Retirement Tips for Over 40’s

OK, if today you are around forty or older and you feel like you do not have enough savings for a retirement. Then do not worry, it is not too late when it comes to saving money for retirement.

First, estimate how much retirement savings you think you would need. Calculate approximately the amount of money you will be able to live happily on throughout retirement. Guestimate how long you expect to live. This computation (retirement calculator) is just a rough figure and after you have the number, you will need to make a list of your outside funds and investments excluding savings. Include any type of pension or Social Security or even a retirement plan that you have.

Set reasonable expectations. You need a retirement plan to reach the amount you have calculated if there is a big difference in the total after adding up your different sources. If you work for a company that has a 401k or 403b or any other type of voluntary contribution program for retirement it would be a wise investment to take advantage of. A really good deal is if your place of employment matches your contribution because that all becomes free money and you should never turn your back on free money. You need whatever you can have and get at this point of your age. You could also consider relocating or downsizing your home. You shouldn't need a huge 3000 square foot home if it is only you and your spouse.

Don’t be conservative. Even as you hit your late forties to fifties you still have several years, perhaps decades before you're going to use your retirement earnings.

What is most important is you should start now and let that retirement nest egg grow. Also, there are many places to go to ask questions when it comes to retirement and making a solid investment. Search them now, and take advantage of them.

Photo courtesy of firstrung.co.uk

Retirement: Deciding on an investment mix and Rebalancing your portfolio

Deciding on an investment mix. How you diversify — that is, how much you decide to put into each type of investment — is called asset allocation. For example, if you decide to invest in stocks, how much of your retirement savings should you put into stocks: 10 percent … 30 percent … 75 percent? How much into bonds and cash? Your decision will depend on many factors: how much time you have until retirement age, your life expectancy, the size of your current retirement savings, other sources of retirement income, how much risk you are willing to take, and how healthy your current financial picture is, among others.

Your asset allocation also may change over time. When you are younger, you might invest more heavily in stocks than bonds and cash. As you get older and enter retirement, you may reduce your exposure to stocks and hold more in bonds and cash. You also might change your asset allocation because your goals, risk tolerance, or financial circumstances have changed.

Rebalancing your portfolio. Once you've decided on your investment mix and invested your money, over time some of your investments will go up and others will go down. If this continues, you may eventually have a different investment mix than you intended. Reassessing your mix, or rebalancing, as it is commonly called, brings your portfolio back to your original plan.

Rebalancing also helps you to make logical, not emotional, investment decisions. For instance, instead of selling investments in a sector that is declining, you would sell an investment that has made gains and, with that money, purchase more in the declining investment sector. This way, you rebalance your portfolio mix, lessen your risk of loss, and increase your chance for greater returns in the long run.

Here's how rebalancing works: Let's say your original investment called for 10 percent in U. S. small company stocks. Because of a stock market decline, they now represent 6 percent of your portfolio. You would sell assets that had increased and purchase enough U. S. small company stocks so they again represent 10 percent of your
portfolio.

How do you know when to rebalance? There are two methods of rebalancing: calendar and conditional. Calendar rebalancing means that once a quarter or once a year you will reduce the investments that have gone up and will add to investments that have gone down. Conditional rebalancing is done whenever an asset class goes up or down more than some percentage, such as 25 percent. This method lets the markets tell you when it is time to rebalance.

Source: www.dol.gov, Photo courtesy of http://realproperty.files.wordpress.com

Retirement : Reducing investment risk.

There are two main ways to reduce risk. First, diversify within each category of investment. You can do this by investing in pooled arrangements, such as mutual funds, index funds, and bank products offered by reliable professionals. These investments typically give you a small share of different individual investments and will allow you to spread your money among many stocks, bonds, and other financial instruments, even if you don’t have a lot of money to invest. Your risk of losing money is less than if you buy shares in only a few individual companies. Distributing your investments in this way is called diversification.

