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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