That truism is a great reminder of how important it is to start planning for your retirement. Whether you choose to acknowledge it or not, retirement is creeping up. Even for those physicians who are just out of residency, retirement planning is essential to providing a secure future. But that doesn't mean you are defenseless against time. In fact, with the proper planning, life after work can be the most rewarding years of your life.
One of the most basic ways to begin planning for retirement is determining your post-work income. Post-work income is the amount of money you'll need to live comfortably at current income levels during retirement, without worrying about running out. It also means making sure you have enough extra money to do the things you have always wanted to do, like travel or just plain relax.
Determine Your Needs
Your postretirement income heavily depends on the age at which you wish to retire and how much money per year you wish to spend. Many people grow accustomed to a certain income, and it's important to stay consistent after retirement. You also need to take into account inflation and longer life expectancies. Generally, expect to live on 75% to 95% of your preretirement income per year during retirement. This way, you will not be forced to deal with a drastic drop-off in the way you live. In order to preserve your assets, you want to take out 6% or less per year.
Here's a quick and easy example of how to determine how much to save. Say you plan to retire at age 65 and decide you will need 30 years of dependable income, at an average of $55,000 a year (assuming you can live comfortably on that amount). You will need to save approximately $1,650,000 to make sure you have enough to retire, without considering inflation, medical costs, travel, and any other unexpected expenses.
Getting a rough idea of the amount you will need is a good way to light a fire under your retirement plan. Often people believe they are saving enough, when in reality their savings fall short. By determining a rough estimate, you can then work with a financial professional to nail down an exact number. The sooner you get started saving, the easier it is on your future.
Find a Professional
Meeting with a financial professional to determine your post-work income is fairly painless. Yet not many Americans have done it. According to the 2005 Retirement Confidence Survey released by the Employee Benefits Research Institute, only 4 in 10 workers have tried to calculate how much they will need for their golden years, and only one third of these workers had a financial professional help. Unfortunately, a whopping 10% said they simply guessed their needs.
I do not recommend guessing, and even most postretirement income estimates need to be tested by financial professionals. Running your estimate through a series of tests can help professionals determine what possible risks and warning signs may come up. For instance, if you or a spouse were put in a long-term care facility at some point during retirement, your advisor can look at your determined number and see if it will hold up under the strain.
Meeting with a professional and determining how much you need to save is the first step toward determining future goals for retirement. It will help you to find out if your number will be sufficient in case of emergencies or other unexpected events. It will wake you up to the real number you need to reach.