Second, you can reduce risk by investing among categories of investments. Generally speaking, you should put some of your money in cash, some in bonds, some in stocks, and some in other investment vehicles. Studies have shown that once you have diversified your investments within each category, the choices you make about how much to put in these major categories is the most important decision you will make and should define your investment strategy. This is important as your retirement living depend on it.

Why diversify? Because at any given time one investment or type of investment might do better than another. Diversification lets you manage your risk in a particular investment or category of investments and decreases your chances of losing money. In fact, the factors that can cause one investment to do poorly may cause another to do well. Bond prices, for example, often go down when stock prices are up. When stock prices go down, bonds have often increased in value. Over a long time — the time you probably have to save for retirement — the risk of losing money or earning less than you would in a savings account tends to decline.

By diversifying into different types of assets, you are more likely to reduce risk, and actually improve return, than by putting all of your money into one investment or one type of investment. The familiar adage “Don’t put all your eggs in one basket” definitely applies to investing.

Tips On How To Save Smart For Retirement

• Start now. Don’t wait. Time is critical.

• Start small, if necessary. Money may be tight, but even small amounts can make a big difference given enough time, the right kind of investments, and tax-favored vehicles such as company retirement plans and IRAs.

• Use automatic deductions from your payroll or your checking account for deposit in mutual funds, IRAs, or other investment vehicles.

• Save regularly. Make saving for retirement a habit.

• Be realistic about investment returns. Never assume that a year or two of high market returns will continue indefinitely. The same goes for market declines.

• Roll over retirement account money if you change jobs.

• Don’t dip into retirement savings.

Source: www.dol.gov

Saving For Retirement

Once you’ve reduced unnecessary debt and created a workable spending plan that frees up money, you’re ready to begin saving toward retirement. You may do this through a company retirement plan or on your own — options that are covered in more detail later in this booklet. First, however, let’s look at a few of the places where you might put your money for retirement.

Savings accounts, money market mutual funds, certificates of deposit, and U.S. Treasury bills. These are sometimes referred to as cash or cash equivalents because you can get to them quickly and there’s little risk of losing the money you put in.

Domestic bonds. You loan money to a U.S. company or a government body in return for its promise to pay back what you loaned, with interest.

Domestic stocks. You own part of a U.S. company. Mutual funds. Instead of investing directly in stocks, bonds, or real estate, for example, you can use mutual funds. These pool your money with money of other shareholders and invest it for you. A stock mutual fund, for example, would invest in stocks on behalf of all the fund’s shareholders. This makes it easier to invest and to diversify your money.

Choosing where to put your money. How do you decide where to put your money? Look back at the short-term goals you wrote down earlier — a family vacation, perhaps, or the down payment for a home. Remember, you should always be saving for retirement. But, for goals you want to happen soon — say, within a year — it’s best to put your money into one or more of the cash equivalents — a bank account or CD, for example. You’ll earn a little interest and the money will be there when you need it.

For goals that are at least 5 years in the future, however, such as retirement, you may want to put some of your money into stocks, bonds, real estate, foreign investments, mutual funds, or other assets. Unlike savings accounts or bank CDs, these types of investments typically are not insured by the federal government. There is the risk that you can lose some of your money. How much risk depends on the type of investment. Generally, the longer you have until retirement and the greater your other sources of income, the more risk you can afford. For those who will be retiring soon and who will depend on their investment for income during their retirement years, a low-risk investment strategy is more prudent. Only you can decide how much risk to take.

Why take any risk at all?

Because the greater the risk, the greater the potential reward. By investing carefully in such things as stocks and bonds, you are likely to earn significantly more money than by keeping all of your retirement money in a savings account, for example.

The differences in the average annual returns of various types of investments over time is dramatic. Since 1928, the average annual return of short-term U.S. Treasury bills, which roughly equals the return of other cash equivalents such as savings accounts, has been 3.9 percent. The annual return of long-term government bonds over the same period has been 5.2 percent. Large-company stocks, on the other hand, while riskier in the short term, have averaged an annual return of 11.8 percent.

