My Desultory Blog

Posted By RichC on August 20, 2017

Snipped parts and archived a TDAmeritrade educational article …

Americans used to count on a pension plus Social Security to get them through those “golden years.” These days, people change jobs more often, rely on dual incomes, and manage their own retirement funds through defined contribution plans. By most estimates, you’ll need between 60% and 100% of your final working years’ income to maintain your lifestyle after retiring.

Saving Is the Key Component of Retirement Income

The accompanying pie chart shows the importance of saving now toward a retirement fund. Not only are Social Security benefits less significant, but also the sums are diminishing and the age at which you can begin to receive benefits is higher.

You can contact Social Security at 1-800-772-1213 to learn what you can expect in benefits and when to expect them. Benefits are calculated on your earnings, with certain variable factors.

Alas, the responsibility for the bulk of your nest egg rests with you. Social Security represents approximately 33% of the aggregate income of Americans aged 65 and older, according to the Social Security Administration.

Also, as you begin thinking about how much you’ll need for a comfortable retirement, you may be startled to learn the impact of inflation. At an average inflation rate of 3%, your cost of living would double in 24 years. Your annual income will need to increase each year even during retirement in order to keep up with the gradual rise in prices of everyday goods.

You’ll also have to consider the likelihood of increased medical costs and health insurance as you grow older. The median nursing home cost for a private room, for instance, now runs more than $92,000 a year and could rise to almost $140,000 per year by 2030, assuming an annual inflation rate of 3%.¹

Meeting Your Goals

Now that you have an idea how much you’ll need to finance your retirement years, of which there can easily be 25 or more, you may better understand the urgency to build your assets.

How Much Do You Need to Retire in Style?

Financial experts estimate that most of us will need about 60%
to 100% of our annual preretirement income to live on each year
after we retire. Find out how close you are to meeting this goal by completing the exercise below.

1. Estimate your last working year’s salary. Multiply your current
   salary by the inflation factor from the table below, based on the
   number of years you have until retirement. This represents the
   future value of your salary, assuming 3% annual inflation.

   Example: If you are currently making
   $40,000 and have 20 years until retirement, your formula is $40,000
   x 1.81 = $72,400

2. Determine what percentage of your current income you expect to
   need after retirement. If 100% seems high, consider that while you
   may be able to stop paying some expenses, like mortgage payments,
   other expenses will likely increase, such as health and travel
   expenses. Multiply that percentage by the amount in #1.

   Example: $72,400 x .80 = $57,920

3. Estimate your future Social Security and retirement benefits.
   The best source for Social Security benefit projections is the
   Retirement Estimator at www.ssa.gov/retire/estimator.html. (If you
   cannot readily access the official calculator, you can also get a
   very rough estimate of your benefit from Table 2 below.)
   1. If you are using the calculator, multiply the monthly amount
      listed next to “at full retirement age” by 12, then multiply that
      figure by the inflation factor from Table 1 below.

      Example: If the calculator shows an
      estimated monthly benefit of $1,153, your formula is $1,153 x 12 x
      1.81 = $25,043

   2. If you are using Table 2, take the number corresponding to your
      annual salary and years to retirement.

      Example: If you currently earn
      $40,000 and have 20 years to retirement, your estimated benefit
      would be $25,000

   3. Subtract your Social Security benefits and other retirement
      benefits from the annual amount calculated in #1. This will give
      you an estimate of how much of your own savings you will have to
      use each year in retirement.

      Example: $57,920 – $25,000 =
      $32,920

4. Estimate the total amount that you will have to put aside in
   retirement accounts, such as 401(k) plans, individual retirement
   accounts (IRAs), and personal savings accounts. To determine how
   much you will need to save, multiply 19.3 by the annual amount you
   calculated in #3. This multiplier represents how much savings you
   would need to last 28 years at 3% inflation and earning a 6% annual
   return. A healthy, 65-year-old male has a 10% chance of living
   longer than 28 years.

   Example: $32,920 x 19.3 =
   $635,356

5. Enter the amount of your current savings and investments and
   multiply it by the growth factor from the accompanying table. This
   is what your savings would be worth by the time you reach
   retirement, assuming an 8% return compounded annually.

