The financial planning process is all about “planning” for your retirement far in advance of your arrival there. You need to think of retirement as a destination.
Thinking about retirement in this mystical, far-off way is common. But it's also a mistake. I want to help you demystify retirement, and think about it more practically.
1. Decide what you want your retirement to look like and by when
This step is basically you daydreaming of a blissful time in the far off future. What will you be doing in this blissful future? Golfing? Volunteering? Traveling?
This is where you say to yourself, “How much money would I need to have every month (or year) at my disposal, to have this blissful future retirement scenario play out?
2. Figure out how much money it’s going to take to have that vision become a reality
So now you might be saying, “But wait, you said I should not be tapping the principal…so how do you take 4% per year, and also increase that 4% by 3% annually to keep up with inflation?”
3. Consider what kind of investment performance you can rely on to both supercharge your savings effort, and then fund your retirement days.
Well the “Multiply by 25,” working in tandem with the “4%” Rule makes a pretty big assumption, which is: you will need to regularly be making 7% compound annual growth on your “retirement nest egg principle.”