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Learn About Financial Planning

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4. Avoiding Financial Setbacks

What other sources of income will I have?

Since October 1999, Social Security has been mailing statements to workers age 25 and older showing all the wages reported and an estimate of retirement, survivors and disability benefits. You can also request a statement by visiting the Social Security Administration's Web site at www.socialsecurity.gov or by calling 800-772-1213 and requesting a free Personal Earnings and Benefit Estimate Statement.

Will you have other sources of income?

For instance, will you receive a pension that provides a specific amount of retirement income each month? Is the pension adjusted for inflation?

What savings do I already have for retirement?

You'll need to build a nest egg sufficient to make up the gap between the total amount of income you will need each year and the amount provided annually by Social Security and any pension income. This nest egg will come from your retirement plan accounts at work, IRAs, annuities, and personal savings.

What adjustments must be made for inflation?

The cost of retirement will likely go up every year due to inflation - that is, $35,000 won't buy as much in year 5 of your retirement as it will the first year because the cost of living usually rises. Although Social Security benefits are adjusted for inflation, any other estimates of how much income you need each year - and how much you'll need to save to provide that income - must be adjusted for inflation. The annual inflation rate is 3.2 percent currently, but it varies over time. In 1980, for instance, the annual inflation rate was 13.5 percent; in 1998, it reached a low of 1.6 percent. When planning for your retirement it is always safer to assume a higher, rather than a lower, rate and have your money buy more than you previously thought. Retirement calculators should allow you to make your own estimate for inflation.

What will my investments return?

Any calculation must take into account what annual rate of return you expect to earn on the savings you've already accumulated and on the savings you intend to make in the future. You also need to determine the rate of return on your savings after you retire. These rates of return will depend in part on whether the money is inside or outside a tax-deferred account.

It's important to choose realistic annual returns when making your estimates. Most financial planners recommend that you stick with the historical rates of return based on the types of investments you choose or even slightly lower.

How many years do I have left until I retire?

The more years you have, the less you'll have to save each month to reach your goal.

How To Prepare For Retirement When There's Little Time Left

What if retirement is just around the corner and you haven't saved enough? Here are some tips. Some are painful, but they'll help you toward your goal.

It's never too late to start. It's only too late if you don't start at all.
Sock it away. Pump everything you can into your tax-sheltered retirement plans and personal savings. Try to put away at least 20 percent of your income.
Reduce expenses. Funnel the savings into your nest egg.
Take a second job or work extra hours.
Aim for higher returns. Don't invest in anything you are uncomfortable with, but see if you can't squeeze out better returns.
Retire later. You may not need to work full time beyond your planned retirement age.
Part time may be enough.
Refine your goal. You may have to live a less expensive lifestyle in retirement.
Delay taking Social Security. Benefits will be higher when you start taking them.
Make use of your home. Rent out a room or move to a less expensive home and save the profits.
Sell assets that are not producing much income or growth, such as undeveloped land or a vacation home, and invest in income-producing assets.

How much should I save each month?

Once you determine the number of years until you retire and the size of the nest egg you need to "buy" in order to provide the income not provided by other sources, you can calculate the amount to save each month.

It's a good idea to revisit this worksheet at least every 2 or 3 years. Your vision of retirement, your earnings, and your financial circumstances may change. You'll also want to check periodically to be sure you are achieving your objectives along the way.

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