Retirement offers opportunities you never had in your working years — leisure time for travel, hobbies, further study, a new career, or even just relaxing. How much will it all cost, though? You should start planning early if you want a real chance to pursue all those opportunities, and that means doing some number crunching, earlier rather than later. You will need to ask some concrete questions about your finances. How much will you need in the bank to enjoy thirty years of retirement? Or, if you already know approximately how much you’ll have in the bank, then, for instance, how long will $600,000 dollars last in retirement?
A general rule has held that you will need approximately 80 percent of your preretirement income to maintain your standard of living. The reasoning is that you will no longer need to upgrade your wardrobe as frequently, or pay commuting expenses, or cover certain entertainment costs. You won’t be losing income through contributions to your retirement account. And, if you downsize to smaller living quarters, your monthly savings will be even more significant, as you’ll save on heating bills, property insurance, yard care, and much more.
However, if you retire in your early or mid-sixties and are in good health, you’re just as likely to spend even more in your first years of retirement than you did in the years leading up to retirement. You might want to travel, and that costs money, especially if you prefer five-star comfort. You’re likely to eat out more often and pay more for entertainment — theater tickets and greens fees, for instance. And if you have more time to indulge in an expensive hobby, that, too, will eat into your budget. So take a hard look at how you’ll spend your time, especially in the first few years of retirement. You may have to ramp up your savings, or adjust your expectations. If you find you have only $10,000 to travel the world, then change your thinking and travel like a college student rather than a jetsetter, backpacking your way across South America or India. You may find you enjoy it that much more!
If you’re close to retirement and already have a good idea about the size of your nest egg, then you’ll need to think about several variables. First, how will you get income from your savings? Some combination of investments is usually the best practice. If you do have, say, $600,000, then purchase an immediate annuity with part of it, guaranteeing an income stream; invest another part in blue-chip stocks or stock funds, giving you some chance at real growth; and invest yet another part in investment-grade bonds that you can hold until maturity. If bond yields are low, then buy bonds with various maturity dates, a technique called “laddering.”
There are countless ways to put together a portfolio, and it may be worthwhile to hire a personal financial adviser to help you through the process. If you have a nest egg plus a traditional pension plan — and, remember, you can also begin collecting Social Security as early as age 62 — you’ll have many options. But if you’re relying on just your nest egg, then it will have to last you. And if you anticipate a retirement of thirty years or longer, then inflation will cut into your buying power. If you have an annuity that pays you $1,000 each month for life, that will cover a lot of bills in 2012, but in 2032 it will be much less valuable.
Most important, start planning early — even in your twenties. The more time your savings have to grow, as you continue to put money away, the bigger your eventual nest egg will be.