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		YOUR RETIREMENT PLAN: How To Get Started
		The number of people who are financially unprepared for retirement is staggering. One study revealed that more than half of the adults in the U.S. were planning to depend solely on Social Security for retirement income. Another study indicated that the great majority of Americans do not save nearly enough money. This Financial Guide provides you with the information you need to get started on this important task.

TABLE OF CONTENTS

Estimating Your Retirement Income
Establishing Goals For Retirement
Deciding on Investments
INFOSOURCES

To enjoy your retirement years, you need to begin planning early. With longer life expectancies and the growing senior population, people need to begin planning and saving for retirement in their 30s or even sooner. Adequate planning can help to ensure that you will not outlive your savings and that you will not become financially dependent on others.

It is never too late to start or to improve a retirement plan. This Financial Guide shows you the basics of retirement planning, and will enable you to get started or to revamp an existing plan. Basically, there are three steps to retirement planning:

1. Estimating your retirement income,
2. Estimating your retirement needs; and
3. Deciding on investments.

ESTIMATING YOUR RETIREMENT INCOME

Most people have three possible sources of retirement income: (1) Social Security, (2) pension payments, and (3) savings and investments. The income that will have to be provided through savings and investments (which you can plan for) can be determined only after you have estimated the income you can expect from Social Security and from any pension plans (over which you have little control).

Social Security

Estimate how much you can expect in the way of Social Security retirement income. To do this, you should file a "Request for Earnings and Benefits Estimate" with the Social Security Administration. This form can be obtained from SSA by calling their toll-free number: 800-772-1213. You can also request a benefits statement online through the Social Security Administrations Web Site.

The amount of Social Security benefits you will receive depends on how long you worked, the age at which you begin receiving benefits, and your total earnings.

If you wait until age 65, the current full retirement age, to begin receiving benefits, your monthly retirement benefit will be larger than if you elect to receive benefits beginning at age 62. The full retirement age is due to increase beginning in the year 2003, and will increase gradually to age 67 by the year 2027.

Also, if you earn income while you are receiving Social Security, your benefit may be decreased.
For the specific rule, see the Related Financial Guide: SOCIAL SECURITY BENEFITS: How To Get The Maximum.

Pension Plans

Estimate how much you can expect to receive from a traditional pension plan or other retirement plan. If you are covered by a traditional pension plan and you are vested, ask your employer for a projection of what you can expect to receive if you continue working until retirement age or under other circumstances—e.g., if you terminate before retirement age. You may already have received such an estimate.

If you are covered by a 401(k) plan, a profit-sharing plan, a Keogh plan, or a Simplified Employee Pension, make an estimate of the lump sum that will be available to you at retirement age. You may be able to get help with this estimate from your employer.

ESTABLISHING GOALS FOR RETIREMENT

Determine how much income you will need (or want) after retirement. Once you have determined this amount, you can figure out how much you will need to put away to have a big enough nest egg to fund your desired income level.

Many people don’t realize that their retirement could last as long as their careers: 35 years or longer. Your nest egg may have to last much longer than you might think. Remember that the earlier you retire, the more you will have to save. If you want to retire at age 55, you’ll have to save a lot more than if you retire at age 65.

A general guideline is that you will want to have at least 70% of whatever income stream you have before retirement. If you have any special needs or desires—e.g., a desire to travel extensively—the percentage should be adjusted upward. The 70% figure is not a substitute for a thorough analysis of your income needs after retirement, but is only a guideline.

Here are some suggestions for estimating how much of an income stream you will want to have coming in after retirement:

Figure Your Current Annual Expenses. The first step in trying to figure out what your annual expenses will be after retirement is to figure what your expenses are now. Take a year’s worth of checkbook, credit card, and savings account records, and add up what you paid for insurance, mortgage, food, household expenses, and so on.

