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Now Is the Time to Plan for Your Retirement

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Ensure you can retire at the time of your choosing by assessing your current resources and building a savings and investment plan that accommodates your situation.

It's never too late, nor too early, to begin planning for retirement. You may have dreams about how you want to spend those "golden" years—resting comfortably on a sunny beach, traveling the world to exotic places, writing the great American novel, or catching up on that reading you always wanted to do. These dreams, however, can't materialize unless you actually take the steps necessary to make them a reality. And that requires adequate planning.

Retirement used be to simpler, or so we thought. In the recent history, a person worked for the same company for 30 or 40 years, retired at 65, collected the employer-provided pension and government-provided social security benefits and then lived out their few remaining years in relative comfort. (Just a few, considering the average American life expectancy in 1960 was 69 years old.) Now, frequent job changes are the norm, and many more of us are striking out on our own. 

The increased job mobility makes it more difficult to accumulate significant retirement benefits. Inadequate funding has generated concern about the future of the social security system. And, lifestyle changes, improved technology and medical advances mean people can expect to live longer than ever before.

At first, retirement planning may seem somewhat daunting. It's scary to consider things like your life expectancy and potential health care needs, especially when you're faced with the more immediate problems of financing the kids' education or paying your mortgage. But the fact is, adequate planning is more important now than ever before. You can no longer rely on your employer or the government to provide for your retirement years. You must take personal responsibility for your future and plan for those 20 to 30 years (or more) after the regular paychecks stop, or after you retire from active participation in your business.

How to Start Planning

Solid retirement planning is within your reach, and it will probably be easier than you imagine. Some of the pieces may already be in place and may need only a little fine-tuning. In other areas, you may need to start from scratch. Just remember to be flexible—you're aiming at a moving target and you will continue to make adjustments as you go. What is important is that you take control, regardless of where you are right now.

The following information will get you started and help you through the retirement planning process.

The major considerations in planning for your retirement are:

  • Estimate your retirement needs. Where will you live? What will be your lifestyle?
  • Estimate what you currently have. Take a look at the benefits for which you're already eligible, plus your current investment holdings. Will this be enough for retirement?
  • Estimate your Social Security benefits. For those nearing retirement, Social Security benefits are likely to provide a large portion of their income.
  • Estimate your benefits under any employer's pension plan. You may be eligible based on former jobs, or you may have established one yourself.
  • Estimate your benefits from other retirement plans. Self-employed people may choose from Keoghs, IRAs, SEPs, or SIMPLE plans.
  • Determine how to bridge the gap. This may depend on how much time remains until retirement and how much risk you are willing to take in your investment strategy.

What Will You Need to Retire Comfortably?

The purpose of financial planning for retirement is simple: to ensure that you have a financially comfortable retirement. But remember, financial planning is not an exact science. You are dealing with uncertainty and will have to make various assumptions and estimates. These assumptions and estimates can be made based on reasonable and educated judgments about what may happen in the future. As time passes and more information becomes available, you will change your assumptions and estimates and adjust your investment strategy to accommodate the changing environment.

The first step is twofold:

  • determine what you will need and want during retirement
  • determine what amount of income will sustain that lifestyle

One method is to prepare a detailed proposed budget of your living expenses during retirement. Consider such items as housing, food, clothing, transportation, insurance, taxes, leisure and recreation costs, medical expenses and savings. You may want to analyze your current spending habits and then identify which expenses would decrease during retirement (such as dress clothing and commuting costs) and which would increase (such as leisure and recreational activities). This is a good method for those who are fairly close to retirement, and who can therefore make fairly accurate budget assumptions.

An easier way to plan for retirement, particularly for those who are under 55 or so, is to state your retirement income objective as a certain percentage of your preretirement income. Many retirees live on anything from 60 percent to 80 percent of their preretirement income. It's usually better to plan at the high end of the range to allow yourself flexibility should your investments not work out as you hoped and as a hedge against rising costs.

Begin Planning by Estimating Your Current Retirement Assets

Once you have determined the amount that you need to retire comfortably, you need is to estimate the resources you currently have that will provide income to you during your retirement years. You will fund your retirement primarily through three main sources.

  • Social Security. Social Security will pay you a percentage of your annual income based on how much you made over your lifetime. On the average, Social Security benefits amount to about 40 percent of preretirement income. The amounts are skewed to provide greater percentage of benefits to those at the lower income levels. That is, if you had a relatively low income, social security benefits would provide about 70 percent of your preretirement pay. If you were relatively highly paid, social security would replace less than 30 percent of your preretirement salary.

  • Employer-provided pensions. An employer-provided pension may be generally equal to anywhere from 50 percent to 70 percent of your preretirement salary. The amount of the benefits may or may not be easily computed, depending on whether the pension is a defined-benefit plan or a defined-contribution plan. Unless you've worked for a company for a number of years, odds are employer-provided pensions aren't an option.

  • Personal savings and pension plans for the self-employed. This plan will provide as much or as little as you managed to save during your working years. This is the aspect of your retirement fund over which you have the most control. It is up to you to determine your savings and investment strategies. If either of the other two are missing or deficient, this is what you will rely on for your retirement income.


Mike is a 45-year-old, single male who intends to retire at age 65. He estimates his annual retirement needs at 80 percent of his preretirement income of $60,000. He also estimate that his Social Security benefits will amount to 20 percent of his current salary.

A quick computation would result in the following:

Retirement Needs Computation
Current annual salary $60,000
% of current salary to be replaced x 80%
Annual retirement income target $48,000
Minus: Employer-provided pension benefits (21,000)
Minus: Social security benefits (assume 20% of salary) (12,000)
Required annual income from savings and investment funds $15,000
Life expectancy — years of retirement (determined by reference to insurance tables) x 15 years
Required target savings and investment fund needed at retirement $225,000
Minus: Current savings and investments:
Individual Retirement Account (20,000)
401(k) Plan (50,000)
Savings account ( 5,000)
Other investments (25,000)
Required additions to savings and investment fund $125,000
Years to retirement (retirement age - current age) 20 years
Current annual savings required to reach savings and investment fund target $ 6,250

Notice that this calculation is based on current dollars. For ease of computation, we'll assume that the positive investment return on the funds saved and the negative effect of inflation on the savings are approximately equal. If, in fact, your retirement goal is at least 5 years in the future, you should consider higher-risk investments that have a greater potential for yields that significantly beat the inflation rate over the long-term.

Develop a Plan to Bridge Any Shortfall in Retirement Income

Between now and your retirement date, you should aim to save and invest so that you can bridge the gap between your retirement needs and your targeted retirement nest egg. To begin, you must start saving now.

You have probably heard the adage, "Pay yourself first." Each month, as you pay your bills, contribute to your retirement savings account, no matter how small at first. What is important is building the savings habit. If you receive a paycheck, the easiest way may be to have an amount automatically deducted from your paycheck and deposited into a savings account specifically earmarked for retirement. Otherwise, you can have your bank regularly transfer an amount from checking into a designated retirement savings account. This account should be kept separate from other savings accounts, such as accounts set up for the children's education or for vacations.

The savings habit is a necessary one to develop—but you should not stop there. A problem that many people have is that while they may save, they don't invest. Leaving your money in a passbook account earning 1 percent while inflation is 3 percent means that your principal is actually shrinking. You need to deploy your funds into investments that will earn enough to beat inflation, pay any taxes on their earnings and still grow and multiply. Make sure that you periodically move your savings, beyond an emergency reserve fund, to investments that will earn a good return.

See planning to reach your goals for a more detailed discussion of a process for setting and achieving financial goals (such as retirement).

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