Take charge of your retirement plans
According to a recent article in AARP Bulletin Today, for the first time in its history, Social Security is taking in less than it is paying out in benefits. High unemployment rates are resulting in fewer workers paying taxes into the system. In addition, low birth rates (fewer people coming into the job market) and high life expectancies (people drawing benefits longer) are contributing to the drain on the system.
What does this mean for you? No matter where you are in your career lifecycle, now is the time to take charge of your own retirement plans—whether it’s starting a fund, or fortifying your current contributions.
According to the system’s chief actuary, Stephen Goss, the Social Security Trust Fund has about $2.5 trillion in assets that can be used to pay benefits until balance has been regained. But with the first of 78 million Baby Boomers hitting retirement age next year, and high unemployment rates expected through 2012, many financial experts are skeptical that the balance will ever be fully restored.
For more than one-third of the people who receive Social Security, these benefits are their sole source of income. Consider that between 1975 and 2010, an average of 3.3 workers paid taxes for every beneficiary, funding approximately $900 of a $1,000 benefit. Projections show that between now and 2035, the ratio will fall to two workers per beneficiary, funding only about half or a $1,000 benefit. Do you really want to rely on those kinds of numbers to protect your future?
A financial planning rule of thumb for your retirement years: figure on needing 70-80% of the income you will be earning at the time you retire. As an example, if you’re living on an annual salary of $50,000 at retirement, you’ll need $35,000 to $40,000 per year to maintain your lifestyle after you retire. This is based on the fact that expenses for clothing and commuting will be lower, but expenses for medical care and leisure travel will probably be a lot higher. You also need to consider the impact of a prolonged disability in the event you do not have Long Term Care coverage.
The good news is, if you start investing in your retirement plan early, you’ll be able to build a nice portfolio without having to take a big bite out of your paycheck. For example, at age 30, you would only need to invest $88 per month at a 5% annual return for every $50,000 you need at retirement. That’s only about $11 per week. At age 40, you would need to invest $84 per month at the same 5% rate for every $50,000 you need at retirement. That averages out to around $21 per week.
And remember, if your employer offers a matching fund toward your 401(k) plan, take advantage of it to its full extent. The pennies you put away now will make a huge difference in the money you’ll be relying on in the future.
It might be hard to imagine how critical a role the money you put away now will affect your distant future, but by “paying yourself first” and sticking to your plan, you’ll be able to enjoy your retirement, instead of having to work through it.