Figure Out How Your Expenses Will Differ After Retirement. After you retire, your expenses will generally be a lot lower than they are while you are working. To help determine how much lower, here are some questions you might ask yourself :

• Will your mortgage be paid off?
• Will you still be paying for commuting expenses?
• How much will you pay for health insurance?

• Will you increase or decrease your life insurance coverage?
• How much will you pay for travel expenses? (Do you want to travel after you retire, either on vacation or to visit relatives? Will you be commuting between a winter or summer home?)
• Will you be spending more on hobbies after retirement?
• Will your children be financially independent by the time you retire or will you have to factor in some sort of support for them?
• Will your income tax bills be the same, lower, or higher?

The answers to these questions will help you determine your estimated annual expenses after retirement. Then subtract from this estimate the anticipated annual income from already-viable sources. (Do not subtract the lump-sum payments you expect to receive—e.g., lump sum payments from 401(k) plans, which will be discussed later). The difference is the annual shortfall that will have to be financed by the nest egg you will need to accumulate.

How do you determine how much you need to save each year to accumulate a nest egg of that size by retirement age? You can do this by using the table below (which, assumes an after-tax return of 5% per year). Just multiply the required nest egg by the Savings Multiplier for the number of years until retirement.

Subtract from this nest egg any lump sums that you expect to receive at retirement. To project the value at retirement of a present asset (retirement account, savings, investments, etc.), multiply the current value of this asset by the Growth Multiplier for the number of years until retirement.

DECIDING ON INVESTMENTS

Generally, the longer you have until retirement, the more of your savings should be invested in vehicles with a potential for growth. If you are very close to or at retirement, you may wish to put the bulk of your savings into low-risk investments. However, this formula is subject to your own financial profile: your tolerance for risk, your income level, your other sources of retirement income (e.g., pension payments), and your unique needs.

Very briefly stated, here are the various retirement-savings investments and their pros and cons. They are discussed in much greater depth in the Related FGs..

Each year, maximize your deposits in a 401(k) plan, an IRA, a Keogh plan, or some other form of tax-deferred savings. Because this money grows tax-deferred, returns will be greater. Further, if the amount you put in is deductible, you are reducing your income tax base.

Money market funds, CDs, and Treasury bills are the most conservative investments. However, of the three, only the Treasury bills offer a rate that will keep up with inflation. For the average individual saving for retirement, it is recommended that these vehicles make up only a portion of investments.

Bonds provide a fixed rate of income for a certain period. The income from bonds is higher than income from Treasury bills.

Bonds fluctuate in value depending on interest rates, and are thus riskier than the lowest risk investments. If bonds are used as a conservative investment, it is a good idea to use those of a shorter term, to minimize the fluctuation in value that might occur.

Although common stock is riskier than any other investment yet discussed, it offers greater return potential.

Mutual funds are an excellent retirement savings vehicle. By balancing a mutual fund portfolio to minimize risk and maximize growth, a higher return can be achieved than with safer investments.

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Related FGs

• INVESTMENT BASICS: What You Should Know
• ASSET ALLOCATION: How To Diversify For Maximum Return
• INVESTING IN MUTUAL FUNDS: The Time-Tested Guidelines
• ROTH IRAs:  How They Work and How To Use Them

Financial Calculators

• Roth IRA comparison calculator.
• IRA calculator.
• Roth IRA calculator.
• IRA deposit calculator.
• Roth IRA deposit calculator.
• Simple spending calculator.
• Advanced spending calculator.
• How long would I be able to make withdrawals?
• What interest rate would I need?
• How much money would I need to start with?
• How much money could I withdraw each month?

• Larry Burkett, The Complete Guide to Managing Your Money, (Budget Book Service, 1996), ISBN 0884861325.
• Jane Bryant Quinn, Making the Most of Your Money, (Simon & Schuster,1997), ISBN 0684811766.
• C. Frederic Wiegold, Editor, The Wall Street Journal Lifetime Guide to Money, (Hyperion, 1997), ISBN 0786861320.

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