How Much Do You Need to RetirePosted: January 10, 2012
The best answer to the question how much money do you need to retire is as much money as possible. The more money you have when you retire the better. The reason for this is obvious you want to live something like your present lifestyle after you stop working. Unfortunately you will no longer have a salary or business income coming in so you will need to compensate for it.
Something else to consider is life expectancy people are living longer. Many people who retire at 65 today will live to 85 or 95 or even longer. That means twenty to thirty or even forty years of retirement. A large percentage of these people will need some sort of nursing care or assisted living arrangements at some point. These are expensive and despite what some people think Medicare will not pay for such care.
That means you need to save and invest as much money for retirement as you can. It also means that most retirement savings plans will not be enough. A large percentage of older people will end up in the terrible situation of being broke and retired at some point.
Your IRA Will Not Be Enough
Here is a dirty secret that a lot of retirement planners will not tell you. Most Individual Retirement Accounts (IRAs) and 401K plans will not contain enough money to finance a comfortable retirement lifestyle. The average IRA or 401K only lets a person invest around $2,000 to $3,000 a year.
You can save up more through stocks, CDs, savings accounts and other investments but these are considered taxable income. Having a lot of money in them can raise your income tax rate. Fortunately there are vehicles you can use to save unlimited amounts of tax-deferred retirement savings. They are called deferred annuities and you can purchase one at any time.
Annuities are tax-deferred and you can use a deferred annuity just like an IRA or 401K. You can invest a percentage of your salary in one. Funds from IRAs and 401Ks can also be rolled over to annuities without incurring any additional taxes. Something to be aware of is that you will have to pay a 10% tax penalty on funds you take out of annuities before age 59½.
Ensure Streams of Income
Simply having a large amount of money saved or invested for retirement is not enough. You will have to have funds that are easy to access and a regular stream of income. This income should be coming in even if you become unable to manage your financial affairs.
An annuity is a contract between you and an insurance company. Under the terms of the contract the insurer has to make a regular payment to you or a beneficiary you chose for a fixed period of time. There are variations of this contract that ensure a life time income. So you can receive a payment until you die. If George retired at age 70 and bought one of these plans he could receive a payment until he dies even if lives until 110 years old.
It is possible to set up an annuity that will automatically put money into your bank account every month. That means George could have the funds available to cover day to day expenses such as rent, utilities, insurance and if necessary nursing care.
Never assume that the funds you have set aside will be enough for retirement. Always save as much as you can and then save some more. That way you will not end up broke and retired.