Harrison Lazarus Advisors: Top Ten Financial® - Chapter 9

If you've done everything outlined in the last eight chapters - reduced your taxes, maximized your annual tax deferred account contributions, invested wisely, utilized debt strategically, and protected your assets with insurance, you will be well prepared for the next step: retirement.

Amount Needed

The difficult part about planning for retirement is determining how much money you need to continue your standard of living without the income a job provides.

One way to think about retirement is in the sense of having a specific amount. This is as simple as going to:

to determine the amount needed for your retirement. These sites are useful because you can quickly determine the amount of money needed to maintain your desired standard.

The second method involves determining this figure for yourself. This includes adding up what you're spending on a daily basis as well as estimating your future expected retirement spending. This method can be quite time consuming.

A third way to think about how much you will need is from the standpoint of how much you earn per year. This method involves multiplying a pre-determined percentage by your current income. The examples below give you a rough idea of the amount of income you need annually to maintain your standard of living in your retirement:

1. You need 85% of your current income if you:

Want or need to maintain your current lifestyle
Will have mortgage or growing rent in retirement
Save 5% or less of your current earnings

2. You need 75% of your current income if you:

Anticipate living your current lifestyle
Will have a smaller mortgage or stable rent in retirement
Save more than 5% or less than 15% of your current earnings

3. You need 65% of your current income if you:

Don't anticipate living your current lifestyle
Have no mortgage in retirement
Save 15% or more than your current earnings

When calculating your retirement income, don't forget to include social security, pension plans and other sources.

Social Security

Although we don't know if social security will be around in the future, we do know it is available today, and it is reasonable to assume that the politicians will not jeopardize their political future by eliminating it, despite the costs.

The simplest way to calculate your social security benefits is to look at your annual Social Security statement. This document includes your expected monthly income from the government. If that is not available, apply for form SSA-7004 at http://www.ssa.gov/online/ssa-7004.html or call (800) 772-1213. The SSA will mail you your Social Security statement.

Pension Plans

Larger companies and government organizations generally offer these defined benefit plans. They were more common in the past than they are in the present. These employer-sponsored benefits are based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company. Typically, if you're entitled to a pension, the amount you receive is a pre-determined percentage of your pre-retirement salary. Since every plan is different, it is important to review your individual plan and request a benefit statement from your human resources department on a regular basis. By doing so, you will have a better understanding of what you will receive when you retire.

Additional Retirement Concerns

In order to determine the additional retirement amount needed, follow the calculation below:

Table 1

Table 2

The growth factor and savings factor amounts are precalculated based on your age for use in Table 1. These figures assume your investments will grow at a 4% annual rate of return higher than the rate of inflation. In other words, if inflation is 2%, your investment return is 6%.

As you can see, the 41 year old needs no additional amount. It pays to save early and often! For the 55 year old, who also is making more and expects more in retirement, he needs to save $5,313 per month to have enough at his retirement.

Desired Lifestyle

For many, living in your current home will not be desirable or recommended for safety and health reasons. You may consider a retirement home or retirement community (RC).

RCs are usually large campuses that include separate housing for those who live very independently, assisted living facilities that offer more support, and nursing homes for those needing skilled nursing care. Since these facilities are all on the same grounds, people who are relatively active as well as those who have more serious disabilities all live in proximity to one another. Residents then have the ability to move from one housing option to another as their needs change.

While usually very expensive, many of these communities guarantee lifetime shelter and care with long-term contracts that detail the housing and care obligations of the RC as well as its costs. The costs of living in a RC can range from a low of $20,000, to a high of $400,000, per year. Monthly payments can range from $200 to $2,500. In some situations, residents own their living space; while in others, the space is rented. In some communities, the entrance fee may be partially refundable. Frequently, three different fee schedules are available.

Today, there are many more retirement lifestyle options than in times past. Although most of us live in the fast lane, take the time now to consider where you want to be and what you want to do when work is no longer the driving force in your life. Planning well ahead of time will make a vast difference in your future. While we all want to, and should, enjoy the present, plan for the future so that retirement is enjoyable too.

Chapter 9