The Impact of Inflation

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.

The Impact of Social Security

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 65 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.

If you are not receiving the statements automatically, or need to request a new one, you can request a new statement here.

The Impact of Pensions

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'll want to use this number. If not, we suggest using an estimate of 35% of future income needs.

Determine How Much More You'll Need

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?

Once you have this number, you have only one question left: how much should you invest each year until retirement in order to have the money you'll need at retirement?

Actually, this is a two-pronged issue. It's not just a question of how much. It's also a matter of how much you'll invest in tax-deferred vehicles such as an individual retirement account. Tax-deferred accounts postpone taxation of your investment earnings until after you make withdrawals (presumably after you retire). That means that all of your earnings stay in the account to compound, so your account value grows faster than it would if you had to sacrifice some of the earnings to current taxes. Looked at another way, it means that you can reach the same goal with a smaller capital investment.

Determining Annual Investment Requirements

Review the tax-deferred retirement plans available to you as an individual and as an employee. You'll want to determine which ones apply to your situation and decide whether to use them. If you are already participating in one or more of the plans, consider re-evaluating the limit of participation and increasing the amount of money you are setting aside for retirement.

Once you know whether you'll use tax-deferred vehicles, you'll need to make a decision about your future investment amounts.

To help you reach your goals visit the retirement calculators at these websites for further assistance.