Retirement Planning

Retirement planning is an integral part of your overall financial plan. Strategies should be designed to suit your goals and comfort level as well as to take advantage of tax saving opportunities. For any plan to be effective, it is necessary to implement these strategies and to review your goals and progress periodically.

The amount you will need in retirement depends on the age you plan to retire, your desired retirement lifestyle, how long you expect to live and the rate of return you expect to earn on your investments. Social Security and employer-sponsored pension plans will probably provide a smaller percentage of what you will need than they did for your parents. The most important aspect of projecting your future needs is estimating how much you will have to save each year to produce the income you need to maintain your standard of living after you stop working.

Pre-Retirement Considerations

To maximize your retirement income potential, one or more of these strategies may need to be applied:

Invest to seek a higher rate of return on investments.

In a retirement plan, assets that have the potential for significant growth over the long term should be considered. It is important that your investment choices be consistent with the level of risk that you are willing to assume. In addition, good financial planning must always take inflation into account. If you disregard inflation, you may end up investing too conservatively. Together we can determine a suitable mix of investments that seeks to meet your objectives, time frame and risk tolerance.

Save more

It is hard to motivate yourself to save for retirement because it generally requires pending less money now. You will have a much better chance of achieving your retirement goal if you maintain (or even reduce) today's standard of living and save as much as you can. Retirement planners generally suggest committing 10% to 15% of your gross earnings, or earnings before tax, to savings for retirement.

Spend less during retirement

Many retirement experts estimate that you need between 70% and 80% of your pre-retirement income to maintain your standard of living during retirement. This may or may not be appropriate for you, as everyone's goals are different. Some of your expenses will increase and others will decrease. For instance, you may spend less on business clothing and lunches, but more on vacations. Also, consider the differences in your living expense for early and later phases of retirement. For example, you'll likely spend more on travel when you're 65 than when you are 85.

Retire at a later age

The effect of retiring later is two-fold. Not only will you have contributed to your retirement plan for more years, but also your salary is also typically higher at the end of your career. Retiring early means losing retirement plan contributions based on those later, higher income amounts. This normally results in a smaller pension. Another effect on retiring early is being retired longer, and being dependent on your investments for a greater number of years.

At Keystone Wealth Management we will also assist in determining whether assets retirement income should be in your name or the name of a trust or other entity. Structuring your investments ahead of time can have a significant effect on the net amount of funds available for your estate after taxes.

There are a number of options available for retirement planning. This list contains a few of the more common.

• Roth IRA (Individual Retirement Account)
• Traditional IRA, Spousal IRA, Nondeductible IRA
• 401(k)
• 403(b) TSA
• SEP – Employee
• SEP – Self Employed
• SIMPLE
• Defined Benefit
• Profit Sharing

Many Americans realize the importance of saving for retirement, but knowing exactly how much they need to save is another issue altogether. With all the information available about retirement, it is sometimes difficult to decipher what is appropriate for your specific situation.

One rule of thumb is that retirees will need approximately 80% of their pre-retirement salaries to maintain their lifestyles in retirement. However, depending on your own situation and the type of retirement you hope to have, that number may be higher or lower.

Fortunately, there are several factors that can help you work toward a retirement savings goal.

Retirement Age

The first factor to consider is the age at which you expect to retire. In reality, many people anticipate that they will retire later than they actually do; unexpected issues, such as health problems or workplace changes (downsizing, etc.), tend to stand in their way. Of course, the earlier you retire, the more money you will need to last throughout retirement. It's important to prepare for unanticipated occurrences that could force you into an early retirement.

Life Expectancy

Although you can't know what the duration of your life will be, there are a few factors that may give you a hint.

You should take into account your family history—how long your relatives have lived and diseases that are common in your family—as well as your own past and present health issues. Also consider that life spans are becoming longer with recent medical developments. More people will be living to age 100, or perhaps even longer. When calculating how much you need to save, you need to factor in the number of years you will spend in retirement.

Future Health-Care Needs

Another factor to consider is the cost of health care. Health-care costs have been rising much faster than general inflation, and fewer employers are offering health benefits to retirees. Long-term care is another consideration. These costs could severely dip into your savings and even result in your filing for bankruptcy if the need for care is prolonged.

Factoring in higher costs for health care during retirement is vital, and you might want to consider purchasing long-term-care insurance to help protect your assets.

Lifestyle

Another important consideration is your desired retirement lifestyle. Do you want to travel? Are you planning to be involved in philanthropic endeavors? Will you have an expensive country club membership? Are there any hobbies you would like to pursue? The answers to these questions can help you decide what additional costs your ideal retirement will require.

Many baby boomers expect that they will work part-time in retirement. However, if this is your intention and you find that working longer becomes impossible, you will still need the appropriate funds to support your retirement lifestyle.

Inflation

If you think you have accounted for every possibility when constructing a savings goal but forget this vital component, your savings could be far from sufficient. Inflation has the potential to lower the value of your savings from year to year, significantly reducing your purchasing power over time. It is important for your savings to keep pace with or exceed inflation.

Social Security

Many retirees believe that they can rely on their future Social Security benefits. However, this may not be true for you. The Social Security system is under increasing strain as more baby boomers are retiring and fewer workers are available to pay their benefits. And the reality is that Social Security currently provides only 20% of the total income of Americans aged 65 and older with at least $44,000 in annual household income.1 That leaves 80% to be covered in other ways.

© 2007 Emerald Publications