Developing A Retirement Game Plan

The retirees of tomorrow will face significantly more challenges than the retirees of yesterday. In the past, retirees primarily relied on an employer’s retirement plan (traditionally, a defined benefit plan) and the government (through Social Security retirement benefits) to finance their retirement years. With traditional defined benefit plans vanishing and the real threat to the Social Security retirement benefit system, the quality of your retirement years will depend primarily on the nest egg you’ve accumulated inside a 401(k) plan and your personal savings.

The following article provides a starting point on how to develop a retirement game plan.

Step One: Develop Retirement Goals
The first step to developing a retirement game plan is to determine how you want to spend your retirement years. If you want to spend your retirement years visiting your grandchildren or performing volunteer work, it is likely you will need a smaller retirement nest egg than if you want to travel six months a year during your retirement. Similarly, if you plan to work part-time after you retire from full-time work, this should make your retirement nest egg last longer.

Step Two: Estimate Your Retirement Expenses
Depending on how you want to live during retirement, financial planners suggest you will need 80% to 100% of your present income (adjusted for inflation) during retirement. Of course, the amount of income you will need in retirement will depend on the lifestyle choices you make and the cost of maintaining your chosen lifestyle. You will need to consider those expenses that will be reduced or eliminated (for example, work-related expenses), and those expenses that may increase in retirement (for example, the cost of health care and travel).

Step Three: Plan for a Long Life
The retirees of tomorrow will live longer on average than the retirees of yesterday and today. It has become common for today’s 65-year-old to live at least another 20 years. When calculating how large your retirement nest egg should be, assume you will live to be at least 90 years old.

Step Four: Determine Sources of Your Retirement Income
Depending on whether you believe you will receive any or all of your estimated Social Security retirement benefits as estimated on the Personal Earnings Benefits Statement provided to you annually by the Social Security Administration, Social Security benefits may be a source of retirement income. In addition, if you are covered by an employer’s traditional defined benefit pension plan, you should know the amount of the monthly benefit that will be paid to you. You probably will have also accumulated personal savings, 401(k) plan benefits, and IRAs. Finally, you should consider whether you will receive an inheritance, or wages from a part-time job in retirement. After considering all the sources of your retirement income, you should estimate the amount of money you will have from these sources and at what age you will have access to these sources of retirement income.

Step Five: Determine What You Need to Save
After you have considered your sources of retirement income, you must determine when you want to retire and estimate how long you will live. For example, if you plan to retire at age 65, and you estimate you will live to be 90 years old, you will need your retirement income to last 25 years.

If you have determined you will need 80% of your pre-retirement income during retirement, and you are making $50,000 a year, you will need to have retirement income of $40,000 a year (without adjustment for inflation). Assume that your annual average return on your assets during retirement will be 5%, and that you will withdraw $40,000 a year from your nest egg, you will need a $563,757 dollar nest egg when you retire at age 65 if you plan to retire on $40,000 a year for 25 years. Now that you have an idea on what the size of your nest egg needs to be, you can calculate how much you need to save until retirement to give you $40,000 annual retirement income given the amount you have currently saved, and the amount of benefits provided by the expected sources of retirement as determined in Step Four.

Please be aware the example in the previous paragraph is an estimate only. Your financial planner can help you determine what amount you need to save on an annual basis to accumulate the size of nest egg you will need to retire according to your wishes.

Step Six: The Do’s and Don’ts for a Comfortable Retirement
The previous five steps focused on establishing a game plan to determine the amount of savings you will need to retire in the style you desire. To give you the best chance to retire as you want, you should keep the following concepts in mind:

Even if you are saving money for other goals such as buying a house, taking a vacation, or paying future college tuition, DO make sure you regularly set aside money for your retirement. DON’T ignore saving for retirement.
DO start saving now. You’re never too old to start saving for retirement because some retirement savings is better than no retirement savings. Similarly, because of the compounding nature of interest, younger employees are in the best position to secure a comfortable retirement.
DO contribute as much as possible to your 401(k) plan. At the very least, you should contribute enough to your 401(k) plan to take full advantage of your employer’s matching contribution.
DO set aside a rainy day fund to cover three to six months of living expenses. This way, if you are hit by a temporary financial crisis, you will not have to stop your regular retirement savings, or even worse, dip into your retirement savings to survive the temporary financial crisis.
DO NOT dip into your retirement savings. DO NOT take a loan from your 401(k) plan and if you receive a cash distribution after a termination of employment, DO directly roll the cash distribution to an IRA or into another employer-sponsored retirement plan.
When you retire, DO see a financial advisor to determine how your investing philosophy should change in your retirement years.
DO give serious consideration to potentially rising health care expenses. You need to understand that Medicare may not cover all of your health-related costs of retirement. You may need to look at private health insurance to supplement Medicare. In addition, you may want to consider purchasing long-term care insurance to decrease the likelihood that long-term care can unravel your retirement plan.
Finally, although you may not like the thought, DO consider working part-time after your projected retirement date, especially if you have not adequately saved for retirement.

The bottom line is that you need to get a clear picture of your retirement goals, the estimated costs of achieving your retirement goals, and the amount of your current and expected savings and potential sources of retirement income. Only then can you determine how much money you should be saving for retirement. If you do not feel you have the ability of developing a retirement game plan, you should consider consulting a financial advisor.