Investing For Your Future
Monthly IFYF Investment Message
June 2005
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Do you know how much money you need to save in order to have a comfortable retirement? If you answered "no," you are not alone. According to the 15th annual Retirement Confidence Survey (RCS), released by the Employee Benefit Research Institute (EBRI) in April 2005, only about 4 in 10 workers (42%) say they have tried to calculate how much they need to save for retirement. That means that more than half of all pre-retirees don't have a clue if their current level of savings is adequate to continue their standard of living in later life.
What can you do to get started planning your retirement savings needs? EBRI recently issued a list of consumer tips based on the results of the 2005 RCS. First, they recommend studying your Social Security benefit estimate statement when it arrives (normally about 3 months before your birthday). Pay particular attention to your full retirement age (FRA), which is the age that you will be eligible for full benefits. For the past few years, FRA has been slowly increasing. If you were born between the years 1943 and 1954, your FRA is 66. If you were born in 1960 or later, FRA is age 67.
Next, get an estimate of how long you might live. There is an interactive Internet tool at www.choosetosave.org that uses factors such as personal health and family history. EBRI also advises using the Ballpark Estimate calculator on that same Web site to get an estimate of what you need to save and to sign up for your retirement plan at work for automatic payroll deduction savings. In addition, EBRI recommends increasing the percentage of income you save every time you get a raise. The 2005 RCS found that 55% of non-participants in retirement plans favored a feature that automatically raises workers' contributions when they receive a pay raise.
EBRI also advises thinking about your health and health care costs when making retirement decisions. The 2005 RCE found that about 40% of those who retire earlier than planned do so for health reasons. They also caution about counting on work in retirement as a major source of retirement income. The report, found at www.ebri.org, states "Although work for pay during retirement is rising, it is unlikely that all who would like to work will be able to do so."
So how much money is needed for a comfortable retirement? It depends. Start by making a list of current income and expenses. Look at the list and decide which expenses will end (e.g., commuting costs) or be reduced (e.g., clothing) after you retire. Then list new expenses that begin in retirement (e.g., long-term care insurance or Medigap health insurance premiums) and new sources of income (e.g., a small business). Do the math and create a post-retirement spending plan. As you crunch the numbers, also begin to envision your lifestyle retirement. Ask yourself questions such as What do I want to do? Where do I want to live? and What makes me happy?
There are numerous Web sites and online calculators to help you calculate how much you'll need to save. Use the Ballpark Estimate to get started and visit the Web sites of investment firms, Cooperative Extension organizations, and financial publications for additional online calculators. Many financial publications cite a commonly used guideline of replacing 70% to 90% of pre-retirement income. For example, if you're making $50,000 a year before taxes, you might plan for $35,000 to $40,000 in retirement to maintain approximately the same standard of living.
While guidelines are useful to begin the planning process, personalized calculations are much better because no rule of thumb fits everyone. Retirement is anything but a one-size-fits-all experiences because personal values and retirement resources (e.g., employer subsidized retiree health insurance) vary widely. In addition, some retirees prefer a modest retirement in a low-cost area while others expect to be more active and incur higher living costs.