Retirement Needs:
What is the total amount of money you'll need at
retirement age? There are a number good
retirement calculators on the Internet. (There are
a few links below) You'll need the basic
assumptions above, in addition to an estimated
investment earnings rate and an inflation rate.
Let’s try an example. Let’s say you believe you’ll
need $50,000 a year to live in retirement. Assume
you’ll live for 25 years after that. You’ll need
enough money at that point to generate $50K a
year, while drawing down your investment fund
total to zero at the end of that 25 year period.
We'll assume a conservative earnings rate for
your savings, say 4%. And a 2% inflation rate.
How much money will you need to retire?
$976,000. So we can see that we need to start
saving as soon as possible to reach this figure!
There may also some tax effects that need to be
considered. We would need to increase our
$50K for any taxes we believe we will have to
pay at retirement and beyond. We should gross
up the annual figure needed by the percent of
income we will actually receive. So if we assume
we are at an average 20% tax rate, we would
divide $50K by 80% (1 minus 20%), to get $63K.
We can generate a new amount needed to retire
based on this - it's $1.23M. The important point
is to use the after-tax amount when doing the
calculation.
We also haven’t included how any other income,
such as Social Security or private pension
payments may affect the calculation. We should
deduct those amounts from our $63K and
recalculate. So if we have $25K in guaranteed
payments from these sources, we would only
need an additional $38K to meet our annual
retirement needs of $50K, or a total of $742K to
at retirement.
Here’s an easy way to come up with a very
conservative estimate of what you will need
without using a special calculator/spreadsheet.
To apply to our example, take the $50,000 and
divide by our assumed earnings rate, 4%. This
comes to $1.25 million. Essentially, this is telling
us we require $1.25M to generate $50K a year in
perpetuity. It’s very conservative, as only if we
live for many years, our investment returns are
worse, and/or we spend much more than $50K a
year will we approach using up this total
amount. And $1.25M happens to be very close to
our initial estimation of what it would take to
generate $50K annually, after tax. So this is a
good ballpark estimate for the total amount
needed assuming no other income and after
taxes.
Now, a new question - How much do we need to
save every year from now until retirement to
have $1.25M? Let’s say we are age 40, have zero
savings, intend to retire at age 65, and assume
again our investment earnings rate is 4%, and
the inflation rate is 2%. It will take savings of
$38K per year to produce $1.25M. That's tough
to do. Of course, given this time frame, one
should probably be in growth stocks for a good
part of this 20 year period (see Investments). If
we assume an 8% growth rate, we would need to
save $17K a year.
That's still pretty tough. If we increase the saving
period from 25 to 40 years (age 25 to 65), the
annual savings amount needed is $5K. This
shows the importance of starting early to meet
your retirement goals.
Retirement Vehicles:
Now that we've seen that we need to save so
much for retirement, let's take a look at the
different ways generally available to save for it.
The following are retirement vehicles for
retirement saving.
Defined Benefit Plans - These are employer
funded plans where there is a formula, generally
based on years of employment, that determines
how much of a (monthly) benefit an employee
will receive at retirement. Sadly, as costs to
employers have increased, these retirement
plans have been infrequently offered to current
employees.
Defined Contribution Plans - these are plans
where the employee contributes a certain
amount into the plan per pay period. This money
is generally tax deferred, and the employer may
contribute, or match, the first several percent of
contributions. The money in the plan is invested,
and any investment gains/returns are re-invested
tax-free until they are distributed. Distribution
generally takes place at retirement, after age 59
½. Payouts can occur earlier but this can cause
penalties and early tax liabilities. There are
several types of these plans:
401k Plans: this is the most common defined
contribution plan. In most of these, the company
matches from the first 1 to 4% or more of the
employee’s contributions. For example, say an
employee contributes 2% of his salary to the
retirement plan. The employer will match that 2%
into the plan. So the employee actually has 4%
of his salary put into the retirement account. The
employee has, in essence doubled his money
immediately. It is this feature that makes the
401K savings plan so valuable. An employee
should always contribute at least the minimum
amount that is matched.
Generally speaking this salary deduction comes
before taxes. The employee is paying less taxes
on his overall salary upfront, so there is an
immediate tax benefit. The entire investment and
retirement gains will be taxed upon distribution,
however.
One can put additional money, over and above
the matching amount, into the savings plan, and
it will also be tax-deferred. Currently the limit that
can be put into a plan is $15,500 per year, or
whatever the maximum percent your plan allows,
whichever dollar amount is less.
