Setting Your Retirement Goals

If you absolutely had to be in a place 1,000 miles away from home within a very specific timeframe, would you plan your travel route to get there? Most people, of course, would plan. Yet, many people ignore planning when considering the path to a goal we all share--one that sometimes also seems miles away.

No matter who you are, you will retire one day--and according to statistics, you'll stay there for a long time. Today, the fastest growing segment of the population is age 80 and over, and the average life expectancy will continue upward as we move through the century. This means you can spend a third of your life or more in retirement!

A Different World?

Many studies show that Americans underestimate what they'll need in retirement because they assume their cost of living will decrease--and some costs will decline.

Most retirement planning experts agree that retirees need from 70 to 85% of their preretirement income to maintain their lifestyle in retirement. This assumption is based, in part, on the likelihood that your mortgage is paid off, income taxes will drop along with your earnings and the cost of raising children has long since passed.

Now for the bad news. Almost everything else will cost more. Inflation, even when minimal, can shrink your savings dramatically in retirement. Many costs during retirement are hard to predict. You will be part of the sandwich generation, squeezed by the cost of caring for an elderly parent while helping your adult children? How much will you really receive from Social Security after taxes and possible cutbacks? Can you count on Medicare and Medicaid?

Begin Planning

Next, figure into your equation questions only you can answer. Will you retire to an area with lower or higher cost of living, or will you stay put? When will you retire? Will you work part-time or, perhaps, open a small business?

Once you know what retirement will look like, then you must decide how to get there. Social Security is one leg, albeit a shaky one, of a three-legged retirement savings stool. This important benefit may survive doomsayers' prediction of its demise, but will it look the same when you're ready to retire? Already, Social Security benefits of higher income recipients are taxed. Will everyone pay tax on these benefits down the road?

Another change in Social Security is guaranteed--the age at which you'll receive full benefits will increase to 67 by the year 2027. You can still retire before then, but you won't receive benefits until age 60, and only 80% of full benefits at that.

Social Security typically makes up no more than 40% of the amount retirees believe they'll need to live comfortably. That's where the other two legs of the retirement stool come into play--personal savings and employer-sponsored retirement savings plans.

If you're like most people who have spent a lifetime paying bills, you might not have a personal savings that is sufficient to meet your retirement income goals. Some people will receive an employer-paid pension--often still not enough to make up the difference. Employer-sponsored plans such as 403(b)s and 401(k) plans may help complete the retirement savings picture.

Early, Often & Smart

Begin early. If you average a $150 monthly contribution from age 25 until age 65 and never miss a month, you'll have saved $72,000. Figure a modest 8% return, and your nest egg at retirement is $524,000--a seven-fold increase of your investment. That's interest and time working for you and your money.

Now here's the best part. Add an employer match of 50% of contributions, that's $225 a month going into your plan. Figure the same rate of return, your investment balloons to $785,000 at retirement.

Save smartly. You may have heard of investment risk and thought of high-growth-potential investment options, which offer more potential risk and reward. There's another type of investment risk, too--investing too conservatively.

If you begin when you're young, it is likely you can ride out the highs and lows of more volatile, higher yielding investment options. Remember, saving for retirement is a long-term goal. If for the same $225 a month beginning at age 25, your plan investments averaged a 9% return, instead 8, your retirement benefits would total $1.05 million at age 65. That's a difference of $365,000 from your return on eight percent.

Begin Now!

Now you know what retirement might look like, how much you'll need to enjoy your later years and how you'll need to save to get there. Only you can complete the trip successfully by making a plan that will work and by sticking to it.