Let’s put that into dollars. If you had invested $1 in Treasury bills in 1928, that $1 would have grown to approximately $20 today. However, inflation, at an annual average of 3 percent, would have eaten $10 of that gain. If the $1 had been invested in government bonds, it would have grown to $52. But invested in large-company stocks, it would have grown to over $6,004. None of these rates of returns is guaranteed in the future, but they clearly show the relationship between risk and potential reward.

Many financial experts feel it is important to save at least a portion of your retirement money in higher risk — but potentially higher returning — assets. These higher risk assets can help you stay ahead of inflation, which eats away at your nest egg over time.

Which assets you want to invest in, of course, is your decision. Never invest in anything you don’t thoroughly understand or don’t feel comfortable about.

Photo courtesy of clangnuts.blogspot.com

Facts Women Should Know About Preparing For Retirement

Women face challenges that often make it more difficult for them than men to adequately save for retirement. In light of these challenges, women need to pay special attention to making the most of their money.

• Women tend to earn less than men and work fewer years.

• Women stay at jobs for a shorter period of time, work part time more often, and interrupt their careers to raise children. Consequently, they are less likely to qualify for company-sponsored retirement plans or to receive the full benefits of those plans.

• On average, women live 5 years longer than men, and thus need to build a larger retirement nest egg for themselves.

• Some studies indicate women tend to invest less aggressively than men.

• Women tend to lose more income than men following a divorce.

• Women are almost twice as likely as men during retirement to receive income below the poverty level.

For more information, call the Employee Benefits Security Administration at 1-866-444-EBSA (3272) and ask for the booklets Women and Retirement Savings, Taking the Mystery Out of Retirement Planning, and QDROs: The Division of Pensions through Qualified Domestic Relations Orders (for example, divorce orders). Also call the Social Security Administration at (800) 772-1213 for their booklet Social Security: What Every Woman Should Know, or visit the agency’s Web site at www.socialsecurity.gov.

Retirement Goals:BOOST YOUR FINANCIAL PERFORMANCE

Tips. Even after you’ve tried to cut expenses and increase income, you may still have trouble saving enough for retirement and your other goals. Here are some tips.

Pay yourself first. Put away first the money you want to set aside for goals. Have money automatically withdrawn from your checking account and put into savings or an investment. Join a retirement plan at work that deducts money from your paycheck. Or deposit your retirement savings yourself, the first thing. What you don’t see you don’t miss.

Put bonuses and raises toward savings. Make saving a habit. It’s not difficult once you start.

Revisit your spending plan every few months to be sure you are on track. Income and expenses change over time.

Avoid Debt And Credit Problems

High debt and misuse of credit cards make it tough to save for retirement. Money that goes to pay interest, late fees, and old bills is money that could earn money
for retirement and other goals.

How much debt is too much debt? Debt isn’t necessarily bad, but too much debt is. Add up what you pay monthly in car loans, student loans, credit card and charge card loans, personal loans — everything but your mortgage. Divide that total by the money you bring home each month. The result is your “debt ratio.” Try to keep that ratio to 10 percent or less. Total mortgage and non mortgage debt should be no more than 36 percent of your take-home pay.

What’s the difference between “good debt” and “bad debt”? Yes, there is such a thing as good debt. That’s debt that can provide a financial pay off. Borrowing to buy or remodel a home, pay for a child’s education, advance your own career skills, or buy a car for getting to work can provide long-term financial benefits.

Bad debt is when you borrow for things that don’t provide financial benefits or that don’t last as long as the loan. This includes borrowing for vacations, clothing, furniture, or dining out.

Do you have debt problems? Here are some warning signs:

• Borrowing to pay off other loans.
• Creditors calling for payment.
• Paying only the minimum on credit cards.
• Maxing out credit cards.
• Borrowing to pay regular bills.
• Being turned down for credit.