It is a personal decision of how much to actually
save in a plan. It is wisest to save as much as
possible while still having enough for normal
living expenses. In addition one should enough
money for an emergency fund that will allow you
to weather an financial emergency - 6 months
income is a fair amount for this. Remember, you
can’t withdraw money from these tax deferred
accounts without penalty. The penalty for early
withdrawal of funds is 10% - and that’s in
addition to the ordinary taxes you’ll need to pay
on a distribution.
Roth IRA: this savings plan is similar to a 401K,
except the contributions are taxed as ordinary
income before they go into the plan. The
investment returns grow tax-free while they are
in the plan. In addition, the are not taxed even
upon distribution. So with the Roth plan one is
taxed on the way in but not on the way out, a
potentially even more lucrative strategy,
depending on one’s age and tax status.
However, you must wait until you are 59 ½
before you can withdraw the money.
Other Tax-Deferred Plans:
There are other types of tax-deferred plans –
examples are Profit sharing Plans and Deferred
Compensation Plans. They operate under similar
principles.
Back to Top
Retirement Calculator Links:
Excel Calculator
Web Calculators:
CNN Money
MoneyCentralMSN
What is the total amount of money you'll need at
retirement age? There are a number good
retirement calculators on the Internet. (There are
a few links below) You'll need the basic
assumptions above, in addition to an estimated
investment earnings rate and an inflation rate.
Let’s try an example. Let’s say you believe you’ll
need $50,000 a year to live in retirement. Assume
you’ll live for 25 years after that. You’ll need
enough money at that point to generate $50K a
year, while drawing down your investment fund
total to zero at the end of that 25 year period.
We'll assume a conservative earnings rate for
your savings, say 4%. And a 2% inflation rate.
How much money will you need to retire?
$976,000. So we can see that we need to start
saving as soon as possible to reach this figure!
There may also some tax effects that need to be
considered. We would need to increase our
$50K for any taxes we believe we will have to
pay at retirement and beyond. We should gross
up the annual figure needed by the percent of
income we will actually receive. So if we assume
we are at an average 20% tax rate, we would
divide $50K by 80% (1 minus 20%), to get $63K.
We can generate a new amount needed to retire
based on this - it's $1.23M. The important point
is to use the after-tax amount when doing the
calculation.
We also haven’t included how any other income,
such as Social Security or private pension
payments may affect the calculation. We should
deduct those amounts from our $63K and
recalculate. So if we have $25K in guaranteed
payments from these sources, we would only
need an additional $38K to meet our annual
retirement needs of $50K, or a total of $742K to
at retirement.
Here’s an easy way to come up with a very
conservative estimate of what you will need
without using a special calculator/spreadsheet.
To apply to our example, take the $50,000 and
divide by our assumed earnings rate, 4%. This
comes to $1.25 million. Essentially, this is telling
us we require $1.25M to generate $50K a year in
perpetuity. It’s very conservative, as only if we
live for many years, our investment returns are
worse, and/or we spend much more than $50K a
year will we approach using up this total
amount. And $1.25M happens to be very close to
our initial estimation of what it would take to
generate $50K annually, after tax. So this is a
good ballpark estimate for the total amount
needed assuming no other income and after
taxes.
Now, a new question - How much do we need to
save every year from now until retirement to
have $1.25M? Let’s say we are age 40, have zero
savings, intend to retire at age 65, and assume
again our investment earnings rate is 4%, and
the inflation rate is 2%. It will take savings of
$38K per year to produce $1.25M. That's tough
to do. Of course, given this time frame, one
should probably be in growth stocks for a good
part of this 20 year period (see Investments). If
we assume an 8% growth rate, we would need to
save $17K a year.
That's still pretty tough. If we increase the saving
period from 25 to 40 years (age 25 to 65), the
annual savings amount needed is $5K. This
shows the importance of starting early to meet
your retirement goals.
Retirement Vehicles:
Now that we've seen that we need to save so
much for retirement, let's take a look at the
different ways generally available to save for it.
The following are retirement vehicles for
retirement saving.
Defined Benefit Plans - These are employer
funded plans where there is a formula, generally
based on years of employment, that determines
how much of a (monthly) benefit an employee
will receive at retirement. Sadly, as costs to
employers have increased, these retirement
plans have been infrequently offered to current
employees.
