Critical Factors to Consider When Retiring

Posted on : Oct 18, 2013 | Filled under : News

Planning a prosperous, fulfilling retirement has become more complicated than ever.King Wealth Planning-Retirement Factors

Your income, ideally, should remain at the same level after retirement. Unfortunately, mistakes are often made in calculating the amount needed to maintain one’s life style.

Some basic questions need answering:

  • At what age will you retire?
  • How much income will you need in order to maintain the life style you desire?
  • What lump sum do you require to maintain the necessary cash flow?

Though these calculations seem straightforward, there are some critical factors to consider.

INFLATION

The returns you get on your investment are important. However, you must also correct them for the rate of inflation. This is your real rate of return. It is computed by subtracting the rate of inflation from your return.

For example, if an investment earns 6% and the rate of inflation is 2%, the real rate of return is 4%. If you do not account for inflation, you will underestimate the amount of money you’ll need to retire. You need to consider this when you make difficult decisions about which investments to select and what level of risk to accept.

In 1980, the rate for a certificate of deposit was 13.5%. Sounds great, right? However, if you were in a 25% tax bracket, your return after taxes would be 10.2%. Factor in an inflation rate of 12.4%, and your real rate of return ends up at a -2.2%! And today, with interest rates and inflation at approximately 2%, someone in a 25% tax bracket would have an actual rate of return of -0.50%.

TAXES

If the bulk of your savings is in a 401(k) or Individual Retirement Account (IRA), taxes will have a large impact. Suppose you’re in the 35% tax bracket and want $10,000 in spendable (after-tax) income. How much would you have to withdraw from your retirement plan?

Instinctively, you might say $13,500 to net $10,000. However, you need $15,400 to net $10,000. This means you, as an investor, must accumulate 54% more money to net the desired $10,000. Clearly, the tax burden is an important factor.

LONGER LIFE EXPECTANCY

When a couple plans to retire, financial planners estimate how long the surviving partner is expected to live. This is called the joint life expectancy. However, 50% of individuals will live longer than the life expectancy tables predict. These tables cannot account for new medical breakthroughs that may prolong life for many people. Thus, when planning retirement allocations, it is important not to underestimate our life expectancy.

ADDITIONAL EXPENSES

The myth is that you will need 70% of your annual pre-retirement income when you retire. You’ll need more than that in all likelihood. If you’re a business owner, for example, some expenses will no longer be paid by the business. Those added expenses for health insurance, travel and entertainment, and auto expenses can take a substantial chunk out of your income.

The definition of a failed retirement is running out of money before you run out of time. The definition of a prosperous retirement is maintaining a life style similar to that of your working years.

By addressing the above issues and continuing to educate yourself about potential pitfalls, you’ll be on the way to a fulfilling retirement.

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