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Lesson 4d: Retirement Planning

Objective: Learn how to create a retirement plan.
"Less than 50% of workers have calculated what they will need to save for retirement."
- Retirement Confidence Survey

Have you thought about how much you need to save for retirement?   If you have not, you can join the crowd.  Most do not plan for retirement because it is too confusing, or they do not believe they will have enough to retire on, so why even try.  Because most of us can expect to spend 25% to 33% of our lives (over 20 years) in retirement, it is never too early to start planning.

"Approximately 60% of workers are currently savings for retirement."
- Retirement Confidence Survey

Many financial advisors suggest saving between 5% to 15% of your income for retirement.  However, this advice does not usually factor in individual circumstances, such as the company retirement plan, the presence of a spouse, or the number of years to save before retirement.  It is important to plan for retirement based on your own specific situation.  For example, a high wage earner with no company retirement plan may need to save more than 15% while a low wage earner with a generous company pension plan may only need to save 5%.

A main reason to start planning now to save for retirement is the growing trend to shift more and more of the financial risks of retirement to individuals:

  • Companies are freezing their defined benefit pension plans and moving to 401(k) pension plans and profit sharing plans.
  • President Bush has proposed moving Social Security benefits to individual investment accounts.

Relying less on retirement savings plans (e.g., 401(k) plans or the proposed Social Security savings plan) means individuals are taking on more financial/investment risk with their retirements.  If the stock market does not perform up to expectations, you will need to do more to ensure your financial security in retirement.

How should you start?

  • At ages 20 to 34, understand approximately how much money you may need for retirement and determine the annual savings target to meet this need.
  • At ages 35 to 49, set your retirement goals (when you will retire and how much you need) and do an annual check-up to determine if you are reaching your goals.
  • At ages 50 to retirement, set up and monitor annually a more complex retirement plan, which includes:
    1. When you want to retire
    2. What your annual expenses in retirement will be (including where you will retire and the cost of living there)
    3. The savings needed to meet your goal
    4. The risk of running out of money during retirement
  • In retirement, annually monitor your plan to see if you need to adjust your spending to ensure a secure retirement.

Sounds like a lot of work?  With today's retirement calculators, an estimated calculation for someone before age 50 could take less than 15 minutes.  For those older than age 50, a more precise calculation is needed and may take up to an hour or two.  The next section discusses the risks in retirement in more detail along with providing a few links to retirement calculators to help you figure out how much you need for retirement.

Financial Topic : Planning - Retirement (continued)
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