Defined Contribution Plans - these are plans
where the employee contributes a certain
amount into the plan per pay period. This money
is generally tax deferred, and the employer may
contribute, or match, the first several percent of
contributions. The money in the plan is invested,
and any investment gains/returns are re-invested
tax-free until they are distributed. Distribution
generally takes place at retirement, after age 59
½. Payouts can occur earlier but this can cause
penalties and early tax liabilities. There are
several types of these plans:
401k Plans: this is the most common defined
contribution plan. In most of these, the company
matches from the first 1 to 4% or more of the
employee’s contributions. For example, say an
employee contributes 2% of his salary to the
retirement plan. The employer will match that 2%
into the plan. So the employee actually has 4%
of his salary put into the retirement account. The
employee has, in essence doubled his money
immediately. It is this feature that makes the
401K savings plan so valuable. An employee
should always contribute at least the minimum
amount that is matched.
Generally speaking this salary deduction comes
before taxes. The employee is paying less taxes
on his overall salary upfront, so there is an
immediate tax benefit. The entire investment and
retirement gains will be taxed upon distribution,
however.
One can put additional money, over and above
the matching amount, into the savings plan, and
it will also be tax-deferred. Currently the limit that
can be put into a plan is $15,500 per year, or
whatever the maximum percent your plan allows,
whichever dollar amount is less.
It is a personal decision of how much to actually
save in a plan. It is wisest to save as much as
possible while still having enough for normal
living expenses. In addition one should enough
money for an emergency fund that will allow you
to weather an financial emergency - 6 months
income is a fair amount for this. Remember, you
can’t withdraw money from these tax deferred
accounts without penalty. The penalty for early
withdrawal of funds is 10% - and that’s in
addition to the ordinary taxes you’ll need to pay
on a distribution.
Roth IRA: this savings plan is similar to a 401K,
except the contributions are taxed as ordinary
income before they go into the plan. The
investment returns grow tax-free while they are
in the plan. In addition, the are not taxed even
upon distribution. So with the Roth plan one is
taxed on the way in but not on the way out, a
potentially even more lucrative strategy,
depending on one’s age and tax status.
However, you must wait until you are 59 ½
before you can withdraw the money.
Other Tax-Deferred Plans:
There are other types of tax-deferred plans –
examples are Profit sharing Plans and Deferred
Compensation Plans. They operate under similar
principles.
Back to Top
Retirement Calculator Links:
Excel Calculator
Web Calculators:
CNN Money
MoneyCentralMSN
| Retirement Planning |
 |  |  |  |  |  |  |  |
Have Questions? Our consultants are available to help
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
 |  |  |  |  |
Have Questions? Our consultants are available to help you
with any financial question. We can also provide in-depth
can help. Please contact: Best-Financial-Advice.com
with any financial question. We can also provide in-depth
can help. Please contact: Best-Financial-Advice.com
Have Questions? Our consultants are available to help
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
Have Questions? Our consultants are available to help
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
you with any financial question. We can also provide
in-depth consultation concerning any financial issue
facing you. We can help. Please contact:
Best-Financial-Advice.com
| Latest Articles: |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
 |
some concrete tools of which you can take
advantage. The key is to make a commitment at
consider when planning for retirement as well as
the earliest age possible to a regular savings
program. Regardless of your age you can
increase your security later in life by preparing
How much money do need to save to ensure that
you have adequate savings for retirement? This
depends on several factors. The first is the age
that you intend to retire. The second factor is
your current age. The third is an estimate of how
long you believe you will live in retirement. Of
course, one should estimate conservatively here.
That is, assume you will retire sooner and live
longer than an average estimate. You also need
to now how much money you may receive from
other sources at retirement.
Of course, you may want to consult with a
financial professional to precise estimates.
advantage. The key is to make a commitment at
consider when planning for retirement as well as
the earliest age possible to a regular savings
program. Regardless of your age you can
increase your security later in life by preparing
How much money do need to save to ensure that
you have adequate savings for retirement? This
depends on several factors. The first is the age
that you intend to retire. The second factor is
your current age. The third is an estimate of how
long you believe you will live in retirement. Of
course, one should estimate conservatively here.
That is, assume you will retire sooner and live
longer than an average estimate. You also need
to now how much money you may receive from
other sources at retirement.
Of course, you may want to consult with a
financial professional to precise estimates.
Best Financial Advice is Available for Consulting: |
 |
 |
 |
 |
 |
 |
 |
 |