Taking The Mystery Out Of Retirement Planning

Most people haven't thought about how long their savings will last in retirement or how much inflation will increase over time.

The Projections and Results Worksheet is where all your prior work comes together. Building on the clues uncovered in the earlier worksheets, this worksheet compares your anticipated income and expenses over the 30 years of your retirement. Making the comparison in dollars valued at the time of your retirement, this worksheet takes into account that while you will have a fixed monthly income, your expenses will increase due to inflation.

At the beginning of retirement, most people's monthly income likely will exceed their expenses; but after a decade or so, expenses begin to exceed the monthly income. Realizing this now will allow you to save and invest any extra income in the early years of retirement so that it will grow and can be used to cover increased expenses later in retirement. Especially if you have a shortfall, the Projections and Expenses Worksheet will allow you to see how much you may need to add to your savings. When doing this comparison of your projected income and expenses, keep in mind that the value of a dollar tomorrow is less than a dollar today. The goal is to stay ahead of inflation. For example, a dollar today is worth more than a dollar in 30 years if the rate of return, say 5 percent, is greater than the inflation rate, say 3.5 percent. The worksheet addresses the impact of inflation by converting your anticipated cash flows into a constant dollar value - at the time of your retirement.

If the result is negative, don't worry. Just about everyone will need to make up a shortfall in savings. Remember also, that it is difficult to project inflation rates, especially for health care, that far in the future. It is better, however, to have a rough idea of where you stand than have no guesstimate at all.

The good news is that time is on your side. Remember the effect of interest compounding and how it can work to make your money grow in 10 years. Each year, as you set aside more money, the combination of savings and earnings will help close the gap. Return again to the worksheets and select the Projections and Results Worksheet. This worksheet lets you figure out how much you need to start to save today to make up the gap between projected income and expenses.

Socking away that amount of money over the next 10 to 15 years, while getting a rate of return you're comfortable with, should go a long way toward matching up income and expenses over 30 years of retirement.

You don't have to save the total amount of any gap between what you have and what you need. Each year the amount you invest will grow, and the growth of your savings lessens the amount you need to save.

http://www.dol.gov/ebsa/publications/nearretirement.html