Part One of Three PartsPlanning for your retirement may seem like an impossible task, especially if you are looking 20 years or more into the future.
How can you possibly know how much you will need when that day arrives?
This is an excellent question for long-term investors, since their focus is always on the future.
One of the key questions in retirement planning is deciding how much you will need to have the lifestyle you want in retirement.
This is one of the most difficult questions to answer in retirement planning, because you have to make some assumptions about the future. This is the first of three articles looking at this problem and how investing in the stock market can help.
A rule of thumb is that you will need 70 to 80 percent of your current income to maintain your lifestyle in retirement. The exact number depends on your retirement plans and ongoing expenses.
If you are concerned about inflation, estimate your retirement income needs to 100 percent of your current income to be safe.
Do you plan to spend time at the library and gardening, or do you plan to travel extensively or buy a second home? Do you still have mortgage payments or automobile loans? Careful planning as you approach retirement will give you an idea of how much income you need to generate.
Planning for retirement that is decades away may seem like an impossible task, but don't let that stop you from making plans - no mater how far in the future they may seem. Here are three tips to get you headed in the right direction.
Tip 1: Advances in health care and greater attention to exercise and diet are helping us live longer, more productive lives. We're able to do more in our older years than ever before. That's the good news. The bad news is you could outlive your money.
Tip 2: Inflation is your worst enemy. Even though it has been held to a modest level in recent years, it still eats away at your nest egg. If it gets out of control again, people on relatively fixed incomes suffer the most.
Tip 3: Always count on your retirement costing more than you'd planned and your investments earning less than you'd hoped. Housing and health care expenses in particular tend to rise faster than the rate of inflation. Don't forget that you don't retire from paying income taxes.
Tip 1: Living a Longer, More Financially Secure Life
Financial planning would be a lot simpler if we all knew when our last day was coming. Advances in health care and people taking better care of themselves have created an age bracket of people who are living longer and feeling better.
If you are planning for retirement at age 65, you need to consider funding a lifestyle at least 20 years past that date. If you are a younger person, this may seem like an impossible task. Who can know what your needs will be in 20 years or more, much less how much they will cost?
No one can figure that out. Leave the fortune telling to others, and set some personal goals for your retirement fund. Don't limit your thinking to just tax-advantaged accounts, such as IRAs and 401(k)s. If you have fully funded those accounts, consider supplementing your retirement portfolio with nontax advantaged investing.
Although you can't know what it will cost to retire in the future, you can assume it will probably take more than you think. Include in your plan the appropriate growth investments that will potentially outpace inflation.
If you are 20 or more years away from retirement, you may find it easier to focus on maximizing your retirement savings now, rather than a goal you can't define. Shoot for a percentage increase in contributions each year as a short-term goal.
Conventional wisdom suggests that your investing should become more conservative as you draw closer to retirement. That is certainly sound advice. However, there is a real danger in adopting a strategy that is too conservative to extend your retirement nest egg for the remainder of your life.
Conservative investors may feel more secure in retirement maintaining that philosophy. You will probably need a larger retirement fund to counteract the effect of inflation and provide the cash to support your lifestyle.
Another strategy is to consider working part-time for some period after your "official" retirement. An income, even a small one, after retirement will extend the life of your portfolio by reducing the amount you need to withdraw for living expenses.
Investors with a moderate tolerance for risk may want to consider keeping a portion of their retirement assets in stocks, whether individual stocks or mutual funds. Stocks have historically performed better than most other investments over a long period. With the potential for better performance comes higher risk. A substantial drop in stocks could affect your retirement plans dramatically.
The challenge is to balance the risks and rewards of stocks with the stability and lower performance of more conservative investments. This strategy compensates for inflation and extends the income-producing years of your portfolio.