Avoid high-interest rate loans. Loan solicitations that come in the mail, pawning items for cash, or “payday” loans in which people write postdated checks to checkcashing services are usually extremely expensive. For example, rolling over a payday loan every 2 weeks for a year can run up interest charges of over 600 percent!

While the Truth-in-Lending Act requires lenders to disclose the cost of your loan expressed as an annual percentage rate (APR), it is up to you to read the fine print telling you exactly what the details of your loan and its costs are.

The key to recognizing just how expensive these loans can be is to focus on the total cost of the loan — principal and interest. Don’t just look at the monthly payment, which may be small, but adds up over time.

Handle credit cards wisely. Credit cards can serve many useful purposes, but people often misuse them. Take, for example, the habit of making only the 2 percent minimum payment each month. On a $2,000 balance with a credit card charging 18 percent interest, it would take 30 years to pay off the amount owed. Then imagine how fast you would run up your debts if you did this with several credit cards at the same time. (For more information on handling credit wisely, see the “Resources” section at the end of this publication.) Here are some additional tips for handling credit cards wisely.

• Keep only one or two cards, not the usual eight or nine.
• Don’t charge big-ticket items. Find less expensive loan alternatives.
• Shop around for the best interest rates, annual fees, service fees, and grace periods.
• Pay off the card each month, or at least pay more than the minimum.
• Still have problems? Leave the cards at home or cut them up.

How to climb out of debt. Despite your best efforts, you may find yourself in severe debt. A credit counseling service can help you set up a plan to work with your creditors and reduce your debts. Or you can work with your creditors directly to try and work out payment arrangements.

Source: www.dol.gov , Photo courtesy of i.ehow.com

“Spend” For Retirement

Now comes the tough part. You have a rough idea of how much you need to save each month to reach your retirement goal. But how do you find that money? Where does it come from?

There’s one simple trick for saving for any goal: spend less than you earn. That’s not easy if you have trouble making ends meet or if you find it difficult to resist spending whatever money you have in hand. Even people who make high incomes often have difficulty saving. But we’ve got some ideas that may help you.

Let’s start with a “spending plan” — a guide for how we want to spend our money. Some people call this a budget, but since we’re thinking of retirement as something to buy, a spending plan seems more appropriate.

A spending plan is simple to set up. Consider the following steps as a guide, but you may want to use a computer program.

Income. Add up your monthly income: wages, average tips or bonuses, alimony payments, investment income, unemployment benefits, and so on. Don’t include anything you can’t count on, such as lottery winnings or a bonus that’s not definite.

Expenses. Add up monthly expenses: mortgage or rent, car payments, average food bills, medical expenses, entertainment, and so on. Determine an average for expenses that vary each month, such as clothing, or that don’t occur every month, such as car insurance or self-employment taxes. Review your checkbook, credit card records, and receipts to estimate expenses. You probably will need to track how you spend cash for a month or two. Most of us are surprised to find out where and how much cash “disappears” each month. Include savings as an expense. Better yet, put it at the top of your expense list. Here’s where you add in the total of the amounts you need to save each month to accomplish the goals you wrote down earlier on the 3"x 5" cards.

Subtract income from expenses. What if you have more expenses (including savings) than you have income? Not an uncommon problem. You have three choices: cut expenses, increase income, or both. Cut expenses. There are hundreds of ways to reduce expenses, from clipping grocery coupons and bargain hunting to comparison shopping for insurance and buying new cars less often. The section that follows on debt and credit card problems will help. You also can find lots of expense-cutting ideas in books, magazine articles, and financial newsletters.

Increase income. Take a second job, improve your job skills or education to get a raise or a better paying job, make money from a hobby, or jointly decide that another family member will work.

Source: www.dol.gov

Prepare for retirement now

Emily Ann Inocentes-Lombos

RETIREMENT. Some look forward to it, while others dread it. Some choose to retire, while others are forced to. It can be a time of pleasant anticipation or unbridled apprehension.

