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Early retirement plan urged


Even if retirement is still in the distance, you’re likely to have some ideas as to how you’ll enjoy your leisure years. Some people look forward to spending time with distant family. Others choose to travel to destinations that they have long wished to reach. For others it may be as simple as pursuing a long-put-off hobby or pastime.

But whatever you look forward to, and whenever the date, you know that you will need a significant sum to make it all happen.

But is there a risk that you might face a shortfall in retirement capital? No one can foresee exactly how much he or she will need. But starting your planning early is a wise first step toward ensuring your future financial security.

Here are a few questions that you should ask yourself as you do your planning.

How much will you need?

Everybody’s answer to this question will be different. People have different expectations for the quality of their retirement lives. A safe answer, in general, is “more than you think.” A consensus answer: 60 to 80 percent of what you earned in your working year.

A variety of approaches is available to help project your specific retirement needs and estimate how much capital will be required to fund those needs. One good way to start is to take a look at the tools available from the American Savings Education Council on its Web site, http://www.asec.org.

How long will I live?

According to the most recent figures from the National Center for Health Statistics, someone who reached age 65 in 2004 can expect to live until approximately age 84. But that’s not necessarily the number that you will want to use in your planning.

Statistics don’t tell the entire story. When attempting to estimate your life expectancy for planning purposes, consider factoring in your personal health history and give some consideration to the health history of relatives higher up on your family tree. Consider, too, when making an age-related assumption that you want to err on the side of living longer. If you don’t, you are increasing the risk that you will outlive your resources.

Finally, if you are married, you should consider your spouse’s life expectancy as well as your own when determining your retirement income needs. According to the NCHS, on average, women will live five years longer than men—although that gap is narrowing slowly.

What about inflation?

Here is a simple example of how inflation can have a significant impact on your buying power in your retirement years.

Suppose that when you retired, you rolled over your 401(k) payout into an IRA. Your plan is to withdraw $40,000 a year from the IRA, which, you believe, along with personal savings and Social Security, will be sufficient to live comfortably in retirement.

Now let’s say that inflation averages 3 percent per year. Then look down the road 15 years into your retirement: You will have to withdraw more than $62,000 from your IRA that year just to maintain the purchasing power that the $40,000 brought you earlier, and that number is going to continue to rise every year.

How do I manage my tax-deferred retirement plans?

Whether it’s a 401(k) or other tax-qualified plan that your company offers, a Keogh plan, a traditional IRA or a Roth IRA, Uncle Sam is giving you a chance to set aside funds for your retirement that can grow dramatically over the years. (Of course, you will have to pay tax on this money eventually, but the magic of compounding and the potential of a lower tax bracket in retirement may ease that blow.)

In many cases you may be able to roll over the funds from a retirement plan into an IRA. If so, the funds can continue to grow until you reach age 70 1/2, when you will have to begin taking annual withdrawals.

Still, the annual withdrawals initially may be small enough so that a significant sum remains in the IRA, enjoying additional years of tax-deferred growth.

It is an offer from Uncle Sam that is hard to refuse.

Be vigilant

Flexibility should be paramount throughout all aspects of your planning. Any number of events or circumstances may require you to make adjustments to your plan.

For instance, when it comes to your investments, over time and because of changes in the markets, your portfolio may need rebalancing.

As you grow older, you may find that income to cover increased medical expenses may need to be incorporated into your retirement formula.

And, too, changes in family circumstance over the years may mean that a rethinking of your plans is in order.

Even if retirement seems miles away, planning early can keep more of your options and opportunities open.



Jeff Francis is vice president and senior investment officer for First Tennessee Brokerage. For more information about this and other personal finance issues, call 865 971-2321.

 

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