The “R” Word

16 08 2011

Not recession… retirement. As soon as you get out of college and get that first job in the “Real World” you are bombarded with company benefits to enroll for and retirement plans to consider. At the start of your career, you are expected to start thinking about and planning for retirement which is decades away. How much will you need every year for retirement? How many of today’s dollars should you be saving for when you will be spending it in tomorrow’s dollars?

On good way to determine your expenses in retirement is to think you will need 80 – 90% of your pre-retirement income. But what does that mean? I will need 80 – 90% of my income that I will be earning on 40 years from now? How do I go about determining that today, in 2011?

A good place to start is by making a draft of a retirement budget. Write down your current category of expenses and how much they cost per month. Then plan on what type of lifestyle you hope to have in retirement? Will you maintain your current lifestyle? Will you be more frugal or more lavish? Will you travel more? Will you be the grandparent that takes everyone in the family on a fun vacation? Start thinking of the financial ability you hope to have at that time.

Another helpful tool is Fidelity’s Retirement Income Planner. (Note: you have to sign up to be a member, but it’s free to use this tool.) It already has a detailed amount of categories to get you thinking about your expenses. The tool automatically adjusts for inflation, which is a plus! After you have entered in the relevant categories as accurately as possible you will have a very good idea on what you will need in your retirement and what your goal should be. Although you can’t expect it to be exact, it will much better than the goal you had 5 minutes ago.

Doing this simple exercise every year or two will help you hone in and stay on the right track.

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