Ateneo Cord conducted a survey to examine how people feel about retirement and what steps they are taking to prepare for it.

Results show that almost all (96 percent) expressed excitement about doing activities they have been putting off.

Sixty-four percent feel they will have more control over their daily routine. Thirty-two percent said they will be relieved that they do not have to work anymore. On the other hand, one of three feel anxious about financial security. Twenty-nine percent feel they will miss their job. A few respondents cited feeling less important, boredom, loneliness and fear.

What steps are they taking in preparation for retirement?

The majority are saving money (67 percent). Others are starting a business (53 percent) and pursuing hobbies and interests outside work (53 percent). About 43 percent are getting involved in community activities and 37 percent are buying retirement plans.

Most respondents (68 percent) agree that they have thought of what they want to do when they retire. It appears that the respondents accept that retirement is an inevitable phase in one's life. Some actually look forward to it as a time when they can do what is important or meaningful to them.

Whether it will be pleasant or traumatic may be determined by how well-prepared one is, emotionally, mentally, financially and, even perhaps, spiritually. Knowing that, a number of them have taken it upon themselves to set goals that would ensure a healthy change in their lifestyle.

A great majority (90 percent) agreed that organizations should help their employees. Indeed, the more organizations equip their employees in planning for retirement, the more smooth the transition will be. The less apprehensive employees are about their future, the more productive they can be for the rest of their work life.

In the Philippines, a few organizations have instituted programs to assist their employees plan for retirement. They offer career life transition workshops, financial planning, business ideas and opportunities seminars, counseling and outplacement. These services are usually outsourced to groups who specialize in these areas. Some more innovative companies organize fairs, inviting government agencies, such as Social Security System (SSS) and banks to give talks on retirement and investment. The main objective is to increase the level of preparedness for an inevitable phase in the employee's career.

While organizations are expected to provide assistance, there is no substitute for planning ahead. Some things to consider in preparing for retirement:

1. Save whenever you can, or/and invest your money early. If your employer offers a retirement savings plan, sign up for it now.

2. Budget your money. A budget checks unnecessary spending, helps you see where your money goes and frees up cash for retirement savings. Before you create your budget, think about the short- and long-term financial goals you want to achieve and be honest about the time it will take you to reach them.

3. Pay off debts, or stay away from them! High-interest debt eats up precious money that could otherwise be put toward your retirement savings. Credit cards are convenient but the high interests are costly and creep up on you!

4. Be in good health by being active and eating well. Healthcare gets more expensive as one gets older, and few organizations cover anyone beyond 65.

5. Plan your activities. Learn new things. Discover new hobbies. Develop a healthy outlook. Try not to attach your identity to the work you are doing at present.

6. Stay connected with your loved ones and friends. While still employed, you might not be spending as much time as you want to with them. Remember, jobs come and go, but relationships endure.

(To know more about retirement issues, attend the Ateneo Cord's learning session, Preparing your Employees for Retirement, on Dec. 5. Call 426-5931 or e-mail ateneocord@admu.edu.ph for questions.)

Source: Inquirer.net

Retirement planning, Pinoy-style

By J. Randell Tiongson

In a short survey conducted, we considered the responses of 100 persons. Their ages ranged from 21 to about 50 with the average age between 30 and 35. Interestingly, there were more males who responded than females. Average income was also diverse, ranging from minimum wage earners to millionaires.

Most of the respondents preferred to retire earlier that the usual 60 or 65 years old, with the average target retirement age at about 50 years old.

Many did not see themselves working for long and expressed the desire to get out of the rat race earlier than the mandatory retirement age. Ironically, while majority wanted to retire early, many did not have any retirement program in place.

Most agreed that they may not have enough money to retire comfortably. As for when’s the best time to start planning, they were unanimous in stating “the earlier, the better,” at least from the time one earns an income or when one reaches 30 years old.

