Planning For Retirement


Too many people are financially unprepared for retirement. Are you one of them? Don't worry . . . it's never too late to start saving. Use the checklist on the left to plot your strategy.

Think you know how much retirement income you’ll need? Think again.

Your retirement could last for decades. Will your nest egg keep pace?

Once you have determined how much income you will need at retirement, you can figure out how much you will need to put away to have a big enough nest egg to fund your desired income level.

A general guideline is that you will want to have at least 70% of whatever income stream you have before retirement. If you have any special needs or desires—e.g., a desire to travel extensively—the percentage should be adjusted upward. The 70% figure is not a substitute for a thorough analysis of your income needs after retirement, but is only a guideline.

Here are some suggestions for estimating how much of an income stream you will want to have coming in after retirement:

Figure Your Current Annual Expenses. The first step in trying to figure out what your annual expenses will be after retirement is to figure what your expenses are now. Take a year’s worth of checkbook, credit card, and savings account records, and add up what you paid for insurance, mortgage, food, household expenses, and so on.

Figure Out How Your Expenses Will Differ After Retirement. After you retire, your expenses will generally be a lot lower than they are while you are working. To help determine how much lower, here are some questions you might ask yourself :

  • Will your mortgage be paid off?
  • Will you still be paying for commuting expenses?
  • How much will you pay for health insurance?
  • Will you increase or decrease your life insurance coverage?
  • How much will you pay for travel expenses? (Do you want to travel after you retire, either on vacation or to visit relatives? Will you be commuting between a winter or summer home?)
  • Will you be spending more on hobbies after retirement?
  • Will your children be financially independent by the time you retire or will you have to factor in some sort of support for them?
  • Will your income tax bills be the same, lower, or higher?

The answers to these questions will help you determine your estimated annual expenses after retirement. Then subtract from this estimate the anticipated annual income from already-viable sources. (Do not subtract the lump-sum payments you expect to receive—e.g., lump sum payments from 401(k) plans, which will be discussed later). The difference is the annual shortfall that will have to be financed by the nest egg you will need to accumulate.

How do you determine how much you need to save each year to accumulate a nest egg of that size by retirement age? You can do this by using the table below (which, assumes an after-tax return of 5% per year). Just multiply the required nest egg by the Savings Multiplier for the number of years until retirement.

Example: You are 40 years old and want to retire at age 65. You determine that you need a nest egg of $350,000 to fund your annual shortfall. To find out how much you must save each year to have that $350,000 nest egg by the time you are 65, multiply $350,000 by the 25-year savings multiplier (2.1%). You will need to save $7,350 (2.1% times $350,000) a year for 25 years.

Subtract from this nest egg any lump sums that you expect to receive at retirement. To project the value at retirement of a present asset (retirement account, savings, investments, etc.), multiply the current value of this asset by the Growth Multiplier for the number of years until retirement.

Example: You already have $75,000 in a 401(k) plan. To find out what that amount will grow to in 25 years, multiply it by the growth multiplier for 25 years. This $75,000 will grow to $254,250 (339% times $75,000) by the time you retire. Subtract this $254,250 from the $350,000 needed in the previous example. This amount ($95,750) is the amount you must accumulate by age 65 to meet the income shortfall. Multiply this $95,750 by the 25-year savings multiplier (2.1%). You now know that, after taking the projected lump sum into consideration, you will still need to save $2,010.75 per year to accumulate $95,750.

Years Until Retirement Savings Multiplier Growth Multiplier
5 18.1% 128%
10 8.0% 163%
15 4.6 208
20 3.0 265
25 2.1 339
30 1.5% 432%

 

Establish Your Retirement Goals
Copyright 2018 Mercer LLC. All rights reserved.
 
Mercer Health & Benefits Administration LLC
AR Insurance License #100102691
CA Insurance License #0G39709
In CA d/b/a Mercer Health & Benefits Insurance Services LLC