You may count yourself among the millions of Americans that sat down with a financial planner to determine how much you should be saving toward retirement. There is probably no other aspect of financial planning that has come off the rails as significantly as retirement planning. Those saving to build a retirement nest egg are finding the numbers more and more difficult to make sense of. Many already in retirement, are learning it is nearly impossible to live on the earnings from their investment portfolio. The new era of one percent CD’s and a stock market that has been flat for ten years, make all of the traditional rules of financial planning irrelevant.
Rule #1 – Average six percent per year and double your retirement nest egg every twelve years
You may be familiar with the so called Rule Of 72. The idea is that you can divide your earnings rate into 72 to determine how many years it will take to double your money. The rule is still intact from a mathematical standpoint, but the idea that people can find a solid six percent investment is not. It was not too many years ago that investors (including me) banked on a 12 percent rate of return and investments that would double every six years. If we use the Rule based on today's investment option (a three percent rate of return), we find that it takes twenty four years to double our money!
Rule #2 – Accumulate ten times your annual income and you will be financially secure during retirement
Traditionally, if you wanted to create an income of $40,000 per year, you needed to accumulate $400,000. The problem is that this is based on earning ten percent annually. Now, in the new world of low yielding investments you may need $1.3 million! This is really a major shock and disappointment to anyone planning for retirement.
Steps to formulating a retirement plan:
1. Determine how much income you will need during retirement
The normal process here would be to determine what income you will receive from your pensions and Social Security. I have deep concerns about the nation’s pension systems which are considerably under funded. In some areas, such as California, the state has only $1 for every $8 of future pension fund liabilities. Many other states like Illinois are in just as much trouble with their pension funding. The Pension Benefit Guaranty Corporation (the equivalent of the FDIC for pensions) is insolvent itself. I won’t even go into the issue of Social Security, which faces inevitable benefit cuts (including increasing the age when benefits will begin).
Some may choose to count on Social Security and pensions, others may not want to include these sources at all. Maybe a more logical compromise would be to discount these sources by 50 percent, to be conservative.
You should also consider what kind of retirement lifestyle you plan to have. By retirement, will you be debt free? What will your lifestyle be like? Once you have determined the amount of monthly income you need to generate on your own, move to step 2
2. How will you supplement your income during retirement?
This may be the most important step in current day retirement planning. Most people will need to continue to work part time. This may take the form of a part time job or even a small business. In my own case, much of my plans for income during my twilight years are connected to my various online businesses. Of course, most people know about my ChristianMoney.com website, but other may not be familiar with the dozens of other online businesses I am also building. For those interested in finding out more about how I am doing this, please visit Christian Internet Income. Internet business offer the perfect balance of flexibility of schedule and location that makes this kind of business ideal for one’s later years.
Experts agree on one thing, the sooner you start making (or re-making your plans) the better off you will be. Many have spent the last few years in a state of denial, but what may have appeared to be a temporary lull in our economy has turned into something much more significant. Whether you want to call this a recession or depression, is likely not as important as recognizing that times have changed. Yes, it is an old axiom but perhaps more appropriate as a description of the ‘new economy’ in which we live that any other that comes to mind.
Helping you make the most of God’s money!