Your Money_ The Missing Manual - J. D. Roth [139]
According to a 2002 poll from Harris Interactive (http://tinyurl.com/HI-rpoll), less than a quarter of senior citizens view retirement as a winding down: "Most see retirement as either a continuation of what was before retirement (40%) or as a whole new life (38%)." Based on their research, Harris Interactive classified retirees into four main groups:
A large chunk (27%) are looking forward to a non-traditional retirement filled with exploration. These folks are generally healthy, wealthy, and well-educated, and want to use their resources to live life to the fullest by pursuing their passions.
About 19% are looking forward to a lifestyle of comfortable contentment. These are the people who want a traditional retirement that includes travel and relaxation.
Some (about 22%) have big plans for retirement, but they spent so much time "living for today" during their working years that they're not sure how they'll afford everything they want. These folks wish they'd saved more when they were younger.
Finally, a large group (32%) are living the worst-case scenario: They're poor, in poor health, and generally pessimistic about the future.
Note
You may think you'll never retire, but your health may force you to reduce your work hours—and your income—as you age. According to a survey in the February 2010 issue of Consumer Reports, 24% of retirees stopped working "because they were made to, their health declined, or they no longer had the energy to work."
Retirement can be whatever you want it to be: You can use it to go back to school, travel the world, watch TV, or write the great American novel. But in order to afford any of those things, you have to start planning now.
Figuring Out How Much to Save
Because you can't see the future, there's no way to know exactly how much you'll need to save for retirement. All you can do is make your best guess, taking these variables into account:
When will you retire?
How long will you live? (You can get an estimate at www.livingto100.com.)
How much will you spend?
What will your health be like?
How much will you save and how aggressively will you invest?
What will the inflation rate be between now and when you retire?
Tip
Delaying retirement can only help your financial situation. The longer you work, contribute to your retirement savings, and go without tapping Social Security and retirement accounts, the more money you'll have later.
Most retirement calculators—both on the Web and from financial planners—estimate how much you'll need by using your income as a starting point. They'll suggest you need 70% (or 80% or 100%) of your pre-retirement income to maintain your lifestyle. But is basing this estimate on your pre-retirement income a good idea?
Say you make $50,000 a year but spend $60,000. In that case, your income understates your lifestyle by $10,000 a year. If you based your retirement needs on your income, you wouldn't come close to supporting your lifestyle.
On the other hand, if you make $50,000 a year but only spend $25,000, basing your retirement needs on your income would lead you to save much more than you need.
As you can see, estimating how much you'll need in retirement by looking at your current income doesn't make much sense. It's one of those rules of thumb—like "buy as much house as you can afford"—that can actually do more harm than good. There's a real danger that by following this advice, you won't have enough saved for retirement. But just as bad, there's a chance you'll have saved too much, meaning you missed out on using money to enjoy life when you were younger.
Instead of estimating your retirement needs based on your income, it makes more sense to base them on spending. Your spending reflects your lifestyle; your income doesn't. The next section explains how to do that.
Tip
You can get a rough estimate of the Social Security benefits you'll receive using this Quick Calculator: http://tinyurl.com/socsec-calc. For a much more accurate estimate of your