You have probably heard from well-meaning friends and family members about the importance of retirement planning. Knowing how important it is to start planning for your retirement, isn’t the same as knowing when you need to start planning. Is there are ideal time in your life when retirement planning should begin? When is it too late to start planning? For your retirement planning to be effective, you need to know when and how to start planning.
Why Is Retirement Planning So Important?
Thanks to advances in science and medicine over the last century, the average American now lives almost twice as long as they did at the beginning of the previous century. As a result, you can expect to live, on average, into your late 70s or early 80s. With the official retirement age in the United States currently set at 66, that means there is a good chance you will spend more than a decade as a retiree. Just because you are retired, however, your bills and expenses do not disappear. On the contrary, as the natural aging process takes effect, you are likely to incur more expenses, not less. In order to avoid bankruptcy, or at least living on a tight budget, retirement planning is essential.
What Will It Cost You to Live during Your Retirement Years?
To hammer home the importance of starting your retirement planning early on in your life, take some time to figure out what it will likely cost you to live during your “Golden Years.” Despite claims to the contrary, there really is no way to know exactly what it will cost you to live during your retirement years. There are, however, some generally accepted guidelines. For example, most experts agree that you will need about 80 percent of your pre-retirement income for basic living expenses post-retirement. For example, if you spend $8,000 per month on everyday living expenses right now, you would need about $6,400 per month for those same expenses after you retire. Once you have that number, multiple it by 25 because if you are at the end of the longevity curve you will spend that much time in your “Golden Years.” You will also need to factor in inflation at the rate of three to five percent a year and add in a basic emergency fund. On top of all that, you need to account for the likelihood that you, or a spouse, will eventually need long-term care.
The Benefits of Starting Your Retirement Plan Early
Sometimes, actual facts and figures are the best way to get a point across, particularly when the point is somewhat theoretical. With that in mind, consider the following two scenarios. Scenario One illustrates what happens when you start planning for retirement at any early age while Scenario Two shows you the outcome if you put off planning until later in life.
Scenario One: You begin to work on your retirement plan savings at age 25 by putting $3,000 a year in a tax-deferred retirement account for 10 years and then stop adding to the account at age 35. Using a 7 percent interest rate, your $30,000 investment will have grown to more than $338,000 by the time you are ready to retire at age 65 even though you did not contribute anything beyond age 35.
Scenario Two: Instead of stopping at age 35, you start saving for your retirement. If you contribute the same $3000 per year for the next 30 years, you might think you will have more money when you reach retirement age: however, the reality is that while you would have saved a whopping $90,000 of your own money under this scenario, it would only have grown to $303,000.
The bottom line is that in Scenario Two you would save $35,000 less despite the fact that you saved for three times as long.
How Should I Start My Retirement Planning?
Once you are convinced of the need to start retirement planning as early as possible, the next step is to actually get started. Retirement planning, like estate planning, is highly personal. You should consult with both an experienced estate planning attorney and financial planner to help you create the framework of your retirement plan.
If you have additional questions or concerns regarding retirement planning, contact the experienced Illinois estate planning attorneys at Hedecker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.
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