Retirement Needs Analysis
Most experts feel you need at least 75 percent of your pre-retirement income to maintain the same lifestyle after you retire. This percentage is called the wage replacement ratio (WRR).
Social Security benefits make up the foundation of one's retirement needs, but most people find they need much more than their Social Security checks. If you don't have adequate retirement savings, you might have to think about delaying retirement, or working part-time after you retire.
Plan on paying off as many of your debts and mortgages as possible between now and the time that you retire. An important part of retirement planning is planning for debt reduction or elimination.
Older retirees tend not to spend as much money as younger retirees. They normally don't have a mortgage, and they don't have expenses associated with travel and the other activities they enjoyed at a younger age. Most older people are less active, and therefore spend less money.
People who are 75 or older spend 26.5 percent less, on average, than those between the ages of 65 to 74. A good rule of thumb is to assume that by age 75, you'll spend 20 percent less than when you first retire.
Many older people do, however, spend more on medical care as they age, but usually not enough to offset the steady drop in the rest of their living costs.
Some older folks spend less only because their incomes dropped when they retired. Most retirees, however, cut back spending voluntarily, and almost half of them continue adding to their savings for several years after leaving their jobs.
As an example, let's assume that you retire when you're 66, and begin living on 80 percent of what had been your working income. And, let's assume you'll live another 25 years.
By age 75, you're likely to be spending just 64 percent of your former income. If you provide for a retirement income equal to 70 percent of your working salary, you'll probably be just fine.
The investment decisions you make at this point of your life are crucial in determining your ultimate retirement savings under a participant-directed plan.
If you invested $5,000 a year in a tax-deferred account earning an 8 percent annual return, for example, you would accumulate $247,000 after 20 years. If the same investment earned 10 percent annually (about the average annual return on common stocks over the past 30 years), your account would total $315,000 after 20 years—a full 28 percent more.
Invest wisely, and save as much as you can in your retirement accounts. Take advantage of the tax deferments, and plan for a happy retirement.
More on: Understanding Finances
Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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