Tuesday, January 1, 2554

Is saving for retirement too!

So says the title is seen periodically by various financial news outlets. An expert or another proclaims proudly that all noises on need so much money for retirement are nonsense. You can get with less.

If this is right, certainly would ease the minds of all citizens worried about having enough money during the withdrawal. Let's take a look at what might happen in the normal life of a retiree.

Shortly before retirement, most people are earning the highest rate of their lives. Of course, as a result of this, many of those people are spending even at higher speed. Children are out of the House and out of College (at least in some cases). MOM and dad have more free time. Travel have always been an interest in, and now, the world is open. Instead of the minivan tired in the driveway, maybe it's time for one of those beautiful luxury cars. After all, we have earned.

Here's the thing about spending habits. They normally don't just stop, even after the change of circumstances. As a consequence, many individuals continue to just retired retirement spending levels for awhile.

Eventually, the cost of most people begin to adjust downwards during the withdrawal. Don't eat so much; don't entertain much; you don't need to replace furniture and other household items so much; don't need work clothes. That car you bought will probably last a bit longer, why don't you drive to work every day. Just how spending drop of habits of a typical retiree it for debate (and depends very much on retiree), but let's factor in a drop of 25% or thereabouts in spending.

Social security will help to finance the bank account. Monthly benefit amounts vary from earlier gains, as well as age at the time of retirement, but let's use $ 2,500 per month as a nice round number that is $ 30,000 per year (in today's dollars). If you currently lives in $ 75,000 per year, and social security will provide about $ 30,000 per year, and lower spending in retirement by about 25%, it means that you have only a gap of about $ 26,000 a year.

If we assume that you'll stay in retirement for about 25 years to $ 26,000 per year, which is a total of $ 650,000. We can reduce this amount from your return of investment. A moderately conservative portfolio might be able to earn 7% +/-di every year. This means that you don't need $ 650,000. You only have about $ 325,000 or thereabouts, when retreating. I forgot one thing, though – inflation. At a rate of 3.5%, your dollars only go half up in 20 years. So, we'd better add that into the mix.

If we redo the calculation is the return of investment with inflation of factoring, the amount required to fund retirement moves at about $ 450,000. I also did add in likely rising health care costs. Studies show that the expected cost of fees for a couple of living in retirement is estimated in excess of $ 200,000 (and maybe quite a bit more, depending on your exact situation). Now, we're up to about $ 650,000 Pension Fund, as long as we don't have any significant additional expenses.

Let's wrap this up. If we give ourselves some slack and decide to live a little more frugally in retirement and not get sick very often, we need between $ 500,000 and $ 600,000. The latest data I've seen vary, but the majority of retirees have accumulated less than $ 100,000 by the time they retire. That leaves a financing gap of $ 400,000 or so.

The calculations above are not complete. Taking retirement, today, not in the future. Portfolio earnings can be higher (or lower) than those hired. Inflation can be different, too. Current income should vary social. Although the above numbers are off by a couple of hundred thousand dollars, there is still quite a gap for the average retiree. The bottom line is that most people aren't, in fact, enough for retirement savings.

Fortunately, some prudent budgeting adjustments, investing and retirement planning wisely can make all the difference.

The key is to start working on it. The first is better than later. Why not plan to take a closer look at your situation sometime soon?

Michael SnowdonMichael Snowdon, CFP ?
Greenwood Village, CO

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