Let’s say you're on an airplane above North Africa headed from Tripoli to Cairo. You’re right over the Sahara Desert when the plane crashes. Nobody's hurt, but you're all stranded in the middle of the Sahara. After you've figured out how much water you have and have all your supplies together and built a shelter, what’s the next step you should take? You need to figure out where you are relative to Cairo so that you don’t head off the wrong way. You need to know where you are in regards to your goal.
That’s the first step in creating your financial plan: figuring out where you are now. You need to know how much money you'll likely have when you retire. Begin by adding up the sources of income you’ll have each month, like Social Security or pensions or real estate income. Then estimate your monthly cost-of-living expenses. Once you have these numbers, subtract your expenses from your income. If you’re like most people, you’ll end up with a negative number, meaning that your sources of income do not cover your entire cost of living.
The next step in your plan is to multiply the difference by 12, so that you know how much you’ll need each year. For example, if you are short $3,000 a month, your yearly deficit will be $36,000. That discrepancy would need to be made up by your investments, so you can have the money you need to enjoy the lifestyle you want. Are your investments large enough to produce that income? If they do, glory hallelujah, you could retire anytime. If not, you have some work to do, to figure out how to generate the needed income.
Basically, you need to figure out where you are in the middle of the Sahara (where you are right now financially) in relation to Cairo (your retirement); and then work out what supplies you have and what you’ll need (your income and your expenses) in order to reach your destination. Once you know what you need in order to get from here to there, I hope you'll design a plan that will be very successful for you.