The purpose of Money Talk is to improve readers' financial capability with research-based personal finance information.
Thursday, October 3, 2019
Financial Planning Tips for Retirement
One of the most significant
financial transitions in a person’s life is the decision to retire. When it
comes to retirement planning, there are no “one size fits all” solutions. A lot
depends on a person’s goals (e.g., traveling and hobbies), and lifestyle
decisions (e.g., where to live and whether to work), as well as available resources
such as an employer pension. Other important factors to consider are health
status, inflation, and family responsibilities (e.g., caring for aging
Some people can live happily on
half of their pre-retirement income while others require 100% (or more!). For
many people, 70% to 80% of the amount earned prior to retirement is a realistic
income replacement percentage. Inflation will increase expenses over time,
however. Therefore, a reasonable annual inflation rate should be factored into retirement
savings calculations.Below are six retirement planning tips
the 4% Rule- One frequently cited
guideline is to withdraw 4% of retirement savings annually and adjust it for
inflation. Extending the 4% rule, someone should save $300,000 for every $1,000
monthly withdrawal needed in retirement ($300,000 x .04 = $12,000/year or
$1,000/month). This guideline assumes at least 50% of a portfolio in stock.
Retirement Budget- Track current
living expenses for several months. Then identify those that will end or
decrease in retirement (e.g., commuting costs and mortgage payments) and those
that are likely to increase (e.g., travel, medical and dental expenses, and
health insurance premiums).
Non-financial Aspects of Retirement-
Consider the three pillars of retirement life: leisure activities, work, and
volunteerism. Experts caution against retiring without giving thought to the
type of lifestyle desired and activities that will fill the time that a job
once occupied. A successful retirement requires much more than money.
a Retirement Savings Goal- Use an online calculator like the Ballpark Estimate. Five key variables in retirement savings
calculations are: age at retirement, amount of annual income needed (as a
percentage of pre-retirement income), growth rate on savings, estimated life
expectancy, and amount of money currently saved.
Check out retirement planning worksheets and online calculators. Monte Carlo
analysis is a simulation of possible investment outcomes used to predict the
likelihood of sustaining a certain withdrawal rate for, say, 30 years.
Action- Enroll in an employer retirement savings plan and save as much as
possible. Start small, if necessary, and gradually increase the amount of money
saved, especially when income increases or a household expense ends.