A successful retirement doesn’t just happen. It can be achieved only by anticipating future needs.
How much money will you need to retire comfortably? The answer depends on your lifestyle expectations and goals. Other factors to consider include the age at which you plan to retire, your life expectancy, the amount and type of employer benefits (if any) and the amount and growth rate of your savings and investments. Once identified, however, the amount of additional money needed can be calculated mathematically. You can then make plans to save the required amount of money. To attain your retirement goal, it is critical that a dollar figure be attached.
Set your retirement goals
What does your retirement dream look like? Traveling the world? Puttering in the garden? Starting your own business? Staying involved through part-time work? Early retirement? Downsizing your home or relocating? Spending time with grandchildren? Volunteering?
Estimate annual retirement expenses
A general rule for maintaining your current lifestyle in retirement is that you will need 80 percent to 100 percent of your present income, adjusted for inflation each year during retirement. Some reductions may be possible because taxes are reduced and work-related expenses are eliminated; however, other costs such as health care and travel are likely to rise. Your lifestyle goals and the costs associated with them will affect your future expenses. Often, the early years of retirement, called the active phase, are the most expensive.
Be sure to plan well beyond age 65
Today’s 65 year old can plan to live another 20 years, if not longer. Estimate annual retirement expenses and your pre- and post-retirement budgets in today’s dollars. Adjust post-retirement budgets for inflation annually to keep the numbers realistic.
Examine retirement income sources
Calculate the amount of income that Social Security and your pension will provide in today’s dollars. While Social Security adjusts annually for inflation, most pension plans do not. Inflation, which in the past 20 years has averaged 5.5 percent a year, threatens the purchasing power of your retirement income. Over time, your pension benefits will make up a declining portion of your retirement income, requiring your savings and investments to make up the difference.
Check your estimated Social Security benefits
A Personal Earnings and Benefits Statement is provided annually by the Social Security Administration. It shows your earnings records, work credit and estimate of benefits. For information on your pension plan, talk to your company’s Human Resource Management Office.
Total the current value of your taxable and nontaxable savings and investments that can be devoted to retirement, including IRAs and employer-sponsored retirement plans. If you have a defined contribution plan [401(k), 403(b), 457 plan, corporate thrift program], project the average rate of return of investments in your account to determine how much personal savings you will have accumulated by retirement age. Include the value of other potential resources, such as income from part-time work, inheritance, business interests or real estate. It may be helpful to discuss these matters with a financial planner to calculate the value of these assets.
Determine savings requirements
Subtract your annual Social Security estimate and any other inflation-adjusted retirement income sources from your annual retirement income needs, to determine the amount you must fund with investments and employer-sponsored savings plans. After considering the amount you’ll get from other investments and pension benefits, compare your financial resources to your retirement income needs. Understand that the resulting calculation is a rough estimate that does not account for inflation. Another key variable is the growth rate on retirement assets. Although stocks have averaged 11 percent, few have 100 percent of their money invested in stocks. A financial planner can help you determine the amount you must save annually.
Adjust the plan
If current and projected resources won’t provide sufficient income, you’ll need to make adjustments. Options to increase savings include increasing income, reducing expenses, increasing the return on your investments, downsizing to a less expensive home, retiring later, post-retirement employment earnings or lowering your projected standard of living in retirement.
Keys to a comfortable retirement
Consider these strategies for a sound, comfortable retirement.
Health care considerations
It is never too early to start planning and saving for retirement, particularly if you would like to retire before age 65. Make a list of your retirement goals, estimated retirement expenses, current assets and prospective sources of retirement income. Then calculate the amount you need to save annually and per pay period to fill the gap between what you have and what you’ll need. Adjusting your plan as conditions change can increase your chances of a successful transition into and during this important phase of life.
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Lukens, J. Financial Planning Provides the Framework. Mississippi State University Extension publication 1688. 2000.
National Endowment for Financial Education. (undated). The Wealth Care Kit. National Endowment for Financial Education (1999). Retirement Planning in the 21st Century.
O’Neill, B. Retirement Myths and Realities. Rutgers Cooperative Extension Service publication FS428. Undated.
O’Neill, B. Making the Most of your 401(k) or 403(b) Plan. Rutgers Cooperative Extension Service publication FS861. Undated.