When asked where they would invest money for their retirement, the top three answers were real estate, time deposits, and savings. There were very few respondents who mentioned more sophisticated instruments like life insurance, mutual funds, unit investment trust funds, stocks, bonds, or structured notes.

Ironically, quite a number of respondents came from the financial services industry. If this is an indication of the habits of the average middle class Filipino, we can surmise the largely unsophisticated leanings of the sector when it comes to investments. No wonder then that our capital market is highly undeveloped, with most of the funds being invested in short term savings and time deposits.

Respondents talked about immediate gratification, the mañana habit, lack of funds, low income, increasing expenses, wrong priorities, short-term thinking, even lack of knowledge, as reasons to explain why they thought Filipinos did not take retirement planning seriously.

One respondent, in fact said: “Filipinos are not too keen on preparing for their retirement maybe because of what we call the extended family. Further, most parents are too busy preparing for their children’s future and they tend to forget to prepare for their old age. They will simply say, ‘If I can provide a good future for my children, they will look after me during my old age.’”

This has been referred by some as ‘Filipino retirement planning’, and this mentality is something that needs to be reconsidered.

With regard to consulting with a professional, nearly all respondents thought it was a good idea, even acknowledging they will need help in this important area. This survey is a good reminder for all of us to take retirement planning more seriously.

Source: Inquirer.net

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.

Estimate How Much You Need to Save For Retirement

Now that you have a clearer picture of your retirement goal, it’s time to estimate how large your retirement nest egg will need to be and how much you need to save each month to buy that goal. This step is critical! The vast majority of people never take this step, yet it is very difficult to save adequately for retirement if you don’t at least have a rough idea of how much you need to save every month.

There are numerous worksheets and software programs that can help you calculate approximately how much you’ll need to save. Professional financial planners and other financial advisers can help as well. At the end of this booklet, we provide some sources you can turn to for worksheets.

Regardless of what source you use, here are some of the basic questions and assumptions the calculation needs to answer.

How much retirement income will I need?

An easy rule of thumb is that you’ll need to replace 70 to 90 percent of your pre-retirement income. If you’re making $50,000 a year (before taxes), you might need $35,000 to $45,000 a year in retirement income to enjoy the same standard of living you had before retirement.Think of this as your annual “cost” of retirement. The lower your income, generally the higher the portion of it you will need to replace.

However, no rule of thumb fits everyone. Expenses typically decline for retirees: taxes are smaller (though not always) and work-related costs usually disappear. But overall expenses may not decline much if you still have a home and college debts to pay off. Large medical bills may keep your retirement costs high. Much will depend on the kind of retirement you want to enjoy. Someone who plans to live a quiet, modest retirement in a low-cost part of the country will need a lot less money than someone who plans to be active, take expensive vacations, and live in an expensive region.

For younger people in the early stages of their working life, estimating income needs that may be 30 to 40 years in the future is obviously difficult. At least start with a rough estimate and begin saving something — 10 percent of your gross income would be a good start. Then every 2 or 3 years review your retirement plan and adjust your estimate of retirement income needs as your annual earnings grow and your vision of retirement begins to come into focus.retiring at 55 today is high — 64 percent for a man and about 75 percent for a woman.

These are average figures and how long you can expect to live will depend on factors such as your general health and family history. But using today’s average or past history may not give you a complete picture. People are living longer today than they did in the past, and virtually all expert opinion expects the trend toward living longer to continue.

Source: www.dol.gov

Planning for Retirement While You Are Still Young

Retirement probably seems vague and far off at this stage of your life. Besides, you have other things to buy right now. Yet there are some crucial reasons to start preparing now for retirement.

You’ll probably have to pay for more of your own retirement than earlier generations. The sooner you get started, the better.

You have one huge ally — time. Let’s say that you put $1,000 at the beginning of each year into an IRA from age 20 through age 30 (11 years) and then never put in another dime. The account earns 7 percent annually. When you retire at age 65 you’ll have $168,514 in the account. A friend doesn’t start until age 30, but saves the same amount annually for 35 years straight. Despite putting in three times as much money, your friend’s account grows to only $147,913.

