Retirement Planning
By Raphael B. Bello
Nearly everyone’s goal is to adequately plan for a comfortable retirement. Planning for retirement would be a much easier exercise if we knew exactly how long we were going to live and even how we were going to die. It would certainly help if we could know how much it would cost to live and what our retirement income would be. However, we do not have precise answers to any of these questions. As much as we have to admit, retirement planning is more of an art than a science. In fact, it is an attempt to quantify the unpredictable. It is like trying to predict what the stock market is going to do next month, it is really a best guess exercise.
Despite the uncertainties, it is important to try to predict both how much income you will need and the potential sources of income available to you. Most people do not start planning for retirement until they reach their early fifties. There is a logical explanation for this. By that time most people have bought the most expensive house they will own and have put their children through college. There are other obstacles we may have to negotiate when planning adequately for retirement; the potential cost of supporting grown children, curtailment of future social security, lower pension payments, growing health care costs and increasing longevity, to name a few.
The first rule of successful retirement planning is to start accumulating money for retirement as soon as possible. In fact, the earlier you can start to accumulate money for retirement the better off you will be. I recognize people barley make enough to cover current expenses. You will have home buying and perhaps child rearing costs. Besides, when you are in your 20’s and 30’s, retirement seems very far away and you feel you have plenty of time to accumulate money. Many people do not manage to accumulate much money until they are in their late 40’s and early 50’s. At that time major expenditures are generally behind them and earning years are at their peak.
Let us say at age 26, investor A was able to save $1,200.00 annually for seven years and for whatever reason, was not able to add to their investment thereafter. Investor B was not able to start investing until age 33, but then they invest $1,200.00 a year for the next 33 years, until age 65. Investor C starts at age 26 and invests $1,200.00 for 40 years, until age 65. Assuming these investments compound annually at 9%, what would result?
Investor A would have invested $8,400.00 and it would grow to $206,772.00 at age 65. Investor B would have invested $39,600.00 and it would be worth $235,178.00 at age 65. Investor C, investing $48,000.00, would accumulate $441,950.00. The point, of course, is that saving earlier rather than later is better, but it is best to save early and keep saving. The most efficient way to save for retirement is to invest in a retirement plan in which you do not pay taxes on the amount you invest and earnings accumulate for you untaxed. Let us say you are able to invest $500.00 a month in a retirement plan. Assuming you are in the 28% federal tax bracket, if you did not make this contribution you would pay $1,680.00 in taxes on $6,000.00 of your earnings, leaving you with $4,320.00 after taxes to spend or invest. Thus even though you invest $6,000.00 in your retirement plan, it is really only costing you $4,320.00, considering the tax savings.
In summary, please be aware that retirement planning is not a simple calculation, it is a lot more complex than that. We are all living longer. We are all aware that the social security and Medicare systems are dwindling. Finally, the cost of health care is a big unknown. Since we have no idea how or when we will die, we will be wise to forgo today’s luxuries to be able to afford tomorrow’s needs.
Raphael B. Bello is a Banker and the Treasurer of Egbe Isokan Yoruba.
For More Information Contact:
Egbe Isokan Yoruba
P.O. Box 90832, Washington, DC 20090
Tel: (202) 270-6382
FAX: (301) 499-5386
Internet: isokan@yoruba.org