Step 11: Retire in Style

And now, ladies and gentlemen, the inflation-adjusted million-Euro question: Can you afford the retirement of your dreams?

While you ponder that, it’s likely that a few other questions will come to mind:

  • How much money will I need when I retire?
  • What kind of lifestyle will I be able to afford?
  • What will the pension system provide for me?
  • Will I need to invest outside of the pension system?
  • Will I need to adjust my plan?
  • Does anyone have a brown paper bag? I’m feeling lightheaded.

Relax. We’re going to tell you almost everything you need to know about retirement, right now, in less than five minutes. Ready? Here goes.

1. Contribute to the right accounts.
If you’ve read this 13-Step investing primer in order and took the 15 to 30 minutes to complete the action items in Step 4, then this part is done.

Just to review: If you have a contribution-based pension scheme at work, your boss matches your contributions, and your company has good investment options, then save at least enough to take full advantage of the match benefit. Doing this can also have tax advantages.

Depending on your personal situation, private pension schemes like Germany’s Riester-pension can be advantageous. You need to pay careful attention to what you’re investing in, though, as many private pension plans have high fees and low potential returns. Above all, private pension schemes should be just a piece of your investment puzzle.

Non-pension investment accounts are important as well, for the reason that they give you the maximum investment flexibility. It’s through these accounts that you can invest in individual stocks as well as stock funds and exchange-traded funds (ETFs) with rock-bottom fees.

2. Choose the right investments.
A lot of people get tripped up on this one. But don’t let it stop you from putting a plan into motion.

The “right” investments for you will change over time as you near the point where you stop investing new money and start spending what you’ve saved.

But it’s important to remember that retirement is not your investing finish line. You probably still have many years of productive life ahead of you after you retire. While the income and safety of government bonds, life insurance, and other fixed-income instruments may seem appealing, a good rule of thumb is that approximately half of your portfolio should still be invested in stocks to ensure you can maintain purchasing power and avoid the devastating effects of inflation.

3. Save enough.
With life expectancy increasing by leaps and bounds, if you give retirement notice at the age of 65, you may want to think in terms of a 30-year retirement. That’s a lot of electricity bills and Mediterranean cruises.

So, how much do you need to save? As much as you can.

A more specific answer can be found in the following table, which assumes you have not yet started to save for retirement:

Your Age Percentage of Income to Save
20s 10%-15%
30s 15%-20%
40s 20%-30%
50s 30%-40%
60s 40%-50%
70s 50%-60%
80s Time to travel the world!

4. Run your numbers to see if you’re on track (and then run them again).
Are you saving enough to retire when you want? Are you withdrawing too much in retirement? There’s one way to find out: Run your plan through a good retirement-savings tool.

Check out some of the free financial calculators on the Internet. Since each will give you a different answer, try at least three. You might find some good tools on your broker’s website or as part of your personal-finance software.

If you start pricing it out now, you won’t experience sticker shock when your ticker isn’t quite as strong. The good news is that many expenses decline or disappear completely in retirement.

5. Stop paying for other people’s retirements.
Unless the person managing the money in your mutual funds or selling you life insurance is bound to you by matrimony or blood relation, you probably don’t intend to contribute to their bank accounts.

Too many investors overpay for underperforming investments, surrendering a hefty chunk of their investment to management fees or insurance expenses for vehicles that won’t help them achieve their financial goals.

Your generosity is not properly appreciated. By choosing lower-cost but better-performing funds, you can add significantly to your portfolio returns. Compounded over many years, we’re talking big money.

So keep a sharp eye on fees.

Live it up today, too!
We’d be remiss if we did not give proper due to a very important period in your life: The here and now.

In the words of John Lennon: Life is what happens when you’re busy making other plans. At The Motley Fool, we firmly believe that saving for tomorrow is not about sacrificing today — it simply requires striking the right life-money balance. So we’ll end this lesson with your moment of Foolish Zen: Living rich and getting rich are not mutually exclusive.

Action: Find out if you’re saving enough for retirement. Well, are you? That’s what calculators are for! Find a good retirement calculator online and determine how much you need to retire in the style you desire. With many retirement calculators, you can even run through “what if” scenarios that allow you to vary things like life expectancy, tax rates, and investment rates of return.