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March 26, 2000
With many things in life "Rewards come to those who plan ahead". That certainly applies when planning for your retirement. The key to a comfortable and secure retirement for women, since we live longer than men, is to make sure your assets outlive you. Depending on your situation, it could be a tricky goal to accomplish. However, through careful planning and discipline it can be achieved. As you start formulating a retirement plan, here's some food for thought:
- Determine how much money you'll need to retire
- Where will the money come from?
- Methods to save
Determine how much money you'll need for retirement – There are many factors to consider when calculating how much money you'll need such as your retirement age, projected level of living expenses, future inflation rates and sources of income. A quick and easy rule of thumb is that you'll need 80% of your final year's income in retirement. Additionally, you'll need to estimate your annual retirement living expenses like housing, food, clothing, medical, taxes, etc. To help you calculate your retirement planning needs try the Vanguard Retirement Planner available through the Vanguard web site (click here for Vanguard Retirement Planner). You can plug in different retirement assumptions like number of years in retirement and the program will calculate how much money you will need to save.
Where will the money come from? – In general, your retirement will be funded through three revenue sources: 1) Social Security benefits, 2) Funds from your company's pension fund and 3) Income from 401(k) or other employer-sponsored plans, IRAs and other investment/saving vehicles.
You can obtain an estimate of your Social Security benefits by calling the Social Security Administration at (800) 772-1213 and ask for a Form SSA 7004 "Personal Earnings and Benefit Estimate Statement".
Find out from your company's employee benefits department what type of pension programs are offered and how you can qualify for them. Your pension benefits will typically be based on your years of service and your salary over your three to five highest paid years on the job. Remember to consider the possibility that your employer may not be able to pay its pension benefits in the future or that you could lose your benefits if you leave the company for any reason.
Although there are many variables to consider when calculating the potential income generated from your various retirement investment/savings vehicles, a conservative way to project your future investment/savings portfolio balance at retirement is to assume an 8% compounded annual rate of return on the principal balance or amount contributed.
Methods to save – There are many vehicles available to help you successfully save for retirement – the key is to evaluate your options and find the one or ones that best suit your personal situation. If you are fortunate enough to work for a company that offers an employer-sponsored retirement program, take advantage of it. These 401(k) or similar type plans are the best way to save for retirement. (click here for related article) Not only do they have tax benefits, but many companies offer a matching program where they match a set amount to whatever you contribute – it's like getting free money! Traditional IRAs offer you tax deductions and the Roth IRAs (click here for article on Roth IRAs) can be used to build up tax-free income. Annuities, which are tax-sheltered investments sponsored by an insurance company that pays you a certain amount at a certain date, can also provide a supplemental tax-deferred income. Unlike an IRA, your annuity contributions are unlimited. To generate a steady cash inflow, consider buying bonds that mature at different times.
Probably the most important factor to planning for retirement is to start as early as possible. Starting early will greatly increase your chances of achieving a comfortable worry-free retirement. If you practice the golden rule of "Pay yourself first", your retirement years will truly be golden!
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