In theory, you should spend about at least 25 years saving for your retirement. Experts suggest beginning some sort of financial retirement planning around age 30. This is a difficult decision to motivate yourself to make, especially when you’re 25, already strapped for cash, and financial retirement planning is one of the last things on your mind. But considering that if you retire at age 62 or 65, and the average American is now expected to live into his 80s, you will need to have savings or income to support you for those 20 years of retirement.
Starting your financial retirement planning
- Determine how much income you will need to support your current lifestyle (or the lifestyle you envision yourself having, whether it’s a half year in Florida and a half year in Chicago or the whole year in a condo in Seattle). Make a list of all your current expenses, and estimate what will be different about your retirement lifestyle. For example, do you have a mortgage that will be paid off? Do you have a small business you will be selling? Are you planning on traveling a lot?
- Determine what your sources of income will be. Most retired people receive Social Security. Most companies offer their employees the opportunity to invest in a company pension or retirement plan. Depending on how much money you will need to live on and how much you’ll be saving through your place of employment, you may also want to look into investments and personal savings options.
- Factor in inflation and taxes. Inflation has averaged out to about 5.5% per year for the past 20 years, which means that your savings will not buy as much in the future, so you will need to have more to account for inflation. Most, if not all, of your retirement income will be taxable. Make sure this is something you figure into Step One.
- Consider your family obligations. Depending on when you retire (retiring as young as age 50 has been rising in popularity) you may still have a child in college to help fund or elderly parents in long-term care.
- Most health insurance plans provide continuing coverage after your retire. However, this is not always the case, and you should make sure you have a long term care policy before retiring. Medicare kicks in after 65, but it is intended to supplement existing coverage and will not replace health coverage.
Two common errors in financial retirement planning
- Failure to update beneficiary designations. The law is the law, and when you are dead and gone, your spouse or children can’t prevent your 401k from being paid out to someone you may not even have contact with anymore. It’s not unusual for 401ks to be paid out to ex-spouses, while the current spouse and children do not receive any portion of the money. Even if marital assets are divided up by divorce, your beneficiary designations do not change until you, the policy holder, update them. Upon divorce or remarriage, or the birth or death of a current or potential beneficiary, you need to contact the appropriate insurance companies, trust companies and mutual funds.
- Failure to supply a secondary beneficiary. Some people think their financial situation is covered as long as they provide a primary beneficiary. Usually this is a spouse or close family relative. Consider what will happen if you and the primary beneficiary die in an airplane accident or car accident together, which is quite possible, because if you are close enough to this person to designate him or her as a beneficiary, you two are presumably spending a large amount of time together.
By Virginia Zignego