Planning and saving for retirement, like cleaning out the attic, may be something you figure you'll get to later. But when "later" arrives at retirement age, you may not have the financial resources to enjoy your golden years.
Long gone are the days when you could expect the traditional sources of retirement income -- Social Security and your company's pension plan -- to carry you through retirement. This is the result of several factors: inflation, longer life expectancies, company cutbacks of medical and pension benefits, and the rising age requirements for full social security benefits.
By taking an early and active role in planning for your retirement years, however, you can stay ahead of the game. Building up your personal savings should be at the center of your overall retirement planning strategy. Your savings could come under increased pressure in future years to make up for the shortfall caused by corporate and government retirement benefit cutbacks. So the sooner you start saving, the better.
Setting specific goals is the first step in planning for your retirement. That means figuring out when you want to retire and what kind of lifestyle you want to have. The younger you are, the tougher it is to calculate exactly how much money you'll need at retirement. A popular rule of thumb is if you earn $100,000 or more annually prior to retirement, you will need almost 70 percent of that amount ($70,000 or more) annually to maintain your standard of living after retiring. Your financial needs could be greater or smaller, of course, depending upon your individual circumstances.
Here's a closer look at the compelling forces, which are causing more workers today to recognize the importance of personal savings for retirement:
In response to soaring retiree health care costs, many cost-conscious employers are reducing health coverage for their retired workers. Companies are making retirees pay a greater share of the premium, tightening eligibility requirements, and requiring higher deductibles. Some businesses are even eliminating retiree coverage altogether. According to a Foster Higgins survey, only nine percent of firms with fewer than 500 employees offer coverage to retirees.
Employer-sponsored pension plans are an important source of retirement income for many employees. But recent changes may ultimately mean a decline in the standard of living for tomorrow's elderly. One trend is companies' shift, generally from defined benefit plans (which promise a specified payout upon retirement), towards defined contribution plans (in which the employer and/or employee may contribute to the employee's account, depending on the plan's specifics). As a result, the decision and risk on how to invest pension funds is shifting from employers to employees -- and many employees who make their own investment decisions are inclined to choose low-risk/low-return investments. Without greater diversification however, that strategy may leave them with a lower-than-expected standard of retirement living.
A tidal wave of baby boomers began straining the Social Security system around 2010. Once considered politically untouchable, the system's walls started cracking in the 1980s when benefits for couples earning over $32,000 were partially taxed for the first time. Higher Social Security taxes or reduced benefits remain a possibility in the future. So don't rely too heavily on Social Security to bankroll your retirement.
Inflation and family needs also can impact your retirement plans. Although the rate of inflation has been relatively low in recent years, the long-term effects of even a low inflation rate can eat away at your pension investment returns. And saving for your children's college education bills and caring for your elderly parents may also erode your savings.
There's no need to panic. But you should start planning for your retirement now. More than ever, it's up to you how large a nest egg you'll have at retirement. To help you determine how much money you'll need to retire on, or to see if your current retirement plan will achieve your goals, consult qualified professionals for retirement planning advice.