You have heard it said that people are living longer into retirement than ever before in human history. Advances in modern medicine are allowing people to live well into their 80’s, 90’s, and even 100’s. What a privilege it is to live at such a time as this! With the potential of living much longer, people also need the finances to sustain them throughout their retirement years.
The Benefit of Time
What is the key to building a secure financial future? Very simply, it is this -- start saving for retirement early. If you were not able to start early, don’t worry. Just start now – wherever you are in life. Time is your greatest ally in growing your savings into retirement wealth.
Take this scenario, for instance. Suppose you are a 30-year-old who earns $30,000 a year saving 6% of your salary each month (or $150). With a 10% investment return, you will have accumulated $574,242 by the age of 65. Assuming the same factors, except that you begin 25 years later at age 55, you will only have accumulated $30,983 by age 65.
Project Your Retirement Income and Expenses
When considering your financial life during retirement, it is good to consider how many expenses you will have and from where your money will come. Many of your current expenses will be less in retirement, such as no longer purchasing business clothes or commuting costs, and no social security taxes. However, your expenses will change to covering health care costs, leisure travel, home maintenance, and gifts to children and grandchildren. Keep in mind that inflation will also increase. Most financial planners suggest that retirees should plan to spend between 60% and 80% of the expenses during their work years.
What sources of income will you have? The three main sources of income for retirees are:
- Social Security
- Private savings and investments
In order to estimate your retirement income and expenses, the following are suggestions:
- Review the annual statement of benefits you receive each year from the Social Security Administration (or go to www.ssa.gov) for an estimate of your Social Security benefits.
- Contact your company’s employee benefits department. They can give you an estimate of your retirement plan’s benefits based on your earnings and years of service.
- Look at your other investments and savings. Their earnings may amount to 30% to 50% of your total retirement income.
- Consider and list all your financial priorities, needs, and wants to get a picture of what it will take for you to live well. Determine how much money you must save each year to meet this goal.
- Seek to understand tax implications for your current financial situation, retirement investments, and what you need to consider for taxes during your retirement years.
As always, we are here to help you navigate the complexities of the tax world.
Michael Allen, CPA
Allen & Company, PC
(770) 428-6229 (T)
(770) 425-5481 (F)