The Importance of Retirement Planning
The constant cry to “save the Social Security System” is fueled by the realization that there are serious threats to the system. The Social Security benefits of today’s retirees are largely paid by the contributions of people who are currently employed. As the Baby Boomer generation enters retirement age (currently 67) and as retirees live longer, the number of people who will be eligible to collect Social Security is growing faster than the number of workers paying into the system. Currently there isn’t a simple fix can remedy this problem in the foreseeable future; any saving of the system will probably involve higher retirement ages, lower benefits, and possibly increased Social Security taxes. (everyone wants it of course no one wants to pay higher taxes).
Longer life spans mean more time for inflation to eat away at the buying power of your income.
The three-legged Social Security System is only one challenge facing tomorrow’s retirees. People have longer life spans, which means more time for inflation to eat away at the buying power of your income. As people grow older, they may eventually need such services as ongoing healthcare and assisted living arrangements—expensive services that can quickly wipe out a life’s savings. All this is beyond the cost of travel, retirement homes, and leisure activities that are part of the dream retirement for many people.
If we want our retirement to be anything like our dreams of leisure and security, it is clear we have to plan carefully to make sure we will have the resources we need.
Retirement: What Are Your Current Needs?
The best way to determine how much money you will need in the future is to know what you need right now. Some people think they need their current income. That is not true. You need “cash inflows” to cover your current expenses, taxes, and savings for future needs.
In retirement, you will need cash inflows to cover expenses and taxes only. You may wish to continue saving for your heirs, but that is not a need. Your expenses may change if you change your lifestyle, and your taxes will change depending on whether your cash inflows are from “income” or a return on investment.
How Much Will You Need to Retire?
That depends. In order to answer this question, you must sit down and picture retirement in your own mind. Retirement means different things to different people. For some, retirement means being sufficiently financially independent to travel and relax 24 hours a day. Others may view retirement as a “career change.” However you view retirement will help you determine how much you will need to retire. So let us help you paint that picture.
Will your lifestyle change dramatically in your retirement vision? Or will you, like most persons, continue doing the things you currently do, trading “work” for leisure and volunteering? Will you incur more expenses in retirement for leisure and travel? Or will you prefer to spend more time with your children, grandchildren, and family? Many “experts” claim that the average person needs 65 percent to 75 percent of his or her pre-retirement income. However, that is average, and we have never met an average person. You can get a good idea of how much you need by examining your current lifestyle and adjusting it for your retirement vision.
Determining Your Retirement Goals
The first step in planning for your retirement is to determine how much money you’ll need for retirement; to know that, you first have to determine the retirement lifestyle you want. You’ll want to answer these questions:
• How early do you want to retire? The earlier you want to leave the workplace, the less time you will have to get your financial act together and the more time in retirement you will need to fund.
• What other plans will you have? Do you want to buy a sailboat, retirement home, or the camper of your dreams? Does your health suggest you may need more medical care?
• What will inflation do to your income? You need to consider how inflation will change your income needs. In 20 years, a 4 percent inflation rate will more than double the amount of money you’ll need to keep your current standard of living.
• What percentage of your current living expenses will you require? You may not need the large home, several cars, or funds to pay for raising children and holding a job. But if you plan to travel or live the country club lifestyle, certain expenses may increase.
When you’ve determined how much money you’ll need to retire on, you’ll be able to compare that with your current savings and investments and plan for a way to make up the difference.
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