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Planning Retirement: Making the Numbers Add Up

| October 15, 2018
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Americans are living longer, healthier lives than ever before. As a result, for many people, retirement may last 20 years or more. So, if “time is money,” how many years do you have in the bank? Because inflation will most likely decrease the purchasing power of your money over time, your dollars may buy less during your retirement than they do today. For example, at 3.5% inflation, $100 today would be worth only $42.31 in 25 years, and this amount would be further reduced to $30.00 in 35 years. 

The sooner you start building your nest egg, the longer it has to grow. Consider the following examples that assume no taxes or inflation. Suppose, at age 25, you save $100 per month for 20 years and earn 6% interest. If you make no additional contributions after the age of 45 and your savings continue to earn 6% interest, at age 65 your savings will be worth $148,182. However, if you don’t begin until age 45 (saving $100 per month for 20 years at 6% interest), at age 65 your savings will be worth only $46,204. In order to achieve savings of $148,182 over 20 years, you would need to earn interest at a rate of approximately 15% per year—or save significantly more than $100 per month! 

While both scenarios illustrate the same amount of money being saved per month, the additional 20 years and the compound interest factor make a big difference. If you are in your prime earning years and start setting money aside now, you may have a better chance of meeting your retirement funding goals. 

Identify Your Goals  

The first step in preparing for your retirement is to determine your objectives. How do you envision your “golden years”? Spend some time thinking about what is really important to you, and consider what you want your future to look like. For example, at what age do you want to retire? Where do you see yourself living? Do you expect to travel frequently? Would you like to continue to work on a part-time basis? Do you see yourself playing golf every day? These questions and others can help you shape a vision for your retirement. 

Once you have a sense of your goals, estimate your financial needs. Generally, a retiree’s living expenses are roughly 30% less than his or her expenses during working years. While some costs may increase, such as health care and leisure activities, others may decrease. For example, retirees tend to spend less on mortgages and education.  

Know Your Resources 

The second step in preparing for your retirement is to determine from where you will attain your retirement money. Most people draw on three main sources of income during retirement: Social Security, employer-sponsored plans, and personal retirement savings. Each offers important resources that can add to your overall retirement savings. 

With Social Security, the benefits received are based on the income you have earned over the course of your life, subject to a maximum amount. It offers, for most, only a base level of income. Therefore, many retirees supplement Social Security benefits with savings from employer-sponsored plans, such as pension plans, 401(k) plans, 403(b) plans, Simplified Employee Pensions (SEPs), and Savings Incentive Match Plans for Employees (SIMPLEs). The tax advantages and, in many instances, matching contributions from employers make these savings vehicles popular complements to personal retirement savings, which often include traditional Individual Retirement Accounts (IRAs) and Roth IRAs. 

Make a Plan 

Now that you’ve thought about your retirement objectives and your potential sources of income, the last step is to develop a plan that helps you address any potential shortfall in your retirement savings. Analyze your current spending habits to find out where your money is actually going and how much you have available to put aside for retirement savings. It may be worthwhile to investigate ways in which you can adjust your lifestyle to decrease spending, and thus increase the amount available for savings. Can you “nip and tuck” without detracting from your quality of life? Are there short-term sacrifices you are willing to make for long-term gain?

When it comes to preparing for retirement, stick to your plan, but be sure to monitor it regularly, as your needs may change over time. Make sure your disciplined approach to saving continues to meet your current and future goals. It’s never too late to start saving. Put yourself in a position of working toward your retirement goals, as soon as you can.

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