Learn and Plan:
Retirement Basics

If you have questions about your retirement savings, it's always a good idea to speak with your financial advisor.  But if you are looking for some basic information and understanding about retirment, you’ve come to the right place. Whether retirement is a distant goal or around the corner, you’ll find information that will assist you in setting and reaching your retirement goals.

How Much Money Will I Need in Retirement?

Generally, financial planners advise that you’ll need a retirement income of 70% to 80% of your current income. These four steps will help you get a realistic idea of how much you’ll need:

  1. Analyze your current monthly expenditures—not to the penny, but certainly learn where your money goes today.
  2. Work through what seem to be logical scenarios for where your current and hoped-for jobs can take you. Then make an educated guess at how much they might pay.
  3. Project how much a dollar in today's money might be worth when you retire. (Historically, inflation has averaged about 3% annually.)
  4. Consider whether 70% or 80% of that number will be adequate when you retire. You may no longer have commuting expenses. You may spend less on clothes. And you may not be supporting your kids. But you may spend more on travel, leisure activities, and entertainment. Don’t forget that taxes don’t stop because you stop working.

Retirement May Last Longer Than You Think

For many people working today, retirement may last as long as their careers. Average life expectancy is rising. A child born in the U.S. in 2002 has an average life expectancy of 77.3. Once you've reached age 65, you can expect to reach age 81 if you're a man and 84 if you're a woman. Keep in mind that this is a statistical "average."  Advances in medical science may result in a longer life, and with it, the increased possibility of assisted living and skilled nursing expenses.

Consider your own health and family history as you plan for retirement. Don't underestimate how long you may need to have income once you've stopped working.

Health Care Costs Are Rising

You see it in your own pay stub if you work for a large company or in your bills if you're self-employed or not covered by an employer plan. Health insurance is getting more expensive.

  • Right now, just over a third of private employers offer retiree health benefits. According to a survey by the U.S. Department of Health and Human Services, more than 80% of those employers are considering reducing the benefits within the next five years.
  • In general, Medicare covers less than half of medical expenses, so you may want to plan for "medigap" insurance—supplemental health insurance issued by private companies. To get an idea of how much this coverage might cost in the future, check with your state's insurance department to learn what current costs are, then project increases based on your age now.

Inflation Reduces the Value of Your Savings

As prices rise, a dollar buys less. That's inflation, and over time it can eat into the value of your retirement savings. So, keeping your savings growing to stay ahead of inflation is another retirement investing challenge.

Where Will I Get the Money?

Right now, Americans age 65 and older rely primarily on four sources for income in retirement:

If you are young and beginning to plan for retirement, two of these sources may not be realistic:

Assets Income: Personal and Retirement-Plan Savings

Personal savings will probably represent a larger portion of retirement income for you than it did for your parents. Be realistic about how much income your savings can provide.

Some rules of thumb:

  • Many financial advisors now recommend relying on just 3% to 4% of retirement assets each year for income.
  • Your retirement income can vary from year to year—sometimes substantially—since it will depend on the value of your savings each year.
  • For every $1,000 of monthly retirement income you want to generate from your own savings, you will need about $230,000 in assets, according to the Schwab Center for Investment Research. For example, if you want $3,000 a month, or $36,000 a year, you would need savings of $690,000. That's a conservative estimate, assuming that you earn 5.2% on your investments and live off the earnings without dipping into the principal.

Most likely you will not have to depend on your savings for your entire retirement income. You would also be entitled to Social Security and possibly pension benefits.

Does that sound like a lot of money to save? Don’t be discouraged. Systematic savings in tax advantaged retirement plans, such as Individual Retirement Accounts (IRAs) and corporate 401(k) plans add up over time.

  • If you invest $1,000 a year starting at age 25 in a tax-deferred account, such as an IRA, earning 8% a year, you'd have over $280,000 at age 65.
  • If you invest $1,000 a year starting at age 40 and earn 8% a year, you'd have $80,000 by age 65.
  • If you invest $1,000 a year starting at age 50, you'd have over $30,000 at 65.

Take full advantage of tax-advantaged savings plans and you can get even more bang for your buck. For example, the maximum annual contribution to an IRA in 2009 is $5,000. Annual contributions of $4,000 starting at age 40 would give you a nest egg of about $305,000 at age 65, again assuming an annual return of 8%.

Whatever your stage in life and no matter how much you’ve saved until now, you have lots of incentives to start planning for a comfortable and independent retirement.


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