Retirement Tips

Here’s Part 2 of our 3 Part series on determining how much you need to save each month to have the money you need for the kind of retirement lifestyle you want.

Step 3 - Determine how much you need to save. Let’s say you currently earn $86,000 per year and have determined you can live on 70% of that or $60,000. To determine the amount of money you need in your retirement savings account by the time you retire, calculate how much it would take to earn $60,000 a year in interest at 8%. The math is simple. $60,000/8 x 100 = $750,000. Next determine how much you will have to save over the years between now and the age you plan to retire to reach your $750,000 goal.

If you don’t have a financial calculator handy, you can go to one on the website of the good folks at FinAid.org. Just click on the handy calculator at www.finaid.org. This particular calculator says it was designed to calculate how much money to save for college, but you can use it to calculate how much you need to save for any financial goal. For the sake of this example, I plugged in $750,000 as the goal and 25 years left before retirement and 8% return. In this situation, it says we would need to save $783 per month. That’s a hefty sum. Let’s see if there are ways to reduce that monthly savings amount.

Step 4 - Adjust for company or other retirement or pension plan payments. You need to adjust the amount you will have to save each month by taking into consideration any retirement or company pension plan payments you may be entitled to. Fewer and fewer companies are offering a defined benefit plan, where you are guaranteed a certain monthly payment. However many still do, usually tied to your number of years of service.

Let’s assume for this example that you qualify to receive 1.2% of your final salary, and that you will be on the job for 30 years when you retire. That’s 1.2% x 30 x $86,000 = $30,960 per year. That means you will have to cover the difference between $60,000 and $30,960 or $29,040 yourself. Applying the same math at 8%, that’s $29,040/8 x 100 = $363,000. Using the calculator on FinAid.org, that’s $379 a month in savings to reach that goal in 25 years.

Tomorrow in Part 3, we will look at adjusting for Social Security and inflation.

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Retirement age is often called “The Golden Years”. One thing is certain. Retirement will be a lot more fun if you have enough gold to enjoy it. What follows is a summary of what I’ve learned from reading a number of books on retirement planning and setting up retirement accounts. To make it more readable, I’ve broken into 3 parts. Here’s Part 1.

In these steps, I’ve kept the math in the example simple to make the process easy to follow. Some folks have written entire books on this subject, and they make excellent reading when you’re ready to get into the process in detail. First step through the process in this simple example and then go into greater detail by doing a little research on your own when you are ready to set up your own retirement savings plan. The important point is - don’t delay getting started until you understand every complex twist and turn of the tax laws and all the investment options. That’s what the pro’s are for. Begin by understanding the basics and then get started. As a friend of mine says about any worthwhile project “It’s more important to get it going than to get it perfect”. So in the famous words of Nike - “just do it”.

Step 1 - Determine how much income you will need to have a comfortable retirement lifestyle. The old rule of thumb many investment advisors recommended was 80% of your current income. However, that’s a very general guideline. You really need to examine your own situation for a better number. Is your home paid for, or will it be paid for when you retire? Then you won’t need money to cover a mortgage payment. If you and your spouse are driving 2 cars now, will you cut back to one car? That’s one less car to maintain or eventually replace. If you currently live in a large house, will you be moving to a smaller house? That’s less for utilities, and the proceeds from the sale of the larger house can go into your retirement account. You’ll also have to factor in that you will have new expenses you didn’t have before. You may need to buy more medicines as you get older. If you have a health plan from your current employer, your share of the cost may go up. You will also probably want to buy Medicare insurance to cover your share of medical costs not covered by Medicare.

Step 2 - Determine what rate of return you believe you can get on your retirement savings. There are many references out there on what rate of return to use for retirement planning. Let’s try to keep the math simple. According to a research report prepared for the Social Security Advisory Board in 2001, the average real rate of return for stocks from 1946 to 1998 was 7.8% after inflation. That seems like a good time period to use because it avoids the Internet boom and bust between 1998 and 2002. This is 7.8% in real, not inflated dollars.

Of course, 7.8% is truly an average over time. In some years the stock market has done very well. In other years, it has taken a big slide. It can be very hard to predict a rate of return over a short period of time. So for the sake of simplicity, let’s round the 7.8% up to 8%. For your own planning, if you want to be more conservative, you can always use an even lower rate.

Tomorrow in Part 2, we’ll walk through some simple calculation to determine how much you need to save to provide the monthly income you need.

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I’ll be ready for retirement in a few years, so I’ve been doing a lot of reading on various retirement subjects lately. I’ve decided to start a blog about retirement so I’ll to have a place to share some of the things I have been learning. Some of the topics I’ve been studying lately include:

* Retirement Planning
* Different kinds of Retirement Saving Accounts
* 401(k) Accounts
* Borrowing against retirement savings
* Finding money to invest for retirement
* Dollar Cost Averaging

I’m not a CPA or tax attorney or lawyer. So don’t treat what I’m saying as some kind of tax or investment advice coming from a professional. I’m just a person who’s being doing a lot of reading lately, and I think I’m beginning to understand some of this stuff. I trust that putting down on paper what I’ve been reading will also help me clarify my own thoughts. For professional advice, you should see a CPA or other tax or investment professional. That’s what I do. I learned to hard way to use a CPA for my taxes after I got audited a few years ago and found out I had managed to get confused on a few things when using do it yourself tax software.

But then life, and retirement, is not all about money, so I plan to write about other things also. I’ve been reading a lot about retirement lifestyles lately, things like selecting a retirement community and staying healthy in your retirement years.

I plan for this blog to be a useful place to post what I’ve learned, and I also want it to be a place where you can also share what you’ve learned, and what you’ve been thinking about retirement and retirement planning. If you’re already retired, I’d love to have you share your thoughts also. Right now retirement is still in the future for me so all my thoughts are theoretical. If you’re retired now, I’d love to hear about the reality of retirement.

To start with, I’ll be posting a number of topics on the financial side of retirement and retirement planning, as well as links to news articles about retirement. After that, I plan to discuss retirement communities and other options – things like should you move when you retire, or would it be better to stay where you’re living now. After that, we’ll see where it goes from there.

Please feel free to comment, and I hope you enjoy it. You can follow the series by checking back in here often.

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