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The Importance of Proper Retirement Planning

The Importance of Proper Retirement Planning

Just as food, water, shelter, and clothing are all important aspects of your life today, so is retirement planning. The funds you save today, while you are still working and earning income, are most likely the funds that will provide that food, water, shelter, and clothing in the future, when you decide to retire. Unless you plan on winning the lottery (an even that has a statistically significant chance of NOT happening), read on.

Retirement Planning - What is it?

Just as the name implies, it is your preparation for the time of your life when you retire and stop working. It is a detailed plan of how you want to live in retirement: how much money you want to have to live off of each month, what age you think you will retire at, and how long you think you will live. Good things to think about are what your expenses are now, what they will probably be in the future, and how much you will need to cover them all. Taking all of those items into consideration, the plan details how much you have to save now in order to accumulate that sum of money to have in the future.

Employers often offer retirement planning tools, such as 401(k) plans; other individuals use IRAs or Roth IRAs to save in accounts that offer great tax benefits.

Why Is Retirement Planning Important?

The introduction to this article showed you the most basic reason, but if you're not convinced, here are a few more:

- In retirement, you will most likely be living off of a fixed income, usually comprised of Social Security and pension benefits. However...

- Social Security is limited, by the system itself, as well as by the amount that you contributed during your working years. While nothing substantial has been said about the end of Social Security, there has been speculation in recent years as to the sustainability of the pay-as-you-go system.

- Also, the pension benefits that once funded quite comfortable retirement lifestyles no longer hold the same potential. Many employers, as they trim their budgets, have cut or eliminated pension plans altogether. With the recent crash in the stock market, those pension plans that did exist may have taken a steep drop, especially if they were heavily invested in the stock market.

- Everyone wants to live comfortably through their entire life, not just when you are young and have parents to take care of you, or when you are middle aged and earning a decent wage to pay for life's luxuries. Being able to enjoy in your old age is a common goal for people, as adjusting to the change from a luxurious working lifestyle to that of a non-working pauper is not so easy.

- Believe it or not, you're not superman. At some points in life your body will probably break down, and won't be able to handle the 40+ hour work weeks and constant stress. Thus, don't plan on working forever.

- A small percentage of people sufficiently save for retirement. Consequently, they are unable to lead as luxurious of a lifestyle as they would like in their golden years.

A Little Example:

As a hypothetical example, say you are thinking about retirement planning. If you went to high school and graduated at 18, went to college and graduated at 22, and then started working, you might work 45 years, until you are 67. (The normal retirement age for those born in 1960 or later, according to the Social Security Administration, is 67 years old). Thus, you would have 45 years to accumulate enough wealth to sustain you though your retirement years. Now how many years do you need to account for?

According to the World Bank, the average life expectancy of a person in the United States is 78.4 years, although some people live longer, or retire earlier. Statisticians state that the average time spent in retirement is now over 20 years (DeVere). From this, estimate the number of years you think you will spend in retirement.

Now multiply that year amount by the amount of money you would need each year to live comfortably. This is how much you will need in total. To find the (approximate, not including inflation) amount you would need to set aside each year, divided that amount by the number of working years you have to save. As you plan for a longer retirement with more luxuries, the sum of money you have to save grows larger, and the annual savings that you must put aside grow as well.

Moral of the story?

Start early. Start now. Retirement planning can't happen overnight.

Image by: Thomas Leuthard