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The Basics of Retirement Planning

Retirement Year after year, having enough money for retirement consistently comes up as number one among Americans’ long-term financial concerns. Consider:

  • The Employee Benefits Research Institute reports that nearly half of all Americans (47%) aren’t confident they’ll be able to afford living comfortably in retirement, up from 29% in 2007.
  • A survey by Allianz Life in 2012 found that 28% of Baby Boomers age 55 to 65 are worried they won’t be able to cover their basic living expenses in retirement, and that 43% don’t plan to focus on retirement planning until they’re five years or less away from retirement.
  • A Wells Fargo survey released in October 2012 found that 30% of middle-class Americans believe that to retire comfortably, they’ll have to keep working until they’re 80 years old.

Here are the basic steps involved in creating a retirement plan. The objective is to introduce you to the retirement planning process so you can be confident that there is a way to map out your future.

Step 1: Set a Goal

Everybody has dreams about retirement: beginning a life of leisure, traveling, dining out, visits with relatives and friends, or whiling away the hours. There’s nothing wrong with dreaming; in fact, it’s necessary to give your life direction. But in the world of financial planning, dreams aren’t goals. The difference is that a financial goal is a measurable objective, with two components: a precise amount of money to be available at a specific future date.

For retirement, then, choose a date. It’s okay if you’re not actually sure if you can retire by that date. This is the one data point where you’re encouraged to state your wish, because the realistic date will really be affected by the second part of the goal: the annual income you want to live on. And how do you decide that? Forget about inflation and use your current household income as a guide. A rule of thumb says that you can maintain the same lifestyle you currently enjoy at anywhere from 60% to 80% of your current income. You can also use current dollars and adjust later for future inflation.

Step 2: Determine Your Defined Annual Retirement Benefits

For most people, defined annual retirement benefits include Social Security income and perhaps a company pension. You can get an estimate of your Social Security benefits by contacting the Social Security Administration or visiting their website. For your projected pension income, contact your employer’s human resources department. You could also include in this sum any predictable income you may expect to receive.

Step 3: Calculate Your Income Gap

Subtract your total defined retirement benefits in Step 2 from the retirement income you defined in Step1. This is your income gap – the amount of annual income you’re going to have to generate from your own savings or other investments.

Step 4: Determine the Approximate Size of the Retirement Fund You’re Going to Need

Divide your income gap by the rate at which you plan to draw from your nest egg every year in retirement, expressed as a percentage. Many experts suggest a number between 3% and 4% – a rate that aims at keeping retires from running out of money over the long run.

Step 5: Calculate How Much Your Current Savings Balance Needs to Grow Each Year

First, tally up the current balances of all the accounts you intend to use to fund your retirement. Second, add into the sum any lump sums you can expect to receive between now and the day you retire. This can include inheritances, the sale of a business, or the sale of any other hard assets, like real estate.

Now subtract this total amount from the nest egg amount you calculated in Step 4 and divide by the number of years you will continue to work. The resulting number represents the average amount of growth your retirement accounts will need until you retire.

Step 6: Determine Where the Growth Will Come From

This is the point at which you can determine if you’re on track to meet or exceed your goal, or if it’s unrealistic and you need to change some of the variables. For a start, reduce the average annual growth amount you defined in Step 5 by the amount you are already saving per year. The remainder is the amount that you will have to earn from investment returns.

To get a very rough idea of the rate of return you’ll need, divide that remainder by your current lump sum. The rate you actually need will be less, if it’s in a tax-deferred account, because compounding will make the effective growth rate a bit higher. Finally, add in an estimated rate of inflation.

This has only been a rough sketch of retirement planning, and it leaves out the final parts: creating and executing an investment strategy and monitoring it year by year. To come closer to the mark, please call so we can discuss your specific situation.

Copyright © Integrated Concepts 2012. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.

 

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