   Example: $30,000 x 4.66 =
   $139,800

6. If line 5 is larger than line 4, congratulations! You are on
   your way to meeting your retirement goal. Keep saving! If line 4 is
   larger than line 5, subtract line 5 from line 4. Enter that amount
   here. This is the additional amount you’ll need.

   Example: $635,356 – $139,800 =
   $495,556

7. Divide #6 by the multiplier in the table below for the number
   of years until your retirement. The multiplier represents how large
   your savings will grow based on your annual contribution, assuming
   an 8% annual return. The result is the approximate amount you may
   want to set aside each year.

   Example: $495,556 ÷ 49.42 =
   $10,027

Table 1 — Factors*
Years	Inflation	Growth	Multiplier
5	1.16	1.47	6.34
10	1.34	2.16	15.65
15	1.56	3.17	29.32
20	1.81	4.66	49.42
25	2.09	6.85	78.95
30	2.43	10.06	122.35
35	2.81	14.79	186.10
40	3.26	21.72	279.78

 

Table 2 — Social Security Income
Years to Retirement
Current Salary	40	35	30	25	20	15	10	5
$20,000	29,500	27,000	25,000	22,500	20,500	19,000	17,500	16,000
30,000	32,500	30,000	27,500	25,000	22,500	21,000	19,000	17,500
40,000	35,500	32,500	30,000	27,000	25,000	23,000	21,000	19,000
50,000	38,500	35,500	32,500	29,500	27,000	25,000	22,500	21,000
60,000	41,500	38,000	35,000	32,000	29,000	26,500	24,500	22,500
70,000	44,500	41,000	37,500	34,000	31,000	28,500	26,000	24,000
80,000	47,500	43,500	40,000	36,500	33,500	30,500	28,000	25,500
90,000	50,500	46,500	42,500	39,000	35,500	32,500	29,500	27,500
97,500 +	53,000	48,500	44,500	40,500	37,000	34,000	31,000	28,500

*Assumes 3% annual inflation and a 5% annual return.

Pensions, Social Security, and Other Allies

Traditional pensions (private and government) are estimated to
supply about 21% of the aggregate income of today’s retirees, while
Social Security is estimated to supply 33%, although nearly two
thirds of retirees rely on Social Security for 50% or more of their
income, according to the Social Security Administration. Still,
you’ll probably fall far short of your goal. A radically reduced
standard of living for a quarter century or more is hardly the
stuff “golden age” dreams are made of.

Fortunately, you have some allies. First is the power of
compounding, which takes advantage of time. Tax deferral is another
ally. Using investment vehicles such as 401(k) plans or IRAs, you
can put off paying taxes on your earnings until you are retired and
potentially in a lower tax bracket. Meanwhile, your contributions
may be pretax or tax deductible, helping reduce current tax
bills.

For example, an investment of $10,000 would grow to more than
$100,000 after 30 years at an annual return of 8% if all the
returns were reinvested and the account grew tax deferred. As with
all hypotheticals, this example does not represent the performance
of any specific investment, and the earnings would be subject to
taxation upon withdrawal at then-current rates and subject to
penalties for early withdrawal.

The more time you have until retirement, the more fortunate you
may be. Delaying just months, never mind years, can significantly
reduce your results. Consider this example: Jane begins investing
$100 a month in her employer-sponsored 401(k) plan when she’s 25.
Mark invests the same amount — beginning when he’s 35. Assuming a
7.5% annual rate of return compounded monthly, when Mark retires at
65, he’ll have $135,587. Jane will have $304,272.

While this is only hypothetical and there are no guarantees any
investment will provide the same results, you can see the
remarkable difference starting early can potentially make.

By starting early, investing systematically, and benefiting from
the potential of compounding and tax deferral, you may pack a lot
more punch into your portfolio.

Another advantage of today’s retirement planning options is that
you can control how your money is invested.

Investment plans need to be customized because different people
have different degrees of risk they will accept as well as varying
time frames they intend to hold their investments. Keep in mind,
all investments involve risk, including the possible loss of
principal. A tailor-made portfolio can be diversified to take these
factors into account. It’s a wise idea to consult a professional
financial advisor for complete information.

¹Sources: Genworth 2016 Cost of Care Survey; DST Systems, Inc., 2016.

Categories: Archive, Financial
Tags: information, retirement