Planning and saving for retirement, like estate planning, may be something you'll get to later. But when later arrives at retirement age, you may not have the financial resources to enjoy your golden years.
Long gone are the days when you could expect the traditional sources of retirement income, such as social security or your company's pension plan, to carry you through retirement. This is the result of several factors including inflation, longer life expectancies, company cutbacks of medical and pension benefits, and the rising age requirements for full social security benefits.
By taking an early and active role in planning for your retirement years, however, you can stay ahead of the game. Building up your personal savings should be at the center of your overall retirement planning strategy. Your savings could come under increased pressure in future years to make up for the shortfall caused by corporate and government retirement benefit cutbacks. Essentially, the sooner you start saving, the more fulfilling your golden years can be.
Setting specific goals is the first step in planning for your retirement. That means figuring out when you want to retire and what kind of lifestyle you want to have. The younger you are, the tougher it is to calculate exactly how much money you'll need at retirement. A popular rule of thumb is if you earn $100,000 or more annually prior to retirement, you will need almost 70 percent of that amount annually to maintain your standard of living after retiring. Your financial needs could be greater or smaller, of course, depending upon your individual circumstances.
There are many influential outside forces which are causing more workers today to recognize the importance of personal savings for retirement:
Medical Benefits: In response to soaring retiree health care costs, many cost conscious employers are reducing health coverage for their retired workers. Companies are making retirees pay a greater share of the premium, tightening eligibility requirements, and requiring higher deductibles. Some businesses are even eliminating retiree coverage altogether. According to a Foster Higgins survey, only nine percent of firms with under 500 employees now offer coverage to retirees.
Pension Benefits: Employer-sponsored pension plans are an important source of retirement income for many employees. But recent changes may ultimately mean a decline in the standard of living for tomorrow's elderly. One trend is that companies shift from defined benefit plans toward defined contribution plans. As a result, the decision and risk on how to invest pension funds is shifting from employers to employees, and many employees who make their own investment decisions are inclined to choose low-risk/low-return investments. Without greater diversification, however, that strategy may leave one with a lower-than-expected standard of retirement living.
Social Security: A tidal wave of Baby Boomers will begin straining the social security system as they start to retire. Once considered politically untouchable, the system's walls started cracking in the 1980's when benefits for couples earning over $32,000 were partially taxed for the first time. Higher social security taxes or reduced benefits remain a possibility in the future. So don't rely too heavily on social security to bankroll your retirement.
Other Factors: Inflation and family needs also can impact your retirement plans. Although the rate of inflation has been relatively low in recent years, the long-term effects of even a low inflation rate can eat away at your pension investment returns. Saving for your children's college education bills and caring for your elderly parents may also erode your savings.
There's no need to panic, but you should start planning for your retirement now. More than ever, it's up to you how large a nest egg you'll have at retirement. If you would like an assessment on how much money you'll need to retire on, to see if your current retirement plan will achieve your goals, or any other questions regarding your golden years, please don't hesitate to set up a consultation.