The old adage "out of sight, out of mind" is never truer than when it comes to budgeting for retirement. Starting young is the best strategy. But typically, nothing is further from a young person's mind, especially when they're just starting a new career or forming a family.
That's probably the biggest mistake most people make when it comes to retirement planning, experts say. While it's hard to give much thought to something that's 20 to 40 years away, developing a budget geared toward retirement is the best way to help make sure you'll have the kind of retirement that you want.
Textbooks may tell you that once you retire, your living expenses will drop by 20 to 25 percent. The rationale is that children will be out of the nest, you won't have expenses associated with working and so on. But that may no longer be the case.
People are simply more active now. They want to take vacations, they may want to have a second home, or they want to pursue hobbies they didn't have time for when they were working. In some ways it's a good problem to have, but they have to plan that their current living expenses will remain constant throughout their lives.
At first, that may sound like a tall order. The average American today may have nowhere near the retirement savings needed to make that happen. But by budgeting properly, reaching your retirement goals can be easier than you think. The key is to start planning early.
While there is no one set scenario, here are some general rules of thumb for calculating your retirement nest egg. First, to avoid exhausting your assets, you should withdraw no more than four or five percent a year, adjusted for inflation, from your portfolio. That means you'll need $20 to $25 in assets for every dollar you want to spend in retirement. So, to generate $50,000 in retirement income, count on having $1 million to $1.25 million in your nest egg.
Social Security benefits can cover some of that amount, but it may not be wise to anticipate Social Security benefits. It would be better to consider it a cushion, not necessarily a requirement of retirement.
For many individuals, then, the question becomes how to get from here to there. Again, it's not as hard as it seems, especially if you start young.
At age 25, for example, saving even 3 percent of your total pre-tax salary a year can help accumulate a sizeable nest egg by age 65, since time is on your side. But as you get older, the annual savings rate needed to accumulate a sizeable nest egg by age 65 increases dramatically - 18 percent at age 45 and up to 28 percent of pre-tax income at age 50, according to some experts, since there is less time to accumulate savings till retirement.
For people who are closer to retirement, it is possible to catch up. But you may have to sacrifice some of your current lifestyle. And budgeting becomes even more important.
You should start by identifying your core or fixed expenses, such as mortgage payments, utility bills, insurance, etc. Basically, it's the money you must spend every month to maintain a household. Expenditures beyond that can be considered discretionary expenses.
Most people have a good understanding of their core expenses and their discretionary expenses. But it's really a challenge for many people to put pen to paper and figure out how much they spend on fixed expenses and what are discretionary activities.
After you identify your core or fixed expenses, then add in the discretionary expenses, the cost of going to the movies, dinners, magazine subscriptions, etc. You'll see that they quickly add up.
Once that's accomplished, the next step is to save and invest your money wisely. A diversified portfolio of stocks may still be the appropriate investment, depending on your time horizon and risk tolerance. It's a good idea to have money directly deposited into a separate account, so you don't feel the savings. If the money isn't in your pocket to begin with, it doesn't hurt as much to have it go somewhere else
The idea is to learn how to begin a saving regimen. When you see your money build up, it motivates you to get - and stay - in the habit of saving.
Heath I. Prior is a registered representative of Lincoln Financial Securities Corporation, member SIPC, 2815 Coliseum Centre Dr., Suite 680, Charlotte, NC 28217 (704) 357-1099, offering insurance through Lincoln affiliates and other fine companies. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was created by Lincoln Financial Securities for its representatives and their clients.
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