Key takeaways
- Planning for retirement can be discouraging given how far away the goal typically is & how slow the initial progress can seem
- Creating intermediate milestones to retirement can encourage you stay on track for the retirement goal
- Having multiple years’ worth of expenses saved up can empower you significantly by opening up all kinds of interesting choices & options as well as increase peace of mind in environments where layoffs are happening
- Rob Berger has created a wonderful framework called the 7 levels of Financial Freedom to track progress towards retirement
- Note that your income has no bearing on when you can retire i.e. a millionaire & you can retire in the same amount of time
- Increasing savings rate from 10% to 50% can reduce time taken to have 10 yrs worth of savings from 34 years down to just 8 years
- Increasing your savings rate is like you are running faster towards the finish line and the finish line at the same time is being moved closer to you.
- Each time you reach an intermediate milestone to retirement make sure you celebrate
- If you’d like to calculate the time it would take you to reach each intermediate milestone to retirement, email me on mezjan@investmentcoach.co.in and I’ll send you my slightly modified version of Rob Berger’s sheet
Introduction
In my earlier article on simple steps to create an investment blueprint, I mentioned that tracking progress to your goal was an important yearly habit / practice to develop.
When you’re planning for a big & scary financial goal like retirement that takes decades to reach. it can be quite discouraging because progress towards the goal can seem very slow indeed for many years.
This is why a good approach when planning for retirement is to plan for intermediate milestones along the way.
Rob Berger suggests we pick milestones starting from having an investment corpus equal to 1 month’s savings to 25 years with intermediate milestones for an investment corpus equal to 1 year’s, 5 year’s & 10 year’s expenses. Of course, you could create your own customized set of milestones along similar lines.
What options or choices open up for you with 10 years’ worth of expenses saved up?
Before we get to the above question, ask yourself what options or choices open up for you if you have 1 years’ worth of expenses saved up? I literally suggest you stop reading this article for a couple of minutes & pause to ponder a couple of answers to that question. Perhaps you don’t have to spend sleepless nights worrying too much about layoffs you are hearing of in your company for example because you know you could easily land another job within a year.
Similarly ask yourself what options & choices open up for you if you have 3 or 5 years worth of expenses saved up. Just as an example, perhaps you could take a break to spend more time with your kids to help them through a crucial phase of their education.
Finally, ask yourself what options open up for you with 10 years’ worth of expenses saved up? Maybe you could pursue that dream post graduate degree you’ve always wanted to. Or perhaps you could take that dream round the world trip or you could give that business you’ve always wanted to start a try.
A sheet to calculate time to intermediate milestones to retirement
If you want to know how long it will likely take you to get to each of the intermediate milestones above, I’ve created a slightly edited version of Rob Berger’s 7 levels of Financial Freedom sheet. Here are a few screenshots based on some sample assumed values.
Time to milestones with 10% savings rate
Time to milestones with 30% savings rate
Time to milestones with 50% savings rate
Notice how the time to get to 10 years’ expenses saved comes down from 34 years down to just 8 years when one increases one’s savings rat
Double acceleration impact via increasing savings rate
Surprise Surprise ! Your income has no bearing on how soon you can retire
If you play around with the numbers on the sheet, you will notice one very interesting fact if you look carefully. Your income makes no difference on the number of years it will take for you to reach any of the milestones to retirement. The only thing in your control that really make a difference in the time it takes to reach a goal is your savings rate.
This effectively means that if a millionaire and you have the same savings rate, it will take both of you the same amount of time to reach retirement ! Alternately, if you have a higher savings rate than the millionaire, you can retire before the millionaire ! 😊
This is because as you save more, this indirectly means that you’re learning to live off less per month. (You wouldn’t have been able to save that much more if you hadn’t learnt to live on that much less). And as you learn to live off less money per month you need less to retire.
So in summary, there are 2 things happening that significantly accelerate / reduce the time it takes to reach a retirement milestone.
- Since you save more, you have more money invested & growing
- Your target goal / amount reduces because retirement goals are correlated to your expenses
It’s like you are running faster towards the finish line and the finish line at the same time is being moved closer to you.
Celebrate milestone achievement
Each time you’ve been disciplined enough & reached a retirement milestone I think it’s a good idea to celebrate in some way or another. Of course, you need to make sure you don’t spend so much on the celebration that it derails your investment plan 😊
Celebrating small wins with each milestone by going out to a restaurant, buying yourself something small or maybe even taking a short vacation are just some random ideas to start with.
Now calculate the time you need to get to each retirement milestone
If you’d like to figure out timelines for you to reach any similar milestones to retirement, you can get the slightly edited version of Rob Berger’s sheet by emailing me on mezjan@investmentcoach.co.in You could play around with it based on numbers specific to your finances. A few things to note though
- While entering a figure for your returns, ensure it is a “post inflation” returns figure e.g. if you’re expecting total post tax returns of say 9% on your portfolio, and if we assume inflation to be 6%, then the returns figure you would enter on the sheet is 3% (9% minus 6%)
The savings rate is the percentage of your monthly post tax income that you save & can be invested i.e. percentage of income not spent every month
Credits: This article is based on Rob Berger’s 7 levels of Financial Freedom. Hence full credits due to him for this article. Rob Berger was formerly Deputy Editor at Forbes Advisor & author of a book on investing called Retire before mom & dad.
Disclaimer: I am not a financial advisor. My articles are meant for people who are not savvy or well versed with personal finance and investing and find it difficult to grasp all the jargon typically used when discussing such topics. I hope to be able to demystify investing and make it as simple as possible for everyone. I’ve invested in Mutual funds for approx. 24 years. I’ve also been a diligent student of the subject of investing over the past 24 years learning & applying the writings of luminaries in the field. In these articles I’m merely sharing my experience & learning from that investing journey and the books of luminaries in the field in the hope that it might help others in some way. I am in no way directly or indirectly claiming to be a hot shot investor who has generated exceptional or even above average returns during my investment journey. However, I am quite confident that even if all you do is learn from my mistakes, educate yourself on sound investment principles & develop good financial habits you will benefit greatly. Please ensure that you consult a financial advisor before taking any decisions or actions concerning your personal finances or investments. I shall not be liable.