How
to Harvest the Rewards of Retirement
First in a four-part series
Introduction•
Step One •
Step Two •
Step Three •
Step Four
Retirement involves making changes -- to schedules, priorities, activities
and finances. One of the major transitions many people experience
at retirement is going from the predictability of receiving a paycheck
to the relative unknown of relying on pension checks, Social Security
and personal savings and investments.
Information in this article and the next three issues will help minimize
the stress of entering that unknown by outlining the decisions you’ll
be making at retirement and offering some general advice about retirement
planning.
Step 1
Determining how Much Money You Will
Need
The amount of money you’ll need for your retirement depends
in large part on two factors:
1. The number of years you will spend
in retirement.
This estimation is a function of your age at retirement and your life
expectancy. Of course, people who retire at 50 will need a larger
nest egg than those who wait until age 65. But too often, people tend
to focus on their age at retirement (“I’ll retire when
I’m 62”) rather than the length of time they’ll
be retired. With today’s life expectancies, you may spend 15-20
years in retirement, on average. And many of us will live longer than
that.
Why is this fact important? The longer you live, the more money you’ll
need. This issue is of special concern to women, who tend to live
longer than men.
A note about early retirement
Many people dream of retiring early (before age 62 or 65). From a
financial standpoint, early retirements must be planned very carefully.
Make sure you have all the information you need to make a well-informed
choice. If you’re thinking about early retirement, keep the
following things in mind:
No
benefits are available from Social Security prior to age 62, and benefits
are reduced between ages 62 and 65. People
born after 1937 face an increased age at which they are eligible for
full Social Security benefits.
For those born in 1960 or later, that age has been increased to 67.
Many
defined benefit pension plans also reduce benefits for people retiring
before age 65. The IRS will impose a 10 percent penalty tax on pension
distributions made before age 59-1/2 (unless you qualify for certain
limited exceptions). Enrollment in Medicare is usually prohibited before
age 65.
2. Your anticipated standard of living
during retirement.
Your lifestyle will affect the amount of income you’ll need in
retirement. Do you have expensive hobbies or extensive travel plans?
Will you want to make higher or lower contributions to charity? Are
you planning to buy -- or sell -- a second home?
It’s generally assumed that a person’s income during retirement
doesn’t need to be as high as his or her pre-retirement income.
Why? Many living costs will decrease during retirement (including transportation
and clothing). On the other hand, some expenses will increase (such
as travel or health care).
One rule of thumb is that retirement income should be 70-80 percent
of current income, adjusted for inflation. It’s important to note,
however, that income needs during retirement are highly individual --
there’s no “right” answer for everyone.
Don’t forget inflation
It’s not enough just to preserve what you have now -- you need
to make your money grow just to stay even with the rising cost of living.
Over the past 30 years, inflation has eroded the purchasing power of
the U.S. dollar by 75 percent. In other words, something you could buy
for $25 in 1964 would cost $100 today. Even a modest rate of inflation
can erode a retirement nest egg over time. So make sure you take inflation
into account when you’re planning for retirement.
This information has been provided to you courtesy of Ministers'
Life, Ascend Financial Services, Inc., Securities Dealer, member NASD/SIPC.
98-0227-85002R
