Happy America Saves Week! February 21-28, 2010 has been designated as ‘America Saves Week,’ which is designed to encourage individuals to ‘Build Wealth Not Debt.’ You can visit www.americasavesweek.org to learn more about the week, and to view and listen to different savings messages.
So how are you going to celebrate America Saves Week? Why not start with one of the most important, if not the most important, savings goal – Retirement Planning. Are you on-track to retire when you want? And will you have enough money to make it through retirement? You’d be surprised at how many people don’t really know the answers to those two questions. You may have an idea, but do you really feel confident about your answer? For starters, a good retirement calculator can estimate if you are currently saving enough. Click here for a retirement calculator that I recommend to individuals. Below are a few tips and things to consider when completing the calculator:
Planned Retirement Age – I recommend completing the calculator twice using two different ages in this section. First, enter the age at which you want to retire. Once you have the first set of results, change your answer to the age at which you consider to be your worst-case scenario.
Desired Replacement Rate – A good rule of thumb is that you will need 80% of what you earned before to live comfortably. However, if you expect your income taxes to stay the same or rise during retirement, you should shoot for closer to 90% of what you earned pre-retirement. Here are some of the reasons you won’t need the same amount of income during retirement – Your house may be paid-off, you may be done providing for your children, you’ll no longer need to pay disability insurance premiums if you don’t have earnings to replace, and you will most likely spend less on new clothes and new cars. And, since you will be retired, you won’t need to be putting away extra money to save for retirement.
Expected Age of Death – I like to recommend using the age of 90 for life expectancy. However, your own health, as well as the health history of your parents, can influence this number. For example, if both of your parents lived until the age of 95, I would recommend planning on living that long as well. Or, if you already know that you are not the healthiest person, and both your parents only lived until the age of 70, you may want to consider using 80 or 85 for your planning. The biggest thing here is to be conservative – I’m sure you would much rather have extra money when you die that goes to your heirs, as opposed to running out and needing to ask your heirs for money to live on.
Inflation Assumption – The long term average inflation rate from 1913-2009 is 3.41%. However, you’ve most likely heard in the news lately about the possibility of inflation rising in the coming years due to all the money that has been printed over the last year. I would recommend entering an inflation rate of 3.5%, but then running the calculator a second time using a rate of 4.0% just to see how much your plan can be affected by an increase in inflation.
Rate of Return – This is probably the hardest number to estimate, as well as the most important. Just a 1% difference can make a huge difference. To be conservative, I recommend using an expected rate of return of 7-8% before retirement. Of course, this number could be higher or lower depending on your personal risk tolerance and how aggressive your portfolio is. Once in retirement, I recommend using an expected rate of return of 4-5%. The key here is that you need your retirement rate of return number to be equal or greater than the rate of inflation so that your buying power is not diminished.
Social Security Benefits – You should receive an updated Social Security statement in the mail annually that shows your estimated benefit amount depending upon your age at retirement. However, if you have misplaced your statement, you can visit this Social Security website to calculate an estimate that you can input as your expected Social Security benefit. If you haven’t received your statement, contact the Social Security Administration at 1-800-772-1213 or online at http://www.ssa.gov/.
So, now that you’ve checked to see if you are currently saving enough for retirement, how do you feel? It’s possible that you are nowhere near as close as you thought you were. Don’t let this frustrate you and keep you from doing something about it. The biggest piece of advice I can give you is to act now – The longer you wait to start saving more, the harder it becomes to reach your goals.
By hiring a fee-only financial planner, you can have a comprehensive retirement plan created for you that will be tailored to your own situation and give you a more detailed answer than a retirement calculator. A fee-only financial planner can also hold you accountable and give you the guidance and discipline that you may be lacking. On the flip-side, you should be leery of a financial advisor or planner that is trying to sell you retirement products (annuities, loaded mutual funds, insurance, etc.) because he/she may be giving you advice that is in their best interest, and not yours.
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If you aren’t sure whether your portfolio is positioned properly for the current market environment based on the amount of risk that you’re comfortable with, we always provide a FREE 2nd Opinion Portfolio Review and would be more than happy to discuss your financial planning goals with you – please click here to schedule your meeting, or give us a call at 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.