Planning for Retirement Now

Americans are becoming increasingly concerned about the high cost of retirement. After a lifetime of working and saving, many people wonder if they will have enough money for daily living expenses, much less travel, hobbies, and recreational activities they want to enjoy during their golden years.

You should consider these facts:

80% of your current income is what experts estimate you will need to maintain your lifestyle during retirement.
Only 23% of the average retiree’s income comes from Social Security benefits.
52% of the average retiree’s income comes from personal savings, investments, and part-time jobs.
42% of people over age 65 are kept out of poverty only by their Social Security benefits.
72% of people polled in a recent survey believe Social Security will be cut or eliminated by the time they retire.
The Basics of Retirement Planning:
Analyze your current assets and liabilities, and then estimate the spending needs and adjust for inflation
Evaluate the planned retirement income
Increase income by working part-time or starting a side business
Mapping the Road to Retirement
Many people in their prime earning years don’t save enough for retirement. One advantage of being relatively young when you start a retirement savings program is that you can amass a potentially larger nest egg due to your longer planning timeframe.

The more you accumulate before you retire, the less you may need to worry about working after you retire to maintain your desired lifestyle. For these reasons, it is important to spend time now developing a well-organized plan for retirement regardless of your age.

Determine your retirement needs and resources. With people living longer than ever before, a sound retirement strategy may need to provide you with an income stream, indexed for inflation, that can last anywhere from thirty to forty years. With this in mind, compare the amount of income you receive now to the amount you will have during retirement.

Develop financial strategies to help provide you with your required income stream. What assets do you currently have? What savings plans do you have in place?

  1. Social Security will not meet all of your needs. In the past, Social Security and a company pension have been significant sources of retirement income. However, the days of “living off” a pension or Social Security have passed. If you depend solely on Social Security or your pension, you may find your income is insufficient to meet your retirement needs. Developing a retirement savings program can help you address any anticipated shortfall.
  2. Increase your savings. One way to boost your savings is to set money aside on a regular basis. Stay disciplined and consider adjusting your budget to save more as your financial situation changes.
  3. Take advantage of your company plan. If your employer sponsors a retirement program, consider contributing the maximum amount up to the amount your employer will match. This can help you take advantage of pre-tax contributions and accumulations on a tax-deferred basis.
  4. Use personal tax-efficient alternatives. Individual Retirement Accounts (IRAs) allow you to save on a tax-deferred basis. Contributions to traditional IRAs may be pre-tax, and funds accumulate on a tax-deferred basis, but income taxes are due when distributions from the IRA are taken. On the other hand, contributions to Roth IRAs are made with after-tax dollars; funds accumulate tax free, and no income tax is due when distributions are taken.

Retirement may seem a long way down the road, however, the younger you are when you begin taking advantage of saving opportunities, the better off you will be when retirement comes.

Conducting a Financial Analysis
Analyze current assets and liabilities for retirement

Housing
If large equity, a reverse mortgage could provide additional retirement income
You could sell your home, buy a less expensive one, and invest the difference
Life Insurance
Life insurance cash value can be converted into an annuity
Other investments
Consider taking the income from investments, such as stocks & bonds
Estimate your retirement spending needs

Understand that spending patterns, where & how you live will probably change
Some expenses may go down or stop:
Work expenses – less for gas, lunches out
Clothing expenses – fewer and more casual
Housing expenses – house payment may stop if your house is paid off, but taxes and insurance may go up
Estimate which expenses may go up

Life and health insurance unless your employer continues to pay them
Medical expenses increase with age
Expenses for leisure activities may go up
Gifts and contributions may increase
Inflation will cause expenses to increase

Four Retirement Planning Mistakes to Avoid
We all recognize the importance of planning and saving for retirement, but too many of us fall victim to one or more common mistakes. Here are four easily avoidable mistakes that could prevent you from reaching your retirement goals.

Putting off planning and saving

Because retirement may be many years away, it’s easy to put off planning for it. The longer you wait, however, the harder it is to make up the difference later. That’s because the sooner you start saving, the more time your investments have to grow.

Don’t make the mistake of promising yourself that you’ll start saving for retirement as soon as you’ve bought a house or that new car, or after you’ve fully financed your child’s education–it’s important that you start saving as much as you can, as soon as you can.

Underestimating how much retirement income you’ll need

One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to accumulate by the time you retire. It’s often repeated that you’ll need 70% to 80% of your preretirement income after you retire. However, depending on your lifestyle and individual circumstances, it’s not inconceivable that you may need to replace 100% or more of your preretirement income.

In order to estimate how much you’ll need to accumulate, you’ll need to estimate the expenses you’re likely to incur in retirement. Do you intend to travel? Will your mortgage be paid off? Might you have significant health-care expenses not covered by insurance or Medicare? Try thinking about your current expenses, and how they might change between now and the time you retire.

Ignoring tax-favored retirement plans

Probably the best way to accumulate funds for retirement is to take advantage of IRAs and employer retirement plans like 401(k)s, 403(b)s, and 457(b)s. The reason these plans are so important is that they combine the power of compounding with the benefit of tax deferred (and in some cases, tax free) growth. For most people, it makes sense to maximize contributions to these plans, whether it’s on a pre-tax or after-tax (Roth) basis.

If your employer’s plan has matching contributions, make sure you contribute at least enough to get the full company match. It’s essentially free money. (Some plans may require that you work a certain number of years before you’re vested in (i.e., before you own) employer matching contributions. Check with your plan administrator.)

Investing too conservatively

When you retire, you’ll have to rely on your accumulated assets for income. To ensure a consistent and reliable flow of income for the rest of your lifetime, you must provide some safety for your principal. It’s common for individuals approaching retirement to shift a portion of their investment portfolio to more secure income-producing investments.

Unfortunately, safety comes at the price of reduced growth potential and the risk of erosion of value due to inflation. Safety at the expense of growth can be a critical mistake for those trying to build an adequate retirement nest egg. On the other hand, if you invest too heavily in growth investments, your risk is heightened. A financial professional can help you strike a reasonable balance between safety and growth.

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