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Running On Empty (or Why People Don't Save)

So, what's your excuse?

"I don't need much money to live on when I retire."

Actually, you'll need anywhere from 65-90% of your current annual income for each year you plan to retire. You also need to factor in the cost of inflation, which will reduce you buying power as the years go by.

With this attitude, you'll be working for more than a few years to save what you need for your retirement. Most people don't realize how much they'll need to retire, so they don't start saving soon enough. The longer you wait to save, the longer it will take you to achieve your goals.

"I don't need my retirement money to last that long."

This is simply not true. With people living longer these days, today's average 65 year old man can expect to live another 15 years, while today's average 65 year old woman should expect to live an additional 19 years. You should save for retirement assuming that you will outlive the "average" 65 year old to be sure you'll have enough money.

"I've got better things to do with my money -- I'm going to enjoy myself while I can."

It's a perfectly good idea to live in the here and now -- and you should enjoy yourself. But realize that if you're not saving today, tomorrow will be much tougher to enjoy. Saving even a little now will allow you to enjoy the present -- and the future.

"My employer is saving money for me through a pension plan."

Many employers are moving away from traditional pension plans which pay you a fixed monthly income based on your salary and number of years you worked. Instead, today's retirement plans are increasingly set up as defined contribution plans, which rely on you to put money into them.

And, if you own yor own business, you personally shoulder the responsibility for retirement decisions for yourself (and for your employees)!

"Social Security and Medicare will take care of my basic needs."

Please do not count on Social Security to handle all of your retirement needs. Remember, you will most likely need 65-90% of your current annual income for each year you will be retired. Social Security will fall short of that -- probably, far short.

Medicare is also not structured to cover all of your expenses. With Medicare, you are still responsible for major expenses like prescriptions and long-term nursing care.

If you haven't started to save yet, you're not alone. But that doesn't mean that it's the right thing to do. Saving for your retirement is like driving from one place to another: The earlier you start, the sooner you'll arrive, and if you never get in the car you'll never get anywhere.

Think of your retirement savings as gasoline: it's what you need to get you to your retirement goal. If you want to retire early, you'll need to move down the road faster, requiring more gas/savings.

A general rule of thumb is that you'll need between 65% and 90% of your final working income each year to maintain your lifestyle during retirement.

Let's say that your final working income is $50,000. To continue living the way you are now when you retire, you'll need $35,000 - $45,000 a year. If you are thinking of retiring in your early 60's, that means you'll need to save between $700,000 - $900,000 to live comfortably for another 20 years.

Of course, the percentage of your income varies from person to person. To get a rough idea of how much of your pre-retirement income you'll need to maintain your lifestyle when you retire, choose one of the following three profiles that best describes you:

If you:

  • Are a high income earner
  • Save a large amount -- at least 15% -- of your annual income
  • Don't intend to lead the same high-income lifestyle you currently have when you retire
  • Will own your home without debt when you retire

You need 65% of your pre-retirement income when you retire.

If you:

  • Save a decent amount (4% - 15%) of your annual income
  • Want to continue the same standard of living that you have now when you retire
  • Think that you will still have some mortgage payments or a small rent to pay when you retire

You need 75% of your pre-retirement income when you retire.

If you:

  • Save less than 5% of your annual income
  • Want to continue the same standard of living that you have now when you retire
  • Will have a good portion of your mortgage or a large rent to pay when you retire

You need 85% of your pre-retirement income when you retire.

No matter how much you'll end up needing at the end of your road to retirement, it's a good idea to put together a retirement savings plan as soon as possible.

 

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