Your Guide To Planning For Retirement

80% Realistic Expectations One of the keys to a satisfying retirement is having realistic expectations. The first step in making sure your expectations for retirement are realistic is having a clear sense of what you are spending, both on the everyday costs of living and on the special activities you’re planning. 50 65 $75,000 3% Current age Retirement age Annual household income Annual inflation rate $93,478. 04 Annual income needed $250,000 $7,500 8% $809,333. 55 $64,746. 68 $2,000 $400 $93,546. 68 Current retirement savings Additional annual contribution Annual rate of return Value at retirement Annual income from savings Monthly income-Social Security Monthly income-investments Total annual retirement income THE PRACTICAL RETIREMENT WORKSHEET You’ll need 75% to 100% of your preretirement income to live comfortably during retirement EXPECTING THE UNEXPECTED Ideally, what you would like to know ahead of time are the things that may go wrong, putting a financial strain on your retirement income. Although you can’t predict what might happen, you can prepare by creating an investment account equal to three to six months of living expenses earmarked for any unexpected emergencies. Most experts advise you to keep your rainy-day money liquid, which means you can turn it into cash easily if you need it. For example, you might put some of these assets in money market accounts for immediate access, and some in US Treasury bills or certificates of deposit (CDs) with six months to one year terms. The danger of investing your emergency fund in stocks or other equities is that you risk having to sell during a period when prices are down if you need cash immediately. This is one case where—on a limited portion of your portfolio—stability is more important than growth or income. If you don’t need the money to cover a serious illness, accident, or other unpredictable problems, you’ll be able to leave the unused assets to your heirs. WAYS AND MEANS Some financial planners estimate you’ll need 75% of your preretirement income to maintain your standard of living after you stop working. Others say you’ll need closer to 100%. Formulas like these may be too simplistic, though, to figure what you’ll actually be spending. One place to start is to calculate what the essentials are costing you right now: food and clothing, heat and home maintenance, utilities, insurance, and property taxes. You can be fairly confident you’ll go on paying these bills and that inflation will push their cost up. Next, think about the things you’re likely to spend less on. Your mortgage may be paid off, you won’t be commuting, and maybe your financial responsibilities for children and parents will come to an end. You may be paying less in income tax, and if you’re not working you’re no longer paying into Social Security. But also consider the additional expenses you may encounter, such as medical and dental care and the cost of your plans for winter in a warm place and summer in a cool one, or perhaps longpostponed trips or courses and equipment to master new skills. KEEP ON INVESTING The rule of thumb is that you should allocate 10% to 15% of your gross annual income to savings and investments. You can choose investment accounts based on your financial goals, your time frame for achieving them, and your tolerance for risk. Assets you invest for growth may provide a stronger return but expose you to more risk of loss. That may be a greater concern as you age. DOING THE MATH The tried and true way of figuring out the cost of living in retirement is to list all your current expenses and then estimate what they’ll be next year and on into future years. You can also anticipate whether you’ll have what you need, based on: • The number of years until you plan to retire • The amount you have already saved • The anticipated inflation rate • The estimated real rate of return, or what you earn on your investments after adjusting for inflation You can find work charts like the one illustrated here to help guide you through the calculation. Often they’re in an easy-to-use electronic format, either online or on a CD-ROM. Or you can ask for professional help in projecting your costs. LOOKING AT THE FUTURE The most revealing thing that projecting your future needs will tell you is how much you can withdraw from your retirement accounts each year to produce the income you need to maintain a comfortable life. In the example above, the assumption is that you’re able to withdraw at the same rate as your earnings, or 8%. Projecting future needs emphasizes how important the rate of return is to your retirement assets. In some periods, when investment markets are depressed, you may not be able to achieve adequate growth, especially if markets are down at the time you begin taking income. By some estimates, to ensure you’ll have money as long as you need it, the most you should plan to withdraw each year is 4. 5% of your assets. FACTORS TO CONSIDER As you prepare a retirement budget, you’ll want to take these factors into account: If you retire at 65, you can expect to live until you’re into your 80s. At current rates, the cost of living will increase by approximately 75% during that time. You have to anticipate changes in Social Security in the future, which means you may get less income from that source. You can’t predict the level of healthcare coverage that your employer will provide after you retire. There’s a direct relationship between age and health costs: About 7% of Americans between ages 65 and 74 need help in handling the tasks of everyday living. But by age 85, almost 30% do. * That may mean you’ll face nursing home or home care costs. *Source: Urban Institute Costs that could go down: • Home mortgage • Commuting • Financial responsibility for children or parents • Work-related clothing Costs that could go up: • Healthcare • Travel • Second home • Further education • Hobbies • Second career This hypothetical example is for illustration only and is not intended to represent or imply the actual performance of any specific investment. 5 4 R E T I R E M E N T P L A N N I N G R E T I R E M E N T P L A N N I N G $ $$ $ MUTUAL FUNDS CASH VIRGINIA B. MORRIS AND KENNETH M. MORRIS Lightbulb Press, Inc. 112 Madison Avenue New York, NY 10016 www. lightbulbpress. com info@lightbulbpress. com Phone: 212-485-8800 y O u R G u I D E T O p l A N N I N G f O R R E T I R E M E N T is a straightforward, easy-to-understand introduction to the information you need to set realistic expectations for living comfortably in retirement, make smart investment decisions, choose life insurance to meet your long-term needs, and plan your estate. The guide helps to put your retirement planning in perspective—whether you are anticipating a new phase in your life or are already retired. • Social Security • IRA Rollovers • Your Estate 65 70 62 • Retirement Strategies • Annuities • Investing