Don't Delay, Start Saving for Retirement

Physician's Money Digest, April30 2003, Volume 10, Issue 8

Most sensible financial planningexperts will agree thatmiddle- and upper-incomeAmericans (eg, physicians) will requireup to 80% of their preretirementincome in order to live a comfortableretirement. For those withbig mortgages, the amount will likelybe even higher. Mostdoctors, however, underestimatetheir retirementneeds. Theimportance of accuratelyplanning foryour retirement and building a sufficient nest egg cannot be overstated.

CALCULATE RETIREMENT

A survey conducted by FinancialPlanning Information, Inc, finds thatjust 23% of those age 50 and olderactually try to estimate their retirementspending. Ideally, all people inthis age bracket should already have aretirement plan in place. The followingillustration can help you projectyour retirement budget. In order toreduce the possibility that you willrun out of money, the calculationassumes a life expectancy of 95 years.

Take your current net income andsubtract the amount you are puttinginto savings. For example, if you are adoctor earning $200,000 a year aftertaxes and save $32,000, then you arespending $168,000 a year. Multiplythat figure by 80%, which is the percentageof current income you'll needin retirement. Thus, you will need$134,400 each year. Next, multiply$134,400 by the number of yearsbetween your retirement age and 95.If you plan to retire at age 65, thatwould be 30 years. In this example,you would need approximately $4million to fund your retirement.

This estimate assumes that inflationwill average 3% a year and returnon your retirement savings will growat least in line with inflation. Web sitessuch as www.asec.org (AmericanSavings Education Council) andwww.smartmoney.com can offer amore precise estimate.

After computing your retirementbudget, project what your retirementincome will be and if it will cover thebudget. When calculating your income,remember to include SocialSecurity and your pension (if you'llbe getting one). Review the annualestimate that the Social SecurityAdministration (SSA) mails you nearyour birthday. You can also request acopy of the statement anytime bycontacting the SSA (800-772-1213;www.ssa.gov/statement). If you'll bereceiving a pension, get an estimate ofyour future payment from youremployer's benefits department andfind out what available options youhave for receiving benefits.

Also include income from your401(k) and other investments (eg,IRAs and Keoghs).The financial servicescompany that managesyour 401(k) plancan help you calculatehow much moneyyou eventually will accumulate andhow much income it will generate.Take a conservative approach whendetermining income from your otherinvestments—estimate a 6% return.

FIND RETIREMENT MONEY

Don't panic if you find that youwill not have enough money to retire.There's time to work toward buildingyour nest egg. One thing you can do isdelay your retirement. By working just1 year past your planned retirementage, you increase the amount you candraw from your nest egg over the restof your life by 10%. This is possibledue to the compounded growth ofyour investment, as well as havingfewer years to spend it.

Cutting down on your spendingcan also make a big difference. Startpaying down your debt, and stopadding to it. Thus, money that wouldhave gone to paying off your debt willnow be available to put into yourretirement savings.

The Financial Planning Informationsurvey revealed that approximately50% of most people's wealth istied up in their homes. Pay off yourmortgage as soon as possible to minimizeinterest payments and free upmoney. Making small extra paymentseach month toward your mortgagewill help. For example, you may have$100,000 remaining on your mortgageand 25 years to pay it off.However, by adding just $100 extra toeach mortgage payment, your mortgagewill be paid off in only 15 years.Before doing so, be sure you can maximizeretirement-savings payments.

Revisit your housing needs. Areyou able to sell your home and buysomething smaller? Keep in mind thatcouples can take up to $500,000 incapital gains from the sale of a housewithout owing taxes. Give seriousthought to the benefits of downsizing.

Careful planning today will ensureenough money to retire comfortablytomorrow.