How Much Will You Need?
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One of the challenges
of retirement planning is the difficulty in predicting the future. Factors
like Social Security, corporate pension plans, food and housing needs
must all be taken into account and the unexpected must be accounted for.
As a first step in planning for retirement, you should estimate how much
your retirement is likely to cost.
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Your total annual expenses in retirement may range anywhere from
70%-90% of your current annual after-tax income.
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Your home mortgage
may be paid off and you may move into a smaller home at retirement.
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Expenses for your
children may decrease, including the major responsibility of
paying for a college
education.
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The cost for health
care will probably rise and so may your need for medical care and
medications.
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Most life insurance
policies are paid up by age 65 and cash value policies actually start
paying
money back to you.
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Leisure and travel
costs may increase, at least in the early years.
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By subtracting the annual income you expect to receive from Social Security,
pensions and current assets from your annual income goal, you'll discover
your annual income gap or shortfall. The question now is: how much in
additional assets will you need to make up this shortfall?
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Calculate
What You'll Need
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Inflation
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Another variable that you must contend with as you plan your retirement is
inflation. Once you find yourself without a salary that keeps up with the
cost of living, you'll become keenly aware of how inflation can erode the
assets you have. It's likely that the cost of goods and services will
increase and you'll need more at retirement than you do now to enjoy the
same things. You don't want to reduce your standard of living, yet you don't
want to run out of money.
Figuring the impact of inflation can be fairly time-consuming. The long-term
historic rate of increase in the Consumer Price Index is 4% so that's a
fairly safe number to use for the rate of inflation.
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Social Security
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Determining the amount you can reasonably expect to receive from Social
Security is an important first step to estimating your retirement income.
The normal retirement age at which full benefits are payable is age 66 today
but will gradually rise to age 67 or 68 in the next 15 to 20 years.
The Social Security Administration automatically provides a personal
statement of estimated benefits for workers over the age of 25 who are
covered by Social Security and who are not currently receiving benefits.
This statement is delivered each year approximately 3 months before your
birthday. Social Security Statement is a concise, easy-to-read personal
record of the earnings on which you have paid Social Security taxes during
your working years and a summary of the estimated benefits you and your
family may receive as a result of those earnings.
Request
a Social Security Statement
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Pensions
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Experts caution that the average American should expect to receive no more
than 35% of his or her annual retirement income from employer-sponsored
pension and profit-sharing plans.
This includes pension plans, 401(k) plans, Keogh and simplified employee
pension (SEP) plans that your employer contributes to on your behalf. If
your employer can provide an estimate of your future benefits (most likely
if you have some form of defined-benefit or pension plan), you can use this number. If not,
you can use an estimate of 35% of future
income needs.
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