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How Much Is Enough for Retirement?

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November 2006
How Much Is Enough for Retirement?

When planning for retirement, the two biggest questions a financial planner needs to address are "how much" and "how long." How much are you going to need and for how long will you need it? The "how much" is a little easier question to address. The "how long" is a little more difficult. With advances in healthcare and people taking better care of themselves, it is quite conceivable that your retirement could last 20, 30, 40, or even 50 years. This makes the "how long" a much more difficult equation to solve.

Let's assume we want to plan for a retirement without limits. How would we go about doing this? First, we need to determine what kind of lifestyle and retirement you are planning. Are you going to have a modest retirement with basic day to day needs or are you planning on taking expensive vacations several times a year? Are you planning on retiring in India or other countries, or are you planning on retiring here in the U.S.?

What Is Your Magic Number?

Is there a specific dollar amount you would like to have as income for your retirement? A general rule of thumb is that you will need anywhere from 70% to 100% of your current living expenses in retirement. This is without factoring in inflation and social security benefits.

Another formula you can use to determine how much you need to have is this: take your current annual living expenses and multiply by 20. If your living expenses are $50,000 a year, that would mean your savings should be ($50,000 x 20) around $1 million for retirement. Then, if you took out 5% withdrawals of your nest egg each year, you would be able to take a steady stream of income without having to tap much into your principal. This is depending obviously on the rate of return of your savings vehicle. If your retirement assets grew at a higher rate than the 5%, your income would also be able to grow to keep up with inflation, which is a very important requirement. Think about it. If you started your retirement with $50,000 a year without factoring in inflation, 10-20 years from now that $50,000 would have a significant loss in purchasing power.

Don't Forget Healthcare Expenses.

When planning for retirement, it is important not to forget healthcare expenses. The costs for long term care including assisted living facilities and nursing homes are continuing to escalate at a higher rate than average inflation. You may want to cover the possibility of this risk with adequate health insurance and long term care insurance. It is estimated that current long term care expenses can range from $60,000 to $100,000 per year. Without adequate planning for healthcare expenses, your retirement plan can have an undesirable outcome. Don't forget, your retirement plan is not just for you. It may also include your spouse! Since, actuarially speaking, women outlive men, poor planning can have an even more adverse effect on your loved ones.

Get Expert Assistance when Needed.

With so many different choices, if you are not sure on how to get started and how to manage your retirement assets, seek professional guidance. A good financial planner can help!

By: Rajesh Jyotishi


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