You've read that Social Security and your company pension plan probably will provide less than two-thirds of the income you'll need during your retirement years. You'd like to do something to make up the difference, but you really don't know where to start.
How do I find out whether I can afford to retire?
The truth is, most people never sit down and figure out how much they'll really need. Research conducted by the International Association for Financial Planning has shown that while a comfortable retirement ranks as the number one financial goal for most Americans, very few know what to do about it. They don't realize that a small investment each year could create a portfolio large enough to meet future needs.
Where can I get help to plan for my retirement?
Using the financial planning process, your financial advisor can help you decide how best to plan for your financial needs during retirement. The financial planning process includes:
- Gathering data about your current situation and your current expectations for retirement;
- Setting goals for retirement needs;
- Quantifying any gap between your needs and resources;
- Analyzing the alternatives (systematic investing and other strategies) to reach your goals;
- Deciding on and implementing your preferred strategies;
- Reviewing your goals, resources and progress periodically to ensure that, with changing circumstances, you are still on track for a comfortable retirement.
Can my advisor help me decide how much to save?
Your financial advisor will help you determine your income needs during your retirement years, and develop a year-by-year investment approach that will meet those needs. The process involves seven basic steps:
1. Estimating future income needs in today's dollars.
2. Calculating that amount in future dollars, based on inflation rate assumptions.
3. Estimating expected income from Social Security, employee retirement plans and other sources.
4. Calculating the additional amount that you'll need. (Subtracting #3 from #2.)
5. Making a reasonable assumption about future life expectancy.
6. Estimating the lump sum necessary to generate the additional dollars needed during retirement years.
7. Computing the annual savings which, when invested at an assumed rate of return, will produce this lump sum between now and retirement.
How much income will I need during retirement?
Even before you seek professional advice, you can calculate a rough estimate. Starting with your current budget, subtract expenses related to raising children, mortgage payments (if your home will be paid for), and job-related expenses (such as transportation). Add back estimated costs for travel plans and make some provision for increased medical care.
Is there any way to cope with inflation?
Yes! By making your money work harder. Generally, inflation is the biggest threat to your future security. Some investments, like savings accounts and government bonds, usually keep pace with inflation. Others, like real estate and gold, generally appreciate faster when inflation is high, but may lose value during low-inflation periods. Some types of mutual funds have consistently earned returns at a higher rate than the inflation rate over time, but at the risk of short-term drops in value.
Which investments are right for me?
Most financial advisors will recommend that you diversify your assets among several investment categories, depending on the level of risk and rate of return you're comfortable with and how long the funds will be invested. Your financial advisor also can evaluate short and long-term prospects for individual investments within each category - for example, stocks, bonds, mutual funds, or direct investments in real estate or other assets. Your advisor also can help you implement your investment choices, if you wish.
What my Social Security benefits will be?
Any determination of future needs should be based on an estimate of how much Social Security will contribute to your income. Your advisor can estimate the benefits you are likely to receive at retirement.
Unfortunately, Congress can change methods of calculating benefit allocations at any time, so it can be risky to expect Social Security benefits to keep pace with inflation.
What I need to invest is too much; what do I do now?
No reputable advisor will expect you to put aside an unreasonable amount each month. Start an investment plan now and increase your contributions to it as your income increases.
Also, remember that you may be able to defer taxes on both your contributions to and earnings in some retirement plans, such as 401(k) plans and Individual Retirement Accounts (IRAs). Even if your investment must be made with after-tax dollars, you can choose one of the many tax-advantaged investments available. Your earnings can grow with taxes deferred until you withdraw the money after you retire.
Does it matter where I take income when I retire?
It could matter a great deal whether you take income first from your retirement account or your personal investments. For one thing, IRAs and retirement plans have minimum distribution amounts that must be taken by age 70 1/2. Whether you take the minimum or more, or whether you begin to draw income from your retirement plan at an earlier date depends on your objectives and on how much flexibility your company's plan offers. Will it provide you with a fixed amount or will your income depend on investment performance? You also should arrange your benefits to avoid the excise taxes on "excess" distributions from retirement plans.
What are my options after retirement?
Suppose I can't set aside enough money to generate the income I'll need, or make my money work hard enough to make up the difference. Is there any way I can reduce the investment amount I'll need at retirement?
There are several ways. Rather than living off investment income exclusively, it may make more sense for you to use a portion of the principal each year, defer your retirement date, reduce your spending level expectations, or begin a new part-time career.
Another approach is to look at your non-income-producing assets - chief among them the family home. Its value could become part of the investment pool and used, for example, to buy an annuity that would provide additional income for life.
Will reaching my goal offer other benefits?
Your most important benefit is a sense of control over your financial destiny and the ability to measure your progress as each year goes by. With periodic reviews and your financial advisor to call on whenever you have questions, you'll always know where you stand financially.
No two financial situations are alike. To find out what shape your plan will take you might want to schedule an appointment for a consultation. |
