When you are creating a retirement plan, the longer you can let your investments grow, the more options you have. This is because delaying your retirement gives compound interest more time to work its magic.

By playing with various retirement calculators, you can see how postponing the happy day can ratchet up your eventual pension.

Planning to retire later is very handy if you’re saving all the money you can and yet you’re still falling short of your target.

The question you really need to ask then is not “when can I retire?” but rather “at what age should I retire?”

Don’t regret not spending more time at the office

I’d love to retire early (tomorrow would be nice) but I’m a late starter when it comes to saving for retirement, so to establish a realistic finishing post, I initially plumped for retirement at 65.

Triangulating your retirement age, target income, and savings rate on a retirement calculator gives you an initial hand to play. You can then stick or twist from there:

• If you want to retire earlier, how much more do you need to save?

• Alternatively, how much bigger could your income be in retirement if you stay on the hamster wheel for longer?

Few people need to hear reasons to retire early, but to avoid a long, impoverished post-work existence, make sure you consider both sides of the equation.

Who wants to live forever?

Finally, remember that your time horizon isn’t entirely within your gift.

You might want to work for longer, but catch a corporate bullet and find it impossible to get another position at your previous level. You may get ill or become a full-time carer.

The list of things that can go wrong is as long as your imagination.

Equally, many of us don’t appreciate just how long we might live for, which can also be a bleak outcome if you don’t have sufficient money in your very old age to keep you in Zimmerframes and bribes for the great-grandchildren.

Playing with a longevity prediction tool could surprise you with forecasts of your future as a nonagenarian.

‘What if’ scenarios are hard to compute, so you need to leave room for error, as with the other key elements of creating a retirement plan.

How on Earth can you fathom how much income you will need when you retire? A good first step when retirement planning is to know how much you need to live on now.

For a realistic answer, you can use a budget-planning tool like Money Saving Expert’s Budget Brain to capture your current spending.

I like this tool because it’s like holding your finances up to the Snow Queen’s mirror. It will give you the true picture of your outgoings – warts and all – by speaking plainly about areas that might otherwise be overlooked, such as dental expenses or beauty therapies. (I spend a lot on virgin’s blood, myself).

Will I really need so much income when I retire?

It’s commonly held that we spend less in retirement than in the buccaneering days of youth, so you can probably strip out:

• Mortgage payments (assuming you have paid it off by retirement age)

• Work related expenses

• Child related expenses

But retirement isn’t all about sitting atop a hoard of your treasure, saving pennies with coupons / cruising the Caribbean, and writing letters to Radio 4.

For instance, you might consider upping your allowance for:

• Travel costs

• Health

• Heating

• Werther’s Originals

Once you’ve done all that, you should have a reasonable base figure for the annual income you’ll need to hit on the retirement calculator.

A few wrinkles

If you’re having trouble picturing your retirement, try this gimmicky but fun retirement income calculator that can help you visualise a life of permanent leisure luxury.

Meanwhile, this retirement calculator lets you pick your desired monthly income, then crank the handle to see how fortune plays out.

Remember that the higher your target income:

• The longer you will need to save,

• Or the more you will need to save,

• Or the higher your growth rate will need to be (which implies a riskier asset allocation),

• Or some combination of all the above.

Working out how much you will need when you retire is just one part of creating your retirement plan, so do subscribe to Monevator for more pointers.

There was a period in my life when I couldn’t bear to think about retirement planning. I didn’t know how to do it. I didn’t think I could afford it. I only knew the problem grew worse with every day I ignored it.

So I blanked it out. It was a big, self-inflating ball of worry but it was invisible. Like a personal climate change problem, I pretended everything was hunky-dory by shutting off the voices of doom in a soundproof part of my brain.

If only I knew how easy creating a workable retirement plan could be!

First things first: It’s vitally important to define your investment goals. Without knowing your destination, you can’t work out how to get there.

A large-scale, life-altering project like investing for retirement may seem too abstract, distant, and difficult to deal with. Yet it can be done quite quickly by stringing together a few logical steps and employing a retirement calculator to crunch the numbers. ¹

Creating your retirement plan

Before the calculators can whir, we need to sketch out our retirement vision and the key factors that will make it happen.

• My vision – To build an annual income that will sustain me and my nearest and dearest once we can no longer work.

• Target – The annual income I need to live on in retirement. Another way of approaching this is in terms of total pension pot.

• Time horizon – e.g. I want to retire no later than age 65.

• Contribution level – Most calculators ask for the percentage of income that will be fed into your pension funds, but ultimately this comes down to how much cash you can save.

• Expected rate of return – What growth rate might we get from the mix of assets we choose for our portfolio?

To make my retirement plan a little more tangible, I’ve taken to thinking of it as my very own financial farm:

• My target income is the crop that I’ll be harvesting in the years to come.

• My contribution level is the seed that I sow.

• The time horizon is the length of the growing season.

• The expected rate of return is the effect of the financial sun, rain, and soil upon my crop.

• I can even throw on fertilizer to increase the expected rate of return by choosing a riskier asset allocation.

Over the rest of this Special Retirement Week On Monevator! I’ll look at how to turn the factors above into raw numbers that you can feed into a retirement calculator.

As we go, we’ll look at each issue in turn (and magically the four bullet points below will be updated with links, too):

• Target: How much do I need to live on in retirement?
• Time horizon: How long have I got until I retire?
• Contributions: How much money must I save to achieve my goal?
• Expected rate of return: Working out your asset allocation

Subscribe now to get each new part emailed to you every morning.

Creating a retirement plan is worth the effort

Your investment goals face no bigger threat than the prospect of you giving up part way through.

By investing some time in your plan, before you invest any money, you will make your goals more tangible. You get a sense of what mission accomplished will look like, and can then draw a deep breath and take on the challenge.

After a while, you will savour your progress, relish defeating your demons, and turn a mental block into an empowering positive in your life. (Honestly!)

Take it steady,

The Accumulator

1. Beware that results can differ depending on which calculator you use. Use them as a guide to planning only, always check the assumptions used by the calculator, and appreciate that reality could turn out very differently.[↩]