What is your ideal retirement?
"Begin with the end in mind." (Stephen R. Covey)
Hi, I hope you are well. Before we explore what your ideal retirement is, let us define first what I mean by “retirement”.
What is retirement?
My view of retirement is as the period where we draw down the wealth that we have accumulated - whether through years of working or/and by way of inheritance. We certainly can choose to work during retirement, but possibly no longer for the sole purpose of wealth accumulation.
In this sense, retirement is a state of being where the retiree can choose a different set of activities to do (or to avoid) compared to non-retirement. It is possible to flip from non-retirement to retirement and back to non-retirement. For example if personal financial condition worsen during retirement that necessitates us to return to non-retirement state. (Hopefully you and I get to enter retirement and not have to flip back.)
Planning for retirement is not the exclusive privilege of the wealthy. How we plan for it will differ according to our circumstances, but everybody or every family can, and arguably ought to, have a retirement plan of some sort.
By failing to plan, you are preparing to fail. (Benjamin Franklin)
My ideal scenario
Let me give an example. I plan to keep “working” during retirement. Not philanthropic work like you read about the rich and famous (which I am not), but doing proper work - something that is usually done by professionals, except I do not intend to do it full time.
Do I expect to earn an income by doing it? The emotional and mental health due to working is probably a good enough reward, but I will not decline if it can generate some income.
Of course I also hope to do some traveling, take photographs, listen to music, watch shows, learn new skills, and on and on. (I guess these are the hobbies part, as opposed to working.) I am not interested in luxury lifestyle while doing any of these as long as they are comfortable and safe and enjoyable.
I do not know if hobbies will be the major portion of the time or equal split with working or what. I will cross the bridge when I get to it, depending on the scenario that will present itself. Most likely the ratio will change over time.
Why is this ideal for me?
My ideal retirement idea evolved without a set process, so I was not sure where it came from until I write this.
I did not grow up with excess. My parents were modest.
I am accustomed to working since I was young: I helped my dad at the store since I was small whenever I was on school holidays.
Throughout my career, I always wanted to satisfy my intellectual curiosity for learning in every job and every job change. “Working” is my avenue to keep learning when I “retire”.
I believe working helps keep my mind sharp and a good avenue to develop and maintain social relationships.
These are my reasons. Yours will be uniquely yours.
What is your ideal retirement?
Surely you have your own unique ideas for the ideal retirement. Can you picture your ideal retirement clearly in your mind?
And WHY? This is an important part. Take time to understand WHY it is ideal for you.
If we are not specific, it is difficult to plan for it. So let us type out (or write down, if you prefer pen and paper) our ideal retirement in as much detail as possible. We need to start somewhere - treat this like a brainstorming exercise. Just type out (or write down) whatever comes to mind the things that we would ideally have, or do, during retirement.
To keep in mind: Ideal, but not exorbitant. Realistically achievable even if it is a stretch, but not unobtainable fantasy.
Then organise the items following whatever structure we are most familiar with in the day-to-day life. Do not rush; take our sweet time. (I myself prefer to do this in a leisurely atmosphere.)
If you are a visual person, you may want to include pictures to better clarify your thoughts. Almost like a mood board with descriptions. If you prefer paper, then you can cut and paste clippings from magazines or print the pictures out. Alternatively, you can use a mood board app such as Milanote or Pinterest.
I myself have yet to make a mood board and this sounds like fun, so maybe I will try it when the mood suits. (Pun intended. 😃)
Oh and do not forget to type out (or write down) WHY that is the ideal retirement for you.
It is a living document
I believe data-driven retirement planning is a process, not a one-time activity, and our plan is a living document. As and when we remember something, we add, subtract, re-organise, or clarify the items and so the document will get many revisions.
It will be harder to keep it tidy if you use pen and paper and have to revise often. But I get it. Sometimes I can only get the creative juice going if I use my fountain pen to brainstorm on my notebook. So use pen and paper, if you must, and then transfer it to an app later on.
Can you afford it?
Documenting the ideal retirement scenario is the first step. Next, we want to know how much that will cost. Drafting a realistic cost estimate is foundational to a data-driven retirement plan.
Some free “retirement calculator” that we can find on the internet assume to budget X% of our pre-retirement income to calculate how much we need. It is a good starting point for some people, but if we agree everyone is unique, then there is a good chance that X% is not representative of you and me.
We want to go beyond just assuming an amount to actually estimate the amount based on what we have described in our scenario above.
Estimating cost at present time
For each item or activity listed in our ideal scenario, we need to estimate the cost as if we are acquiring it or doing it now. Yes, for each and every one of the items.
This exercise is not so much fun as documenting the ideal scenario, but we can only get as much value of the planning as the effort we put in. There is no way around this to develop a data-driven retirement plan.
At the same time, keep in mind, we only need rough cost estimate. No need to overdo this exercise.
And let us not forget to check against our current expenses. We may have not bothered with them when we thought of the ideal retirement scenarios, but many, if not most, will still be items that we will spend money on. For example, electricity cost, mobile phone plan, streaming TV, etc.
We want to be as exhaustive as we can.
For cost estimating, we should do this in an app (e.g. spreadsheet like Apple Numbers, Microsoft Excel, Gnumeric, LibreOffice Calc, etc). Doing this on paper will be torture.
When we have all the costs estimated, we add them all up in the spreadsheet to get our cost estimate at present time.
Estimating cost at retirement time
Depending on how far out our retirement is, inflation can have a big impact. So we take the cost estimate at present time and then add inflation year-on-year until the target year when we hope to start the retirement.
Okay, but how do we know what the inflation rate will be in the coming years? Not possible. As 2021-2022 has shown, inflation rate can swing unexpectedly - even catching the experts off guard. What we can do is to look at recent historical data and use it to guide us to decide what to assume as the inflation rate. When we know better, we update this inflation rate.
And there are so many unknowns between now and the future, so if we want, we may add Y% on top as buffer. And as you might have guessed, there is no rule for what Y% should be. This depends on our comfort zone.
What we need to remember is that this is a living document; it is meant to be adjusted as and when we have better data or when we want to test an assumption. As a start, just pick a number for Y% and we will revise it later.
By adding the buffer to the year-on-year inflation to the cost estimate at present time, we get the cost estimate at retirement year one. Of course as a start you can set the buffer at 0% and revisit it later on. Inflation rate differs from country to country, but unlikely to be 0%.
Estimate for year one = estimate at present + year-on-year inflation + buffer
And thereafter, similar concept applies to calculate retirement year two and onward.
Start of a journey
Let us recap. By documenting our ideal retirement scenario:
We would have described in detail what our ideal retirement scenario would look like (maybe visually also on a mood board).
We would have noted down WHY it is our ideal retirement.
We would have estimated the cost at present time.
And we would have estimated the cost at retirement.
In the next newsletter(s), we will explore if the ideal scenario is within reach and how to adapt it.
Have a great day.
Disclaimer: Anything I share is not intended as financial advice; I am merely sharing personal opinions and experiences. The information is of general nature and you should only use it as a place to start your own research and you certainly should do your own due diligence. You ought to seek professional financial advice before making any decisions.
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