Retirement Planning: The Basics

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Retirement Planning: The Basics

Determine your retirement income needs It's common to discuss desired annual retirement income as a percentage of your current income. The problem is that it doesn't account for your specific situation. To determine your specific NEEDS, you may want to estimate your annual retirement expenses.  You can use your current expenses as a starting point, but note that your expenses may change dramatically by the time you retire.  You should also take inflation into account. The average annual rate of inflation over the past 20 years has been approximately 2.3 percent. (Source: Consumer price index data published by the U.S. Department of Labor, January 2015.) A realistic estimate of your expenses will tell you about how much yearly income you'll need to live comfortably.

Calculate the gap Once you have estimated your retirement income needs, take stock of your estimated future assets and income. These may come from Social Security, a retirement plan at work, a part-time job, and other sources. If estimates show that your future assets and income will fall short of what you need, the rest will have to come from additional personal retirement savings.

Figure out how much you'll need to save By the time you retire, you'll need a nest egg that will provide you with enough income to fill the gap left by your other income sources. But exactly how much is enough? The following questions may help you find the answer:

  • At what age do you plan to retire? The younger you retire, the longer your retirement will be, and the more money you'll need to carry you through it.
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  • What is your life expectancy? The longer you live, the more years of retirement you'll have to fund.
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  • What rate of growth can you expect from your savings now and during retirement?
  • What do you want to do in retirement?
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Build your retirement fund: Save, save, save When you know roughly how much money you'll need, your next goal is to save that amount. It's never too early to get start saving (ideally, begin saving in your 20s). You may want to arrange to have certain amounts taken directly from your paycheck and automatically invested in accounts of your choice. This arrangement reduces the risk of impulsive spending that will threaten your savings plan.

Understand your investment options You need to understand the types of investments that are available, and decide which ones are right for you. If you don't have the time, energy, or inclination to do this yourself, hire a financial professional. He or she will explain the options that are available to you, and will assist you in selecting investments that are appropriate for your goals, risk tolerance, and time horizon. Note that investments may involve the risk of loss of principal. Investment and insurance products are: not FDIC insured; not guaranteed; and, may be subject to investment risk, including possible loss of principal.

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