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Retirement Planning
Identify Personal Goals
Gather Data
Evaluate Goals and Identify Obstacles
Develop Strategies for Goal Achievement
Design Implementation Steps
Review Progress
Identify Personal Goals
When defining your retirement goals, your description should be specific and measurable. For example, a goal to "retire at age 60 with resources to sustain current living expenses of $25,000 per year" is a goal which is both specific and measurable. Other examples of workable goals are "to have sufficient insurance coverage to fund long-term nursing home care" or "to build a retirement home costing $80,000." If you have several goals, you should prioritize them so that your resources will be allocated to the most important goal first. By assigning a priority to each goal, you also ensure that secondary goals won't take precedence over primary goals.
Gather Data
In this process, it is important to understand your needs. Many planners estimate retirement income needs by using a benchmark of between 70 to 100% of your current spending levels. To determine the appropriate percentage for your retirement, you need to determine if any of your current expenses will change when you retire. Will your travel and leisure expenditures increase? Will your job-related expenses for commuting and clothing change? Will you have to pay more for medical costs? It's generally accepted that many of your routine annual expenses will change during your retirement years. The trick is determining whether those expenses will increase or decrease, and by how much.
Another consideration in retirement planning is inflation. Because people are retiring earlier and living longer, the impact of inflation can be substantial. For example, a couple spending $25,000 per year for living expenses when they first retire can expect to spend more than $56,000 for the same living expenses in 20 years solely due to annual inflation of 4%.
Impact of Inflation
|
Based on 4% Inflation |
Based on 8% Inflation |
|
Cost of Living . . . |
Cost of Living . . . |
Today |
10 Yrs |
15 Yrs |
20 Yrs |
Today |
10 Yrs |
15 Yrs |
20 Yrs |
$25,000 |
$37,000 |
$45,000 |
$56,900 |
$25,000 |
$54,000 |
$79,250 |
$116,500 |
$30,000 |
$44,400 |
$54,000 |
$67,700 |
$30,000 |
$64,800 |
$95,100 |
$139,800 |
$50,000 |
$74,000 |
$90,000 |
$109,600 |
$50,000 |
$108,000 |
$158,500 |
$233,000 |
Both living expenses and inflation are important in understanding your retirement needs because you are planning for a period of time, not a point in time.
Once you develop your estimated living expenses over your retirement, you need to inventory the sources of your retirement income. Your retirement funds will probably come from a variety of sources. While you may have little control over amounts that will be paid from some sources, amounts from other sources are completely dependent upon your decisions. For example, your company's pension plan provides benefits commensurate with your salary level and years of service. The same is true for your Social Security benefit. These benefits are based upon formulas incorporating your age, income, and years of employment.
On the other hand, you can have significant influence over your contributions to company-sponsored savings plans (sometimes known as 401(k) plans). Although your employer must sponsor the plan, and may even provide matching contributions, it's up to you to use the plan. To make the most of this savings opportunity, you must be disciplined and establish regular contributions based on a percentage of your income. You're also responsible for learning about the available investment options. Your contributions are generally portable -- which means that if you change employers, the funds can be transferred to your new employer's plan or rolled into an Individual Retirement Account (IRA).
Finally, you have absolute control over your personal savings programs. You can select your own bank savings accounts or Certificates of Deposit (CD), manage investment mixes in your mutual funds, or select maturities of bonds purchased by your broker.
Federal laws can also influence your retirement resources. Pension plans can be distributed in lump-sums or paid to you over your life or the joint lives of you and your spouse. Your distributions are taxed as you receive the benefit payments. Social Security benefits are taxed at different tax rate for some individuals and the benefits can be reduced if you earn too much from part-time employment during retirement.
Perhaps the greatest impact of federal tax laws on retirement planning is the fact the taxes on contributions to funds and investment earnings in company qualified savings plans, IRA's, and other tax-deferred vehicles such as annuities are not paid until the funds are withdrawn from the account. As you can see, a tax-deferred savings program can make a difference in your the amount you accumulate for retirement.
THE POWER OF TAX-DEFERRED COMPOUNDING
The Impact of How You Save for Retirement
Type of Investment |
After-Tax/Taxable Earnings (Example: Passbook Savings Account) |
After-Tax/Tax Deferral on Earnings (Example: Non-Deductible IRA) |
Pre-Tax/Tax Deferral on Earnings (Example: 401(k) Plan) |
Value at end of: |
|
|
40 years |
$6,764 |
$15,642 |
$21,725 |
35 years |
$5,112 |
$10,645 |
$14,785 |
30 years |
$3,863 |
$ 7,245 |
$10,063 |
25 years |
$2,920 |
$ 4,931 |
$ 6,848 |
20 years |
$2,207 |
$ 3,356 |
$ 4,661 |
15 years |
$1,668 |
$ 2,284 |
$ 3,172 |
10 years |
$1,261 |
$ 1,554 |
$ 2,159 |
5 years |
$ 953 |
$ 1,058 |
$ 1,469 |
Amount Invested |
$ 720 |
$ 720 |
$ 1,000 |
Assumptions: The individual earned $1,000 before taxes, is in the 28% tax bracket, and is earning an 8% interest rate on his/her investment. |
In analyzing your retirement resources, it's important to note that all assets must be converted into a common form which will reveal your expected income stream during retirement.
Evaluate Goals and Identify Obstacles
Using the data gathered, you can now compare your retirement income needs to the projected income stream generated by your retirement resources. If your retirement resources exceed your needs, the excess can be used to fund other goals. If there is a shortfall, (or retirement gap) you are now able to quantify the amount needed to fill the gap.
Develop Strategies for Goal Achievement
The first steps of the retirement process quantify the difference between your estimated needs and your projected resources. If there is an excess, you can develop and prioritize new goals for using the additional funds. These goals may include more retirement travel, earlier retirement, or providing for your grandchildren's college education.
Design Implementation Steps
After you develop and document the strategies or alternatives that can be utilized to achieve your goal, you should create an action plan that reflects the alternative or alternatives you select to meet your goal. This plan should list:
Action Plan
- The action -- increase retirement resources.
- The person who is responsible for completing the action
- The completion date -- to do on pay day each month.
- The expected cost -- cost is $75 per month ($900 per year).
Review Progress
Once you develop your plan, the process is dynamic. As you revise and prioritize your projected goals, you may see changes in your estimated income needs, projected resources, and other assumptions. It's a good idea to review your action plan regularly and if necessary, make changes to make sure it still meets your needs. |