You can start small and grow. Even setting aside a small portion of your paycheck each month will pay off in big dollars later. Company retirement plans are the easiest way to save. If you’re not already in your employer’s plan, sign up.

You can afford to invest more aggressively. You have years to overcome the inevitable ups and downs of the stock market. Developing the habit of saving for retirement is easier when you are young.

Source: www.dol.gov

Envision Your Retirement

Retirement is a state of mind as well as a financial issue. You are not so much retiring from work as you are moving into another stage of your life. Some people call retirement a "new career." What do you want to do in that stage? Travel? Relax? Move to a retirement community or to be near grandchildren? Pursue a favorite hobby? Go fishing or join a country club? Work part time or do volunteer work? Go back to school? What is the outlook for your health? Do you expect your family to take care of you if you are unable to care for yourself? Do you want to enter this stage of your life earlier than normal retirement age or later?

The answers to these questions are crucial when determining how much money you will need for the retirement you desire — and how much you’ll need to save between now and then. Let’s say you plan to retire early, with no plans to work even part time. You’ll need to build a larger nest egg than if you retire later because you’ll have to depend on it far longer.

Managing Your Finances Towards Retirement

It starts with a dream, the dream of a secure retirement. Yet like many people you may wonder how you can achieve that dream when so many other financial issues have priority. Besides trying to pay for daily living expenses, you may need to buy a car, pay off debts, save for your children’s education, take a vacation, or buy a home. You may have aging parents to support. You may be going through a major event in your life such as starting a new job, getting married or divorced, raising children, or coping with a death in the family.

How do you manage all these financial challenges and at the same time try to "buy" a secure retirement? How do you turn your dreams into reality?

Start by writing down each of your goals on a 3"x 5" card so you can organize them easily. You may want to have family members come up with ideas. Don’t leave something out at this stage because you don’t think you can afford it. This is your “wish list.” Sort the cards into two stacks: goals you want to accomplish within the next 5 years or less, and goals that will take longer than 5 years. It’s important to separate them because, as you’ll see later, you save for short-term and long-term goals differently. Sort the cards within each stack in order of priority.

Make retirement a priority!

This needs to be among your goals regardless of your age. Some goals you may be able to borrow for, such as college, but you can’t borrow for retirement.

Write on each card what you need to do to accomplish that goal: When do you want to accomplish it, what will it cost (we’ll tell you more about that later), what money have you set aside already, and how much more money will you need to save each month to reach the goal.


Look again at the order of priority. How hard are you willing to work and save to achieve a particular goal? Would you work extra hours, for example? How realistic is a goal when compared with other goals? Reorganize their priority if necessary. Put those that are unrealistic back into your wish list. Maybe later you can turn them into reality too. We’ll come back to these goals when we put together a spending plan.

Beginning Your Savings Fitness Plan

Now let’s look at your current financial resources. This is important because, as you will learn later in this booklet, your financial resources affect not only your ability to reach your goals, but also your ability to protect those goals from potential financial crises. These are also the resources you will draw on to meet various life events. Calculate your net worth. This isn’t as difficult as it might sound. Your net worth is simply the total value of what you own (assets) minus what you owe (liabilities). It’s a snapshot of your financial health.

First, add up the approximate value of all your assets. This includes personal possessions, vehicles, home, checking and savings accounts, and the cash value (not the death benefits) of any life insurance policies you may have. Include the current value of investments, such as stocks, real estate, certificates of deposit, retirement accounts, IRAs, and the current value of any pensions you have. Now add up your liabilities: the remaining mortgage on your home, credit card debt, auto loans, student loans, income taxes due, taxes due on the profits of your investments, if you cashed them in, and any other outstanding bills.

