With an increasing number of people scheduled to begin retirement in the next few years, it is important to begin thinking about the subject. Even if you're not near the age of retirement yet, it's a good idea to begin thinking about how you plan to fund your retirement as soon as possible. The sooner you begin to plan for retirement the more you can be sure your retirement won't be plagued by money issues.
So, how much money do you need for retirement? A lot of that answer, of course, depends on what plans you have for retirement. If you plan to travel, want to purchase an RV, or have similar specific plans, you will naturally need more money in order to fund your retirement. Above and beyond those expenses; however, it is important to think about your day-to-day essential needs.
For example, consider whether you will still owe any debt payments when you choose to retire. Of course, many of us would like to think that we'll be out of debt by then, but in reality,, you may still owe on a vehicle, credit card,, or even a house. Be sure to calculate those costs into the amount you need for retirement.
You'll also need enough money to cover such costs as utilities, auto, and home insurance, groceries, and other miscellaneous expenses we all must pay on a month-to-month basis.
Healthcare will be an extremely important aspect of your retirement. Naturally, as we grow older our healthcare needs to increase and that means spending more money. If you fail to fund your retirement in a sufficient manner, even one serious health problem could wipe out your retirement fund and you might find yourself facing the rest of your retirement with serious money problems. Just for your healthcare costs alone, it's a good idea to plan on budgeting at least $15,000 per year for every year of your retirement.
You also need to consider whether there will be expenses when you first retire that you'll still need to cover such as support for aging parents (with life expectancy figures today, it's definitely a possibility) and college education expenses for kids.
In addition, don't forget miscellaneous costs which may pop up that we tend to forget. These costs include home repair costs, such as replacing a roof, purchasing another vehicle, etc.
After adding up all of the costs you'll need to cover during retirement, don't forget to take into consideration the effects of inflation. Figure on costs today rising an average of about 4% a year for every year you have left until retirement and then some.
Finally, don't forget to give serious thought to how long you may need to fund your retirement. Quite surprisingly, many people tend to underestimate how long they'll live and as a result run out of money. Don't let that happen to you. The best rule of thumb is to assume you'll live to at least age 90 and calculate for that.
If that failed, there was always Social Security to bail them out. But with pensions going the way of the dinosaur and Social Security also on the path to extinction, retirement saving is more important than ever.
In fact, if you don't begin saving for your retirement now, you may not have any retirement to look forward to at all - you could be working until the day you die, and that's no way to spend your golden years. So now that you know you need to save and invest, what is your ultimate objective? How much will you need for retirement?
Retirement Tip - Open an Individual Retirement Account (IRA)
Individual Retirement Accounts allow you to save money for retirement, tax-deferred. There are two types of Individual Retirement Accounts - the traditional IRA and the Roth IRA - but the most important thing to understand is that an IRA is a type of account, not an investment product itself.
Often you'll hear people talk about IRAs as if they are savings bonds, CDs, or mutual funds. Still, these are merely things that would go in an Individual Retirement Account - an IRA is a tax-sheltered account specifically for retirement savings, more like your checking account than an investment product.
The best thing about IRAs is that they allow you to save for retirement without having to worry about Uncle Sam's share. A traditional IRA lets you make tax-deductible contributions of up to $4,000 per year to your account - this means if you fully fund your IRA, you will have a $4,000 write-off on your taxes!
The money you put into the account can be used to buy stocks, bonds, or almost any other type of investment. As your IRA grows in value, you never have to pay any taxes on capital gains - even if you sell stocks within the account for a profit!
However, when you begin withdrawing money from the IRA (you're eligible to start at age 59 1/2), you are taxed on the full amount of your withdrawals at your regular income tax rate.
For most people, a Roth IRA is even better. It allows you to make after-tax contributions - meaning you won't get that $4,000 tax write-off - and otherwise, works much like a traditional IRA. So how can a Roth be better? Because since you're using after-tax money, Uncle Sam will never, ever be able to tax your account's earnings.
This means that if you build up $20 million in your Roth IRA, you won't owe the government one dime when you start withdrawing your loot!
So How Much Will You Need for a Comfortable Retirement?
Retirement experts say people turning 65 in 2006 will need approximately $1 million for retirement. This may seem like a lot, but with life expectancies rising every year, it's understandable.
A liquid net worth of $1 million would allow you to buy government bonds that paid $50,000 a year in interest, and you'd get your principal back at the end of the bond's term.
For your retirement, you will need to determine the inflation-adjusted equivalent of $1 million. Figure inflation at 3 percent a year, and see how much you'll need. Then determine how much you'll need to save each year at an 8-10 percent return on investment, in order to achieve that much.
Thanks to the power of compound interest, the sooner you start saving the better. So get started today if you want to have a leisurely retirement. You'll thank yourself in your old age!
