Retirement Planner – Don’t Plan Your Retirement Until Your Read This First!

From the desk of: Keelan Cunningham
Date: February 07, 2012
Re: Retirement Planner...

No one disagrees that retirement planning is a good thing yet many people fail to take time to plan.

If there is a retirement plan in place, it has often been left till the last minute, maybe even just a few years before retirement. This article offers an outlook on retirement planning that may shock some of you.

If you love doing what you’re doing you’ll most likely never want to retire. It’s often said that most of the wealthiest people in the world still work in their own companies not because they have to but because they want to and enjoy it. However, I bet you they all have retirement plans folded away neatly in their back pockets.

For many people their job-description becomes their self-description and so when they retire from work they can feel worthless and wither away fast. To cap things off, many retirees at 65 die within 2 years of retiring. Jeez, what an anti-climax! It’s no wonder people don’t bother planning their retirement!

No Job, No Stress, No Pay!

A popular rule-of-thumb claims you need roughly 70% of your pre-retirement income (90% if you wish to maintain your pre-retirement standard of living). Work-related expenses will decrease whilst healthcare, leisure-related expenses increase. This assumes you’re in relatively good health and medical care costs are modest. If your health is poor your healthcare expenses will escalate.

Financial security during retirement is probably priority no. 1 for most people. To live securely and comfortably in retirement for many people means at the very least generating sufficient income passively by means of some retirement savings plan or other financial assets to allow them to live according to their usual standard of living.

There are 4 typical sources of retirement income:

• Social security benefits

• Employer-sponsored retirement plans

• Post-retirement employment income

• Personal savings and investments

Whilst you may be diligently putting away for your retirement, the real challenge is to know your retirement income needs way before you ever want to retire. Try one on the many retirement income calculators available online to work this out.

When calculating the expenses you will have in retirement, keep in mind that they are in today's dollars. To get a better idea of what they will be when you are ready to retire, you should adjust them for inflation. A current income need of $20,000 per year adjusted by 4% inflation year on year translates to a requirement of $43,800 per year 20 years later.

Cat Food or Caviar!?

A standard employer-sponsored retirement savings plan such as a 401(k) is the mainstay in most financial retirement plans. Individuals can utilise a standard IRA or Roth IRA also. Many self-employed people opt for a Self-Directed 401(k). Relying on a standard retirement savings plans will prove unsatisfactory as it generally will fall way short of your retirement income needs. However, faced with a choice of having a standard retirement savings plan (e.g. a 401(k), standard and non-standard IRAs etc.) versus having no retirement savings plan at all, I would definitely prefer to have even a standard 10% of my earnings invested in standard retirement plan than in nothing at all. If nothing else it’s a good habit to “save and invest” a % of your income. However, unless you are putting away large chunks of cash into your retirement plan, it alone is probably not going to give you more than a lower-middle class lifestyle during your retirement.

Typically, if your retirement income needs are modest, social security benefits may provide 20-30% of your retirement income whilst employee-sponsored retirement plans may provide 20%. Therefore, it is your personal savings and investment strategies that will be the key differentiator between you living off cat food or caviar!

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