When investing for retirement, you’ll need to have a goal in mind that’s based on how much you’ll need to afford the quality of life that you’re after. Retirement planning is basically figuring out how much income is needed based on what you think you’ll be spending. Once you add in your social security and pension benefits, it’s up to you to figure out what shortfall needs to be covered to meet your living requirements. Retirement is less fun when you run out of money, so here are a few factors to consider to make sure your retirement investing produces income that lasts as long as you do.
Inflation
Inflation is one of the biggest challenges facing retirees after they quit working. Financial planners typically estimate a 3% inflation rate as a baseline for their calculations. Using the rule of 72, that means that the spending required to maintain your standard of living will approximately double every 24 years. If inflation averages 6%, you will need to double what you spend every 12 years to maintain your standard of living. The popularity of the 3% forecast for retirement planners owes to the fact that inflation has been mild and averaging about 3% since the 1980s. But the future has no obligation to repeat the past, and government debt, negative interest rates and unsustainable entitlement programs run by the government are all threats to escalate inflation. During the oil crisis of the 1970s, the inflation rate was closer to 10%. Because of these uncertainties, it’s prudent for retirement planning to use a variety of inflation scenarios to forecast how varying inflation rates affect your need to save.
Life Expectancy
Actuarial tables and the life expectancy tables kept by the Social Security Administration forecast that men and women live until the middle of their 80s, with women averaging about a couple of years longer life expectancy than men. Calculating your life expectancy is important since your investing targets will change depending on how much longer you expect to live. Unless you have a chronic illness or have a family history of a debilitating disease, it is important to forecast your life expectancy optimistically. If you’re in your 50s or 60s, it’s recommended that you forecast your retirement needs into your 90s. Longevity, antiaging science and biotechnology are rapidly developing and will ultimately improve the life expectancy for older adults as they grow into their golden years. The risk of forecasting a too short of a life expectancy is that you’ll run out of money too soon. Retirement planning is like buying insurance for your later years, but that insurance is null and void if you’re not generous enough with your mortality forecast.
How Much Your Pension and Social Security Will Contribute to Your Retirement Funds
The taxes you pay for social security during your working years are in some form given back to you when you reach retirement age. The best way to forecast how much social security benefit you shall receive is to use the free SSA retirement calculator which will give you a personalized social security projection using your earnings history. The social security administration estimates that your benefit will be approximately 40% of your working income, which is more biased towards your most recent wages. Of course, social security is an unfunded entitlement program which has no assets behind it: the working age population pays social security taxes to fund retiring workers who are growing in ranks year after year. Corporate pensions, just like the murky future of social security benefits, are not necessarily a bad rock to be depended upon. If your company is bought out or declares bankruptcy, the pension liability is often ripe for pillaging or getting cut altogether during negotiations. That’s why it’s generally smarter to depend on 401(k)s or IRAs which are part of your personal savings account. Ultimately, 401(k)s and IRAs are something you own and form part of your savings. Although the pensions of government workers are generally more dependable than of those who’ve labored in the private sector, it’s up to you to calculate just how much faith you have in the institutions that are backing your pension obligation.
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