistake most people make. They decide to pick a year to stop working (usually 65) rather than trying to understand how much money they need to abandon a steady income.

You might be able to retire at 55 if you save early and save enough. Conversely, you might need to work until 70 or later. Consider this: Every $1 million you control will generate about $40,000 in retirement income. Social Security earned by a couple with reasonable work histories is likely to generate about $40,000 as well.

If you epect to bring in a combined $80,000 and your living expenses are only $50,000, could you quit work earlier? Do you need something less than $1 million? It’s an interesting point to consider.

2. Be realistic about saving, spending

How can you get to $1 million in your working life? By saving money and investing it carefully. A market return of about 7% will double your savings every 10 years, while inflation will tend to cut its purchasing power in half over 20 years.

Saving $10,000 a year for 30 years will get you there. That’s just $5,000 a year each for a working couple, about a car payment each. Consider retirement to be the fancy car you’ll drive in your golden years and just set it aside.

3. Have a disaster plan

Bad things happen. Make sure you have enough insurance to transfer away the risks that could derail your plan. A major health emergency or a car accident that puts you out of work, for instance.

Likewise, consider buying long-term care coverage to avoid spending through your savings as you get older and need more assistance.