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PROJECTS

How much of my income will I need in retirement?
 

A lot of people assume that they'll need an income equal to what they were earning the day before they retired in order to maintain their lifestyle in retirement. In most cases, that's not true. As a general rule, you should be able to live very comfortably on 60 to 80 percent of what you were earning annually.

 

Let's review how this percentage is derived.

Let's assume that 100 percent represents your gross income, then begin subtracting the items you won't be paying or saving for in retirement.

To get more specific with respect to your personal after-tax need, you should create an expense statement based on your current living costs and then make the appropriate changes for retirement.

 

For example, if it costs you $4,000 per month to maintain your lifestyle today after taxes and you won't have a $500 monthly house payment in retirement, your costs are now 87.5 percent of your original monthly expenses ($4,000 - $500 = $3,500/$4,000 = 87.5 percent).

 

On the other hand, you may have new expenses in retirement that will replace that house payment, such as extensive travel or additional health costs.

Defining Your Personal Goals
 

Many individuals begin investing without setting clear goals. This approach is much like starting a trip without knowing where you are going or when you can expect to get there. The first step to successful investing is identifying what you want to achieve. In other words, decide why you are investing and what you want your investments to do for you. Before you commit even a dollar to any investment, you should sit down and list your objectives and when you want or need them to be met.

Start by asking yourself questions like these:

  • Do I want to give my children a college education? How much money will I need? And how long do I have before the expenses will begin?

  • Do I need to build a fund for my retirement? How much will I need to accumulate to be able to live comfortably through my entire retirement? When will I begin to draw on my retirement fund?

  • Do I want a new home or a second home? How much cash will I have to put down and when will that be?

  • How can I get the money for the vacation I want to take next year?

  • What if I become sick or disabled? Should I have an emergency fund and, if I do, how large do I want it to be?

The answers to these questions and others like them can help you identify your specific goals. You should next rank how important each goal is to you. Once you have your list of goals and have decided their priority, you can develop the strategies needed to make your goals a reality. The answers to your questions also can help you determine the most appropriate overall investment strategy for your situation (for example, whether you should invest for capital growth or income or both) and the types of investments (stocks, bonds, etc.) that can best help you make that strategy a success.

Don't be surprised if you find you have more than one important goal. For example, many individuals invest for retirement and a child's education at the same time. You may have a combination of long-term objectives (five years or more) and short term objectives (less than five years). Meeting them all may seem an impossible dream right now. Don't let that deter you. Keep in mind that you won't have much chance of reaching any goal unless you start with a well thought out plan.

Your investment goals may not stay the same as your life progresses. Your investment plan has to be flexible enough to allow you to adapt to changing circumstances.

Example: Steve and Sonja, both in their thirties, have three young children and three goals that are important to them: college education for the children, a confortable retirement, and a vacation home. But, after paying their expenses, their Income doesn't allow building equally toward all three goals.

In developing their investment plan, Steve and Sonja decided retirement and education were their more Important goals. They are concentrating on them for now. But they also invest a small amount each month for their second home.

Going through the worksheet below will help you analyze each of your goals, both in terms of how much money you will need to meet the goal and your investment time frame. The worksheet will also show you how much you will have to invest each year to accumulate the amount you need to meet each goal.

In addition to your goals, your investment plan should take into account other variables, such as your income, expenses, debt, family responsibilities, housing needs, and insurance protection. These factors will affect how much money you have available to invest and the amount of risk you are willing to take with your investments.

Investment Goal Worksheet

1. Goal

2. Years until money is needed

3. Total amount needed for goal in today's dollars

4. Inflation factor (our example assumes 3% average annual inflation)

5. Projected future value of amount needed

6. Amount already saved toward goal

7. Return factor (our example assumes 7% return)

8. Projected future value of amount saved

9. Additional money needed to reach goal (subtract #8 from #5)

10. Annual savings factor (our example assumes 7% return)

11. Annual savings needed to reach goal

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