Strategies for Successful Retirement

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.

  • Pay yourself first. Even if money is tight and you are saving for other goals, regularly set aside money for retirement. Children may obtain scholarships and student loans to finance their education--but, scholarships for retirement don’t exist! Experts recommend saving about 10 percent per year, depending on your age, other resources and retirement goals.

  • Begin saving immediately. The miracle of compound interest will allow a $10,000 investment in a tax-deferred account, invested at 8 percent interest, to grow to $100,627 in 30 years. To get the same yield in 15 years, a $31,722 investment at 8 percent is required. .

  • Maximize contributions to employer-sponsored tax-deferred retirement plans. Employee contribution plans such as 401(k) and 403(b) can build significant retirement funds. Contribute as much as possible. Saving just 1 percent more of your pay can result in a five figure sum at age 65. Take full advantage of employer matches if offered. This is free money that should not be passed up.

    If you are self-employed, set up your own tax-deferred retirement account such as a Keogh plan, simplified employee pension plan (SEP), savings incentive match plan for employees (SIMPLE) or IRA, and contribute the maximum possible.

    Take advantage of nondeductible education IRAs, nondeductible Roth IRAs and the liberalized rules for establishing and contributing to IRAs.

  • Set aside an emergency fund to cover three to six months of expenses. An emergency fund can prevent the need to dip into your retirement contributions for extra money and face the resulting penalties and tax obligations.

  • Invest to outpace inflation and taxes. Although, stocks have averaged 11 percent, few people have 100 percent of their money in stocks. Many are earning low rates of return on CDs and passbook savings accounts. A significant portion of your investments should be in growth assets, such as stocks. Minimize risk by diversifying and investing for the long term (five years or longer). Invest your money, not for the highest yield, but for total return. Focus on total return, which is the dividends, interest or other income received from an investment, plus (or minus) the capital appreciation. As many people approach retirement, they move to “safer,” lower-earning fixed income investments.

    Because retirement may last 20 years or more, it is important for retirees to keep some money in stocks to keep up or stay ahead of inflation. Many advisers recommend keeping a minimum of 20 percent of investments in stock to keep up with inflation. Consider having at least 50 percent of your portfolio in stocks; perhaps even 60 percent during the first 10 years of retirement. Many advisers recommend keeping a minimum of 20 percent of investments in stock to keep up with inflation.

  • Make the money in your tax-deferred investment work hard. Two factors influence the ultimate size of your retirement account: the amount of contributions and the earnings on those contributions. If your plan offers investment alternatives, diversify and put a significant portion of your money in equities other than your company’s stock.

  • Don’t touch your retirement funds! It is unwise to tap into your retirement account to fund emergencies or other goals. Even repaying the loan results in a loss of compounding. If you receive a lump sum distribution upon a job change, roll it over directly into an IRA.

  • Choose your benefit carefully when you retire. If you belong to an employer-sponsored retirement plan, upon retirement you will typically have to choose to 1) receive monthly payments and pay taxes based on a ratio, 2) withdraw the funds in a lump sum and pay taxes on them or 3) roll the funds over to an IRA to defer taxes. The law imposes special restrictions on the amount of lump-sum distributions that may be made from a defined benefit plan. Therefore, assuming normal longevity, annuity payments may be more valuable than a lump sum distribution in some plans. Selecting the most desirable option will depend on your needs. Seek professional guidance about these issues.

  • Continue investing after retirement. You are likely to have a long retirement, and your money will have to work hard for a long time.

  • Make tax-efficient asset withdrawals in retirement. After retirement, keep money in tax-deferred accounts as long as possible. Make withdrawals from taxable accounts and municipal bonds before tapping into tax-deferred investments.

  • Withdraw wisely. Many financial advisers believe retirees can logically plan for a withdrawal rate somewhere between 4 percent and 5 percent annually. Withdrawals can be increased by the rate of inflation annually. Retirees should base withdrawal decisions on expected investment returns and the desire to leave money to heirs.

Health care considerations

  • Medical expenses can decimate the best of retirement plans. Medicare, which covers hospitalization and doctor’s fees, generally provides less than half of the health-related costs of people age 65 and older. Private Medigap insurance can help supplement the government program.

  • Health care coverage is a special concern for early retirees, since Medicare benefits are unavailable until age 65. Many companies are reducing or dropping medical benefits offered to their early retirees. Those early retirees should consider extending coverage through their ex-employer’s plan via COBRA rules, buying private insurance or going back to work to get into a health plan.

  • Expensive long-term care can devastate a retirement plan. Depending on the size of the estate and other factors, many people are advised to buy long-term care insurance to cover a portion of this risk.

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.

Garman, E.T., & Forgue, R.E. (1997). Personal Finance. Boston: Houghton Mifflin Company.

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.

2/16/2005 4:06:58 AM
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