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Savings
Fitness:
A Guide To Your Money and Your Financial Future
Avoiding Financial Setbacks
Will you have other
sources of income?
For instance, will you receive a pension that provides a specific amount
of retirement income each month? Is the pension adjusted for inflation?
What savings do I
already have for retirement?
You'll need to build a nest egg sufficient to make up the gap between
the total amount of income you will need each year and the amount provided
annually by Social Security and any pension income. This nest egg will
come from your retirement plan accounts at work, IRAs, annuities, and
personal savings.
What adjustments
must be made for inflation?
The cost of retirement will likely go up every year due to inflation-that
is, $35,000 won't buy as much in year 5 of your retirement as it will
the first year because the cost of living usually rises. Although Social
Security benefits are adjusted for inflation, any other estimates of how
much income you need each year - and how much you'll need to save to provide
that income - must be adjusted for inflation. The annual inflation rate
is 3.0 percent currently, but it varies over time. In 1980, for instance,
the annual inflation rate was 13.5 percent; in 1998, it reached a low
of 1.6 percent. When planning for your retirement it is always safer to
assume a higher, rather than a lower, rate and have your money buy more
than you previously thought. Retirement calculators should allow you to
make your own estimate for inflation.
What will my investments
return?
Any calculation must take into account what annual rate of return you
expect to earn on the savings you've already accumulated and on the savings
you intend to make in the future. You also need to determine the rate
of return on your savings after you retire. These rates of return will
depend in part on whether the money is inside or outside a tax-deferred
account.
It's important to choose
realistic annual returns when making your estimates. Most financial planners
recommend that you stick with the historical rates of return based on
the types of investments you choose or even slightly lower.
How many years do
I have left until I retire?
The more years you have, the less you'll have to save each month to reach
your goal.
How much should I
save each month?
Once you determine the number of years until you retire and the size of
the nest egg you need to "buy" in order to provide the income
not provided by other sources, you can calculate the amount to save each
month.
It's a good idea to revisit
this worksheet at least every 2 or 3 years. Your vision of retirement,
your earnings, and your financial circumstances may change. You'll also
want to check periodically to be sure you are achieving your objectives
along the way.
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