Paying for Your Retirement Vision
How do you picture your retirement? Maybe you'll be traveling the world. Or golfing. Or just relaxing and enjoying the grandkids. Now ask yourself how you're going to turn that picture into reality. Will your current path allow you to pay for your vision of retirement?
"The future ain't what it used to be"
Baseball legend Yogi Berra may have summed up retirement best with this colorful, yet insightful, quote. For better or worse, retirement is indeed not what it used to be. The days of leaving the company at age 65, gold watch in hand and retiring to the rocking chair on the porch is no longer a typical retirement scenario.
The new vision of retirement, for many, is to be active, involved and engaged in life. Paying for that vision, though, is another story. A number of factors could put your retirement income goals at risk. Without planning, outliving your savings is a real possibility. So, are you ready for your retirement?
Longer life, longer retirement
People are living longer than ever nowadays. That's the good news. The bad news is that means you may need more money for retirement. The Society of Actuaries reports that a 65-year-old male has a 50% chance of living to age 85, while a 65-year-old female has a 50% chance of living to age 88. And the odds of at least one member of a 65-year-old couple living to 92 is 50%.1
Trying to figure out how long you'll live isn't realistic. Your best bet is to count on living longer than you think, and consider the possibility that you may need retirement income into your 90s.
Expenses can be so expensive
According to general retirement guidelines, your savings will need to replace 70-80 percent of your pre-retirement income in retirement – depending on how active (or expensive) a lifestyle you plan. While some expenses may disappear when you stop working, others will quickly replace them or increase.
You can likely say goodbye to work-related expenses, such as clothes, lunches out, payroll taxes and retirement plan contributions. But you'll have plenty of new expenses, like travel, health insurance and medications. And, 69 percent of Americans turning age 65 will need long-term care services at some point in their lives2 – a number expected to increase over years.
The bottom line is that during retirement, you'll likely be in a spending mode, as opposed to a saving or earning mode. You'll need to take that into account when planning your retirement savings.
"A nickel ain't worth a dime any more"
Another amusing Yogi Berra quote helps sum up the impact inflation can have on your retirement savings goals. Even low inflation can damage your purchasing power in retirement. For example, if you bought a gallon of milk for $4.29, if you project a 3% inflation rate over the next 25 years, that same gallon would cost you $8.98 in 2035.
Will your retirement savings let you afford a nine-dollar gallon of milk? If the rate of return on your investments isn't outpacing inflation, affording a gallon of milk could be the least of your worries.
The rest is up to you
What about Social Security and pension plans? In recent years, these traditional sources of retirement income have become a smaller part of the equation. Consider that for the average worker, Social Security replaces only about 38 percent of pre-retirement income.3 In addition, defined benefit plans, such as pensions, have been on the decline for years, with only about 38,000 plans today, compared to a high of 114,000 in 1985.4
For the next generation of retirees, these numbers may be even lower. So, it's up to you to make up the rest.
Between living longer, expenses and inflation – even with Social Security – you'll need to save more than you think. And you'll need to invest more wisely, too. Even a small difference in the rate of investment return can make a huge difference in your total earnings when you retire.
Investing in a retirement plan
Whether you choose to invest aggressively or conservatively, the key to a long-term investment plan is taking advantage of tax-deferred savings opportunities (with tax-deferred plans, taxes are due upon withdrawal). Your employer-sponsored retirement plan is one such option that may be available to you. Opening an IRA is another.
A traditional IRA is similar to an employer-sponsored plan in that it lets you contribute before-tax money and accumulate interest on a tax-deferred basis. That means you won't pay income tax until after you begin taking withdrawals at retirement – when you'll likely be in a lower tax bracket. With a Roth IRA, you contribute after-tax dollars. Investment gains, if any, are also accumulated on a tax-deferred basis, but when you retire, distributions are tax-free.
A plan to get there
No matter what your vision for retirement, be sure to understand the importance of a long-term approach to saving; expect to save more than you thought; and consider taking advantage of tax deferral opportunities, such as an IRA or your employer-sponsored retirement plan.
Yogi Berra also once said, "You got to be careful if you don't know where you're going, because you might not get there." If you don't have a clear picture of your retirement, then you may indeed never get there.
1 Source: Annuity 2000 Mortality Table; Society of Actuaries. Figures assume a person is in good health.
2 American Association of Homes and Services for the Aging.
3 Fast Facts & Figures About Social Security, 2011. Rep. Vol. 13-11785. Washington, DC: Social Security Administration, 2011.
4 "Choosing a Retirement Plan: Defined Benefit Plan." Internal Revenue Service, United States Department of Treasury. August 2010.
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