If you're age 35 or more and haven't made a serious effort to plan for retirement, your dreams of a comfortable and active retirement could turn into the nightmare of being old and poor.
Scare tactics, you say? Consider this: most experts say you need at least 66% of pre-retirement income to live comfortably when you retire. But an active retiree may need 70-80% of pre-retirement income to pay for added travel and health care costs.
Will your company pension and social security replace 60-80% of your salary?
The portion of your earnings that can be replaced by social security falls dramatically as you climb the income scale. Even if you qualify for the maximum social security benefit, you will probably require additional retirement income from other sources.
Your pension plan
Will your company pension make up the difference? That depends on the plan, your length of service, and your earnings. Many companies are trying to scale back their retirement plans. And if you've changed jobs often, you will have decreased the length of service credited to your pension.
What about inflation?
The impact of inflation will also be a factor in whether you can retire comfortably. If inflation outpaces the cost-of-living increases for social security and your company pension, your plans to live comfortably from these sources may need to be changed dramatically. And if you have a short-fall in your retirement income to begin with, the effects of inflation will be magnified. Assuming inflation at a modest 4% annually, prices will double every 20 years.
How much is enough?
If the prospect of living your remaining years on a steadily declining income doesn't fit your plans, take stock of your situation now. Then take action to establish a program that will lead to a comfortable retirement.
First, do an estimate of how much income you will have at retirement and an estimate of how much you will need for the kind of retirement you have in mind. For a quick estimate of whether or not you'll have enough income for retirement, calculate the following:
|1.||Yearly income needed at retirement in current dollars (70%-80% of current gross income):||$|
|2.||Expected social security benefits:||$|
|3.||Expected retirement benefits (IRA, Keogh, 401(k), company plans, etc., currently in place):||$|
|4.||Annual investment income needed (line 1 minus lines 2 and 3): If your current savings will provide this amount, you are in good shape. If not, read on.||$|
How to come up with more
If you won't have enough, the next step is to see how you can come up with the extra income. Your choices will probably be limited to some combination of the following:
- Save more (reduce current spending).
- Increase the return on the savings you already have.
- Postpone retirement.
- Plan to supplement your retirement income with part-time work.
- Accept a lower standard of living when you retire.
The younger you are, the more of your retirement income you can fund through a savings plan. If you're age 30 and start saving 10% of your yearly income today, you'll probably reach retirement with a comfortable nest egg. If you don't get started until age 40, you may need to save 20% of your income.
Maximize your earnings
When deciding on a savings plan, you will want to maximize your earnings. Look first at tax-deferred savings, particularly if your employer offers a 401(k) plan. If you don't have a 401(k) available, you can still get tax-deferred earnings through an IRA, long-term growth stocks, insurance annuities, real estate investments, and Series EE bonds.
To earn more on your savings, consider investing in equity investments (stocks and real estate) rather than fixed-income investments (CDs, bonds, savings accounts). If you're ten years or more from retirement, you may want to put more of your money in equities. As you near retirement, it may be appropriate to switch more of your funds to fixed-income investments.
Start planning now
Regardless of where you decide to invest, the single most important step to a comfortable retirement is to start planning and saving today.