Determining the amount of money you will need for retirement is a highly personal and complex decision. The goal depends on a number of factors, including the lifestyle you desire, the target retirement age and anticipated life expectancy, according to officials at the Pennsylvania Institute of Certified Public Accountants.
The general rule is that you'll need 70 percent of your pre-retirement income to live comfortably. Many CPAs, however, suggest 80 percent or more as a better figure, especially because of rising health-care costs and increasing longevity.
Think through your responses to the following questions, and then start to prepare yourself for the realities of retirement.
How Do You Define Retirement?
For some, retirement means leaving the job market and moving to an area with a lower cost of living. For others, it may represent starting a new career or creating a business out of a hobby. Still others envision traveling the world. Since retirement means different things to different people, the way you envision it plays a critical role in determining the amount you'll need to save.
How Much Income Is Needed for Retirement?
To determine your annual income needs for retirement, first take stock of your current expenses. List your monthly necessities -- housing, property taxes, transportation, insurance and food -- then make adjustments for changes you anticipate in retirement, such as having paid off your mortgage or your child's college tuition bills. Factor in costs you expect to increase during retirement, such as health care and leisure activities. You should err on the high side when calculating projected expenses. Don't forget to factor in inflation: a 4 percent annual rate should provide a safe cushion.
When Do You Plan to Retire?
Consider your personal retirement timetable. Obviously, the earlier you plan to retire, the more money you will need.
How Long Do You Expect to Live?
Your life expectancy generally depends on your family history, lifestyle and overall health. You can get an estimate by using one of the many online life-expectancy calculators, including one on the American Institute of CPA financial literacy Web site at: www.360financialliteracy.org . To be on the safe side, add five or more years to whatever number you settle on, particularly if you're in excellent health or if one of your grandparents lived to be 100.
What Will Be Your Sources of Retirement Income?
Determine the current market value of what you have saved for retirement in bank accounts, mutual funds and brokerage accounts, as well as what you have invested in IRAs or other personal retirement savings. Then, look at the most recent annual benefit statement that you received from your employer to determine the amount you can expect to gain from your 401(k) or other qualified employer pension plan. Finally, check your statement from the Social Security Administration to get an idea of your projected monthly Social Security benefit. Also plan to work with a good financial planner.
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But before you get to retirement, some expenses may come in the way unexpectedly. The son who wanted the B.S. in education and, just as you're using your retirement calculator, decides to go for a Ph.D. in animal husbandry.
With baby-boomers becoming parents later in life, those college bills can start coming in even as Social Security kicks in.
Most people can't afford the most expensive house or latest luxury sedan. Yet when it comes to their children's education or needs, parents often feel that only the very best will do.
The truth is that plenty of excellent and affordable schools are out there -- you just need to do your homework.
Which sounds more doable: an annual lump-sum payment of $15,000, or 10 payments of $1,500? Many schools have contracts with tuition-management services that allow you to spread the annual cost of tuition over the year, making eight, 10, or even 12 payments.
These aren't considered loans, so you pay no interest, although there is typically a small annual enrollment fee. Check with the schools your child may be interested in attending to find out their payment options.
Grants and scholarships exist, but they aren't easy to find. Start by checking out individual college Web sites, as well as associations related to your child's talents or career aspirations.
Don't overlook local sources. You may be able to acquire multiple small scholarships from local service organizations, such as the Lions Club. Community-based awards may be smaller, but they're also easier to win.
Some large companies also provide scholarship funds to the children of employees. Check in with your company's human-resources department to see if your employer is one of them. Unions could be another source of scholarships, as can professional associations.
One option is to use a reputable scholarship search site, such as FastWeb.com or College Board.com. Be wary of scholarship search engines that charge a fee. It may be a scam.
The most common type of student loan is the Stafford loan, a federally guaranteed low-interest loan based on financial need. Parents may borrow up to the full cost of a student's education, minus financial aid, with a PLUS (Parent Loan for Undergraduate Students) loan. To qualify, the parent must meet the lender's eligibility requirements.