What Kind Of Income And Saving Do You Have For Retirment?

Will you have other sources of income? For instance, will you receive a pension that provides a specific amount of retirement income each month? Is the pension adjusted for inflation? What savings do I already have for retirement? You’ll need to build a nest egg sufficient to make up the gap between the total amount of income you will need each year and the amount provided annually by Social Security and any pension income. This nest egg will come from your retirement plan accounts at work, IRAs, annuities, and personal savings. What adjustments must be made for inflation? The cost of retirement will likely go up every year due to inflation — that is, $35,000 won’t buy as much in year 5 of your retirement as it will the first year because the cost of living usually rises. Although Social Security benefits are adjusted for inflation, any other estimates of how much income you need each year — and how much you’ll need to save to provide that income — must be adjusted for inflation. The annual inflation rate is 3.3 percent currently, but it varies over time. In 1980, for instance, the annual inflation rate was 13.5 percent; in 1998, it reached a low of 1.6 percent. When planning for your retirement it is always safer to assume a higher, rather than a lower, rate and have your money buy more than you previously thought. Retirement calculators should allow you to make your own estimate for inflation.

What will my investments return? Any calculation must take into account what annual rate of return you expect to earn on the savings you’ve already accumulated and on the savings you intend to make in the future. You also need to determine the rate of return on your savings after you retire. These rates of return will depend in part on whether the money is inside or outside a tax-deferred account. It’s important to choose realistic annual returns when making your estimates. Most financial planners recommend that you stick with the historical rates of return based on the types of investments you choose or even slightly lower.

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