Using Tax-Deferred Investments to Promote Long-Term Wealth Building
So, what’s an investor to do?
FinMason (finmason.com), self-proclaimed numbers crunchers and producers of an independent investment analysis tool, may have the answer.
According to FinMason’s “Building Bricks,” there are three basic steps you can take to sketch out a general retirement plan:
*First, calculate how much money you need to retire. To get a rough idea, take the amount of income you would like at retirement, subtract the amount you expect from social security and divide the result by 4 percent. For example, if your total annual income required in retirement is ,000, subtract other sources of income (Social Security might be about ,000), which leaves you with ,000 that your savings needs to produce each year. Divide by .04 and you get a whopping 0,000. This is the amount you need to save in order to retire the way you would like.
Next, think about the minimum amount of income you would need to retire at all, and do the same calculation. This is your minimum retirement goal. The idea is to create a retirement plan where you have a good chance of retiring the way you want if markets go as planned, but still stays above your minimum retirement goal if markets behave poorly.
*Next, determine how much you can set aside each month. The amount you save each month is usually the biggest driver of your ability to ultimately retire. In this way, small sacrifices now will most likely bring big dividends down the road. Not making sacrifices now will likely lead to worse outcomes.
*Lastly, determine your investment risk tolerance. This is another important consideration since it typically drives the investments you choose. One straightforward way to determine your risk tolerance is to use an online retirement calculator that allows you to choose different risk levels and see how that effects your retirement. You want to choose a risk level that gets you as close to your goal as possible without dipping below your minimum retirement amount. It is also helpful if the tool shows you how much you could lose in a stock market crash so you can gauge what a really bad day would feel like.
For more information, visit www.finmason.com.