Subtract your liabilities from your assets. Do you have more assets than liabilities? Or the other way around? Your aim is to create a positive net worth, and you want it to grow each year. Your net worth is part of what you will draw on to pay for financial goals and your retirement. A strong net worth also will help you
through financial crises.

Review your net worth annually. Recalculate your net worth once a year. It’s a way to monitor your financial health. Identify other financial resources. You may have other financial resources that aren’t included in your net worth but that can help you through tough times. These include the death benefits of your life insurance policies, Social Security survivors benefits, health care coverage, disability insurance, liability insurance, and auto and home insurance. Although you may have to pay for some of these resources, they offer financial protection in case of illness, accidents, or other catastrophes.

Source: www.dol.gov

What do we know to avoid surprises at retirement?

The future is always uncertain and planning for it is difficult. But understanding and preparing for uncertainty, can make us look forward to a bright future and retirement – a situation where we can make anything possible. Basic questions we should ask ourselves, for example, what will be our living expenses when we retire? How much income will we have? What numbers should we use for inflation and investment return? Things and situation can and will change the most well thought-out plan. But we should, as always, be prepared for it.

In the book, "The Future Shock of Retirement" by Jonathan Cohen, Matthew H. Scanlon, and Matthew O'Hara of Barclay Global Investors, it explored the "future shocks" to the American Retirement System, and what they mean to the post-retirement living standards for Americans close to retirement.

Social Security and Medicare

In terms of Social Security and Medicare: those born between 1946 and 1964 (the baby boomers generation), enter retirement, the ratio of workers to retirees will decrease markedly which would impact government budgets for elderly particularly government budget allotment for Social Security and Medicare. The U.S. Congressional Research Service expects that during the 75-year period ending in 2025, the percentage of retirement age individuals will more than double from 8.1 percent to 18.2 percent. This change will reduce the ratio of potential workers to retirees by more than 50 percent, from 7-to-1 to 3-to-1.

More, by 2010, longevity will have increased by almost 15 years since 1940. Life expectancy and span is projected to grow by one year each decade through 2050. This will adversely impact the stability of Social Security and Medicare. With more retirees and elderly population sharing the pie, the less Social Security and Medicare each one of us would get.

The economic situation could change, it could be better, or could get worse, but assuming no changes to current benefits and given expected demographics -- the present value of our fiscal imbalance is estimated at $68.5 trillion. This number will continue to rise in the years ahead. U.S. fiscal policy has yet to respond to these demographic changes, placing Social Security and Medicare in jeopardy. Let us just hope the Obama administration and the Democrats majorities in both Houses of Congress would do something about it.

Today, more or less, 6.9 percent of federal income taxes go toward these two programs. By 2020, as much as 26.6 percent of all federal income taxes will be required to sustain current Social Security and Medicare benefits for the greatly expanded retirement population. So? "The simplest thing that has to happen next year is to raise taxes," says Cohen. "While this will increase assets, you also have to reduce liabilities. The only way to reduce liabilities is to reduce benefits ... there is no other way to do it," he adds.


Home Equity

Whenever I think about this, I think of subprime. We have seen during the last few months how the appreciation in our home can vanish, and how it can go negative in value, given the economic crises. The study indicates that most mechanisms for capitalizing on part of one's housing equity, such as reverse mortgages, are fraught with waste due to structural inefficiencies. So what should you be doing now to prepare for such changes? Scanlon offers practical advice:

"First, if you have revolving debt ... get rid of it as soon as possible. Second, if you are not saving fully in a 401(k) retirement plan, do so immediately ... it is never too late to start saving. Make sure that you are not in risk-adverse types of investments. Third, it is almost certain that capital gains rates will not be lower in the future and probably will be higher. Whatever investment you're in, make sure it is tax efficient," he adds.

The facts are clear: This country has a huge and growing deficit, and Barack Obama will have to make some unpopular but necessary decisions. Some of the assumptions you made when planning your retirement are likely to change.

You have to prepare, and now is the time to take more control of your future ...