The balance between the income you will need, the resources you have and how long you will live will help to determine your financial security in retirement.
People have different goals and make unique lifestyle choices, but financial publications frequently indicate that 70 percent to 80 percent of the amount earned during pre-retirement is a realistic amount of income needed during retirement. A good indicator of the income you will need can be estimated by making a list of current expenses such as housing, food, transportation and utilities. A list of occasional expenses such as health care costs, insurance, travel and education also will help provide a picture of your needs. Which expenses will decrease and which will rise when you retire?
Your stage of retirement, whether newly retired or in a later phase of retirement, may be a factor in the amount needed and the type of expenses incurred. The average life expectancy has increased during the last century with many people living into their 80s and 90s. The effect of this increased life expectancy on short-term and long-term health-care costs and the need for funds to support this longevity must be considered.
Where will you live? A decision to move to a smaller dwelling or to a less expensive geographic location will affect finances. If you own your home and have substantial equity, you might use some of that equity for retirement funds or investments. Will you continue to work part-time? Is this an opportunity to turn a hobby into a career? Would this be a chance to change careers, serve as a mentor or teacher, or volunteer in an area of interest? What new lifestyle expenses might crop up?
Many current retirees have a defined benefit pension plan which pays a fixed amount on a regular basis. The change in the funding of pension benefits to a defined contribution plan and the use of the
401(k) and 403(b) may mean that many baby boomers will rely on the decisions they have made rather than on an employer’s pension manager who makes decisions regarding these saving and investment opportunities.
Your Social Security benefits will depend on your lifetime earnings and the age at which you retire. The earliest you can begin collecting monthly Social Security benefits is age 62. Most people think that the full retirement age is 65, but for baby boomers this age may be 66 or 67. If you return to work after beginning to collect Social Security benefits, there may be a reduction in these benefits. Also, some pensions are integrated or affected by the amount of Social Security benefits collected.
According to the 2002 Retirement Confidence Survey conducted by the Employee Benefit Research Institute and the American Savings Education Council, workers are most likely to expect that the largest share of their income will come from personal savings. A variety of saving and investment instruments are available. These investment vehicles might be used to handle a tax-deferred investment such as traditional Individual Retirement Accounts, or IRAs.
Roth IRAs, which can earn interest tax-free over the life of the investment, might be even more attractive. Effective January 2002, higher contribution limits went into effect for both Roth and traditional IRAs, and those with 401(k) and 403(b) plans. In addition, there is a special catch-up provision for people age 50 and older. Contribution limits and catch-up amounts will both increase gradually from 2002 through 2010. You may want to do further research or talk to a financial advisor to investigate how these plans might provide an advantage for you.
Information on savings and investments have been featured in Judy McKenna’s "It’s Your Money" columns under "Handling Money in Retirement and Retirement Planning." View these at www.ext.colostate.edu/pubs/columnym/ymgold.html. An online retirement planning program offered by Purdue University, called "Planning for a Secure Retirement," can be accessed at www.ces.purdue.edu/retirement/. The 2002 Retirement Confidence Survey and financial calculators to help you with your financial plans can be obtained by going to the Choose to Save Web site at www.choosetosave.org.
Additional information on financial needs during retirement is available by contacting Colorado State University Cooperative Extension office in your county. You can access additional information on topics for Healthy Aging by going to www.ext.colostate.edu, clicking on publications and then going to Healthy Aging.