Long-Term Planning: Keeping Your Eye On The Prize

There is a witticism that goes something like “experience is something that you get just after you need it” and this is certainly the case in many instances. There are times when you find yourself in this type of situation when you still have time to overcome whatever challenges that lack of experience may have caused. But when you fail to construct a long-term plan and stick to it over the years you may find that it is too late to overcome your lack of foresight.

Time can pass extremely rapidly and you may find yourself celebrating your 50th birthday without having ever seriously considered the specifics of how you will be financing your retirement years. This is a difficult situation to be in because when you look at the statistics people are living longer than ever; once you reach the age of 65 the odds are even money that you will live beyond the age of 85. It takes very focused long-term planning to be prepared for this type of longevity.

A lot of people think that Social Security and Medicare will take care of most of their needs, and this may be true to some extent. But according to the Boston College Center for Retirement Research the average American senior citizen will incur around $197,000 in out-of-pocket medical expenses during the course of his or her life. Obviously the longer you live the large this number is likely to be. If you include the possibility of long-term care as well the typical individual could expect expenses that could exceed $500,000.

The statistics would indicate that the sooner you implement a long-term plan with these anticipated costs as your guide the better. People who have their retirement years in mind when they’re in their 30s and 40s generally find themselves fully prepared, and those who do not often wind up understanding how important it is to plan ahead after it is too late to do so.

Interest-Free “Loans” No Longer Available Through Social Security

Social Security is something that people tend not to think much about until they start to get closer to retirement age. So if you haven’t yet done your research you may not be aware of the fact that the amount of your benefit can vary based on when you choose to apply for Social Security.

Your full retirement age is connected to the year you were born. For those who were born between 1943 and 1954 the full retirement age is 66. If you were born in 1955 your full retirement age is 66 years and two months. For those born in 1956 the retirement age is 66 years and four months, and in this manner it increases by two months per year through 1960. For those born in 1960 and later the full retirement age is 67.

You can choose to accept reduced Social Security benefits when you are as young as 62 years of age. Just how much less you would receive also depends on the year of your birth, but for those who fall into that 1943 to 1954 category the lifetime benefit would be reduced by 25%. When people who were born in 1960 and later reach the age of 62, should they choose to apply for early benefits they would be reduced by 30%.

On December 8th the Social Security Administration instituted a new rule that put an end to an interesting opportunity. In the past retirees could accept a reduced benefit at the age of 62 then pay back everything they had received at age 70, reapply for Social Security, and receive the maximum possible benefit.

One could invest that money for eight years and benefit from its growth, pocket the earnings, and pay back what amounted to an interest-free loan from Uncle Sam. This will no longer be allowed as applications for Social Security may now be withdrawn only within a 12 month period after the initial filing and this can be done just a single time. Social Security Loans are no longer available.

Calculating Your Retirement Nest Egg

Saving for retirement can help to ensure you have enough for your basic living expenses as well as any extras you desire. Knowing how much to stockpile may seem confusing, but it doesn’t have to be.

Current Expenditures

You can estimate your current yearly costs by calculating your monthly expenses and multiplying by twelve. For a more in-depth calculation, review your previous year’s tax return. Look at your after-tax income and subtract all funds you put into savings or gave to charity. This will give you a rough estimate of your current yearly expenses. In future years, your spending will rise with inflation, but your income should keep pace.

Non-Retirement Expenses

Next, calculate expenses you will not have in your retirement years. Many retirees no longer have a mortgage if their home is paid off or if they move to a smaller dwelling. You also will not need funds for your children’s care if you expect them to have be living independently by that time. In addition, consider any work-related expenses such as daily transportation and work clothing.

Retirement Expenses

During your later years you may see a rise in some expenses. Perhaps you wish to spend time traveling. Your medical expenses may also increase with age. Also, take into account if you intend to help your children with expenses even after they have reached adulthood.

Your Estimate

With your estimated expenses, you can calculate how much you will need for each year of retirement. Subtract your non-retirement expenses from your current costs and then add your projected additional expenses.

So, how many years should you save for? The current life expectancy is 77.9 years. You may, however, want to save with an expectation of 90 as more people are living into their 90s. Subtract your planned retirement age from 90 and multiply your yearly savings figure by that number of years. This should be your retirement savings goal. Use this figure to regulate how much you are saving each year in your retirement accounts.