Assuming for a moment that you would like to maintain your current lifestyle in retirement, your question now is likely, "How much will I need?" To answer that question, you can begin by preparing an estimate of your current annual expenses. Whether your spending varies from month to month, or you live with a budget and have a good handle on your expenses, the following Current Annual Expenses Worksheet is a good start for summarizing what you need to spend each year to maintain your present lifestyle.
Financial planners estimate that during retirement, you will need 80 – 100 percent of your current income to maintain the same standard of living. The exact amount will depend on your lifestyle choices. If you want to move closer to your children, for example, and real estate is very expensive in that area, your living costs could be substantially higher. Often, people underestimate how much they’ll need to cover future health care and long-term care costs. If you are younger than the traditional retirement age — 65 — these estimates may not be reliable.
Retirement income can come from a variety of sources — Social Security, employer pensions, and IRAs. To enjoy a comfortable retirement, however, you will almost certainly need to start saving for retirement now to supplement your retirement income. Figuring out what you need, and how to get it, is not simple. A qualified financial planner can help you evaluate all the factors (e.g., inflation) that will influence your retirement income.
What about Social Security?
For most people, a Social Security check will be an important part of their retirement income. The age at which you will receive full retirement benefits (called "full retirement age") is shown in the table below.
*Source: http://www.socialsecurity.gov/retire2/retirechart.htm
If you choose, you can begin taking your Social Security benefits any time after age 62. Since you will be getting benefits for a longer period, you will receive a lower monthly payment.
Taxes on Your Social Security. If you have income in addition to your social security, you may owe tax on the social security benefit. Currently, if your yearly "combined income" (your earnings plus non-taxable interest plus one half of your annual social security receipts) exceeds $25,000, you could owe income tax on a portion of your social security receipts. The Social Security laws and limits change frequently; you can get up-to-date information at www.irs.gov, or you can check with a financial advisor or tax professional to determine how the IRS rules apply to your situation.
What If You Retire before 65?
Medicare starts at age 65, so you will need to decide how to pay for your health care if you retire before then. If you have to purchase medical insurance, it can be a significant expense, perhaps even approaching the total of your social security checks. Some early retirees take a part time job that offers medical benefits. If you elect to do this, it could provide you with an opportunity to "do something different" until you reach 65.
Saving for Sunny…and Rainy Days
When it comes to saving for retirement, time can be an asset in helping money grow. For example, if you estimate that you will need $500,000 in savings for retirement (to supplement the income from your Social Security and work pension), the following chart shows how much you would have to save and invest, assuming an 8 percent tax-deferred annual rate of return.
Source: www.bankrate.com
Note that this chart does not reflect the effect of taxes. It is for illustrative purposes only and does not reflect returns on any specific product.
When saving for retirement, you’ll want to consider your retirement goals, the number of years until you retire, your tolerance for risk, and the tax implications of your investments.
