Monday, April 11, 2011

Two Changes That Will Improve Your Odds of Retiring

If you're over age 50 and worried about your retirement, consider making two changes that could significantly improve your odds of retiring.
Ten years ago, I used to hear lots of people talking about traveling the world, buying vineyards with their Cisco (Nasdaq: CSCO - News) stock, and endowing their Alma maters with legacy buildings bearing their names. Well, I don't hear many people talk about those things too much these days. But just because you can't get a building named after you, doesn't mean you can't have a secure retirement.

• Retirees: Is It OK to Dip Into Principal? 

• Long-Term Care's $1 Million Nightmare

• Social Security: How Much Will You Get?
If you're over age 50, and feel like you're behind with your retirement goals, you need to make a realistic assessment of what's achievable. For many people, the lifestyles they're leading while working won't be supportable by the income they can generate from their retirement savings at age 65.
That means you've got to change your retirement goals. If you combine working a little longer with some modest reductions in your retirement lifestyle, you can vastly improve your retirement picture.
1. Working 5 More Years
First, consider how much of an impact working five more years could have on your retirement. Let's assume you're 65 and have $1,000,000 in retirement assets. If you could earn 5% a year on those funds, your retirement plan would be worth about $1,275,000 at age 70, or about 28% more than at age 65. That means it could support almost 28% more in distributions.
Plus, let's assume you could save $15,000 a year for each of those 5 years. The extra savings helps boost the plan balance to $1,360,000, or about 36% more than at age 65.
By waiting five years, you've increased your retirement assets and potential retirement income by 36%.
2. Reducing Your Lifestyle
Now let's assume you also reduce your retirement lifestyle expectations by 15%. That means you'll need 15% less in savings to meet your goals.
• For a couple targeting $100,000 of retirement income, that means living on $15,000 less a year. A good rule of thumb for producing distributions in retirement is that every $5,000 worth of distributions will require about $100,000 of assets at age 70. If you reduce your lifestyle needs by $15,000 that means you need $300,000 less in assets to support your retirement.
You might not be happy about the prospects of a reduced lifestyle, but you may find it works just fine if you adjust your expectations. It really comes down to how important it is for you not to work. If that 15% reduction provides you with the freedom to retire, it may well be worth it.
Combined Impact
When you combine the 36% boost in retirement assets by working five more years with the 15% reduction in lifestyle expenses, you've got a swing of 50% in your retirement preparedness. That's a huge change, and can make all the difference between an unrealistic goal and an achievable goal.
There are lots of retirement planning tools out there that will help you make some projections, and allow you to play with different retirement scenarios. I like some of the calculators at because the site provides a variety of different calculators on savings and debt reduction. If you're working with an advisor, then enlist their help in running different retirement goals.
Bottom Line
You can put yourself on a path to a more secure retirement if you're willing to adjust the path.

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