Retirement: The Time is Now.
By Raphael Bello
I have written an article about retirement planning, in the last Isokan Yoruba Magazine. I am always amazed at the advanced planning a good retirement takes. It is not that it is difficult, it is just that it goes against a basic human trait, procrastination. Once you have a plan in place though, keeping up with it can become second nature. The reward is worth the sacrifice in the end.
One of the first steps is to take a look at all of your current assets. By that, I mean look at what you have saved in a company retirement plan, i.e. 401K, individual retirement plan account and other common stocks, mutual funds or savings accounts. Next, take a look at your current living expenses, including taxes, food, clothing, rent, mortgage, insurance and medical expenses, etc.. You will need to estimate the current amount of expenses to maintain your lifestyle, then project it to retirement. If you plan to retire in ten years and assume the rate of inflation will be about 2.5 percent per year, you need to multiply your current living expenses by 2.5 percent a year. Continue to do that for each year of retirement. Once you have determined what it will cost to retire and maintain your current lifestyle, you need to take a look at the different investment programs. Please, note the most common mistake people make is assuming their living expenses will decline when they retire. Contrary to what many people believe, they are not going to change their style of living once they retire.
Though there have been a lot of controversy surrounding social security and whether or not the program will survive, you should still assume it will be a part of your plan until you hear otherwise. You will need to project, based on the 2.5 percent annual inflation figure, what you would receive each month from social security at retirement. Next, take a look at your retirement plan at work, if you have one. Contact your human resources department and ask them to project, based on your earnings, what you can expect to reap at your retirement. When you add these two up, there is a "shortfall", that is the portion you have to provide.
The next question at this point is, how many years beyond retirement should you plan for? That is, how long do you expect to live? How will you generate that extra income? You may need to plan for more years beyond retirement than you think. Because we are exercising more and eating healthier and medical care is better than ever, we are living longer. Of every three people age 65 today, 1.3 of them will live to be 90 and in 10 to 15 years, that life expectancy is predicted to jump to nearly 100. With those statistics in mind, you may need to prepare for a retirement that will stretch nearly as long as your working years.
Armed with all this information, how do you prepare? Your preparation should be two fold. You need to plan for both the everyday living expenses during you retirement years as well as any extraordinary expenses, i.e. medical expenses. Part of that planning means protecting the assets you have acquired. in fact, one of every three people over the age of 65 spend time in a nursing home. The average stay is two and a half years. Since Medicare does not pay for custodian care in a nursing home, that is a quick way to use up your assets. I will advise that because of the expense of long term care, people should consider purchasing long term care insurance for both themselves and their spouse once they reach the age of 50. You should also consider protecting you assets in the early stages of life. My suggestion is disability insurance to protect your earnings.
Also, putting away as much money into a tax deferred plan, a 401K plan could mean your kids can qualify for financial aid for college, allowing you to save more of your assets for retirement. Other assets, such as those generated through the Uniform Gift to Minors Act, your home’s equity and other outside investments are fair game on a financial aid form for your children when the time comes to go to college.
Once you have a projection for just how many years retirement may be, as well as some ways to project your assets along the way. You need to generate the figure that will be the final piece of your retirement planning puzzle. For example, someone currently earning $50,000.00 a year would need $1,000.000.00 to retire tomorrow and maintain their current standard of living. One way to accumulate enough income to cover the "shortfall" between what you have saved and what you will need is to be sure you are taking full advantage of all the retirement vehicles around. It is tax deferred and many companies will match at least part of your contributions. Please remember to diversify within your 401K plan. Many people put themselves at risk by owning too much of a company they are employed by. Your portfolio should be only 10 to 15 percent of your company’s stock, then build up your assets in other areas.
Next, look for investment opportunities you can participate in on your own, like the IRA. Everybody can have an IRA, even if you have a pension plan. It is money that can accumulate on a tax-deferred basis and money that will be left in an account to work for you during your working years. Recent changes in the current laws allow a married couple to each contribute $2,000.00 a year to an IRA. The dual contribution must be made to two separate IRA accounts. The old law only allowed a non-working spouse to contribute $250.00.
In addition to the IRA, you can supplement your shortfall through your own portfolio of common stocks. Start investing on your own, make a pact with yourself that you are going to put away every bit you can. If you find you are not saving enough, just like an exercise, you need to push yourself a little bit to make progress. Infact, I will recommend that 20 percent of your gross income go toward your retirement savings. Start investing in equities (common stocks, mutual funds, variable annuities) each and every month. You have to invest in equities if you are going to beat inflation.
Once you have established a plan, don’t stop there, it is important to go back and review your plan at least once a year to be sure it is on track. Retirement is not something you do once, but throughout your life. That is what gives you peace of mind.
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