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Savings
Fitness:
A Guide To Your Money and Your Financial Future
How's Your Financial Fitness?
Envision Your Retirement
Retirement is a state of
mind as well as a financial issue. You are not so much retiring from
work as you are moving into another stage of
your life. Some people call retirement a "new career."
What do you want to do in
that stage? Travel? Relax? Move to a retirement community or to be near
grandchildren? Pursue a favorite hobby? Go fishing or join a country club?
Work part time or do volunteer work? Go back to school? What is the outlook
for your health? Do you expect your family to take care of you if you
are unable to care for yourself? Do you want to enter this stage of your
life earlier than normal retirement age or later?
The answers to these questions
are crucial when determining how much money you will need for the retirement
you desire - and how much you'll need to save between now and then. Let's
say you plan to retire early, with no plans to work even part time. You'll
need to build a larger nest egg than if you retire later because you'll
have to depend on it far longer.
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Planning for Retirement
While You Are Still Young
Retirement
probably seems vague and far off at this stage of your life. Besides,
you have other things to buy right now. Yet there are some crucial
reasons to start preparing now for retirement.
You'll probably have to pay for
more of your own retirement than earlier generations. The sooner
you get started, the better.
You have one huge ally - time.
Let's say that you put $1,000 at the beginning of each year into
an IRA from age 20 through age 30 (11 years) and then never put
in another dime. The account earns 7 percent annually. When you
retire at age 65 you'll have $168,514 in the account. A friend doesn't
start until age 30, but saves the same amount annually for 35 years
straight. Despite putting in three times as much money, your friend's
account grows to only $147,913.
You can start small and grow.
Even setting aside a small portion of your paycheck each month will
pay off in big dollars later.
You can afford to invest more
aggressively. You have years to overcome the inevitable ups and
downs of the stock market.
Developing the habit of saving
for retirement is easier when you are young.
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Estimate How Much You
Need to Save For Retirement
Now that you have a clearer
picture of your retirement goal, it's time to estimate how large your
retirement nest egg will need to be and how much you need to save each
month to buy that goal. This step is critical! The vast majority of people
never take this step, yet it is very difficult to save adequately for
retirement if you don't at least have a rough idea of how much you need
to save every month.
There are numerous worksheets
and software programs that can help you calculate approximately how much
you'll need to save. Professional financial planners and other financial
advisors can help as well. At the end
of this booklet, we provide some sources you can turn to for worksheets.
Regardless of what source
you use, here are some of the basic questions and assumptions the calculation
needs to answer.
How much retirement
income will I need?
An easy rule of thumb is that you'll need to replace 70 to 90 percent
of your pre-retirement income. If you're making $50,000 a year (before
taxes), you might need $35,000 to $45,000 a year in retirement income
to enjoy the same standard of living you had before retirement. Think
of this as your annual "cost" of retirement. The lower your
income, generally the higher the portion of it you will need to replace.
However, no rule of thumb
fits everyone. Expenses typically decline for retirees: taxes are smaller
(though not always) and work-related costs usually disappear. But overall
expenses may not decline much if you still have a home and college debts
to pay off. Large medical bills may keep your retirement costs high. Much
will depend on the kind of retirement you want to enjoy. Someone who plans
to live a quiet, modest retirement in a low-cost part of the country will
need a lot less money than someone who plans to be active, take expensive
vacations, and live in an expensive region.
For younger people in the
early stages of their working life, estimating income needs that maybe
30 to 40 years in the future is obviously difficult. At least start with
a rough estimate and begin saving something-10 percent of your gross income
would be a good start. Then every 2 or 3 years review your retirement
plan and adjust your estimate of retirement income needs as your annual
earnings grow and your vision of retirement begins to come into focus.
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How To Prepare For Retirement
When There's Little Time Left
What if retirement is just around
the corner and you haven't saved enough? Here are some tips. Some
are painful, but they'll help you toward your goal.
- It's never too late to start.
It's only too late if you don't start at all.
- Sock it away. Pump everything
you can into your tax-sheltered retirement plans and personal
savings. Try to put away at least 20 percent of your income.
- Reduce expenses. Funnel the
savings into your nest egg.
- Take a second job or work
extra hours.
- Aim for higher returns. Don't
invest in anything you are uncomfortable with, but see if you
can't squeeze out better returns.
- Retire later. You may not
need to work full time beyond your planned retirement age. Part
time may be enough.
- Refine your goal. You may
have to live a less expensive lifestyle in retirement.
- Delay taking Social Security.
Benefits will be higher when you start taking them.
- Make use of your home. Rent
out a room or move to a less expensive home and save the profits.
- Sell assets that are not producing
much income or growth, such as undeveloped land or a vacation
home, and invest in income-producing assets.
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How long will I live
in retirement?
Based on current estimates, a male retiring at age 55 today can expect
to live approximately 23 years in retirement. A female retiring today
at age 55 can expect to live approximately 27 years. And the likelihood
of living at least 20 years for someone retiring at 55 today is high-over
60 percent for a man and about 75 percent for a woman.
These are average figures
and how long you can expect to live will depend on factors such as your
general health and family history. But using today's average or past history
may not give you a complete picture. People are living longer today than
they did in the past, and virtually all expert opinion expects the trend
toward living longer to continue.
What other sources
of income will I have?
Since October 1999, Social Security has been mailing statements to workers
age 25 and older showing all the wages reported and an estimate of retirement,
survivors and disability benefits. You can also request a statement by
visiting the Social Security Administration's Web site at http://www.ssa.gov
or by calling 800-772-1213 and requesting a free Personal
Earnings and Benefit Estimate Statement.
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