Getting Started

Financial planners estimate it takes anywhere from 60% to 80% of your final salary to maintain your standard of living in retirement. Yet, how do you know if that will be enough money? And where will this money come from?

Knowing how much you'll need to fund your lifestyle during retirement is important because most of us can expect to live 20 or more years after we retire.

Unfortunately, there are as many answers to the question of how much money you'll need as there are dreams for retirement. The actual dollar amount depends largely on what you plan to do: switch careers, travel, start a new business. The possibilities are endless, so it's important that you start considering your options now and set some realistic financial goals for yourself.

To get started you need to ask yourself four basic questions:

• What are my investment goals?  
 
• How long do I have to invest?  
 
• How long do I expect to live in retirement?  
 
• How much risk am I willing to take?  
 

As mentioned previously, your investment goals will depend on how you plan to spend your retirement. If you don't have a clear idea just yet, consider your current lifestyle and your dreams. This will help you formulate an investment goal, which you can adjust as retirement age approaches.

Next, determine how long it will be before you retire—your time horizon. Generally speaking, the longer your time horizon, the more risk you may be able to accept in exchange for potentially higher returns. If your time horizon is relatively short, you may not want to accept as much risk and may prefer a more stable investment.

After your goals and time horizon are determined, you need to analyze your attitude about risk. Can you accept a lot of fluctuation in the value of your investment for potentially higher returns? If so, you may want to consider stocks. However, if you feel anxious when the markets begin to fall, you may want to consider fixed-income investments.

Remember, taking the "safest" route with your money may not be safe at all. Perhaps the riskiest thing you could do is to not invest your money at all. That's because you expose your money to the risk of inflation, the insidious erosion of your money's purchasing power due to the rise in the prices of goods and services.

From 1969 to 1998, inflation averaged 5.3% a year. At that rate, prices will double every 13 years.* This means inflation can pose as a big problem in retirement savings. In order to stay ahead of inflation, you often need to take some risk with your money.

After examining the issues of investment goals, time horizon, and risk, you can then select the sources to fund your income needs for retirement.

Because it may be hard to imagine yourself retired, it may be even harder to think about where the money for retirement will come from. Traditional methods for funding retirement, such as Social Security and other retirement benefits, may not meet all your financial needs—especially when people are living longer and retiring at an earlier age.

One solution may be to rely more on retirement savings programs that you control to fund an active and comfortable retirement. Your employer may make this responsibility easier for you by offering a retirement savings plan. An employer-sponsored tax-deferred savings plan is one of the most powerful tools available today. It enables you to decide whether to participate, how much money goes in, how it's invested, and how long it stays invested. You can select investments that match your financial objectives and reflect your comfort with risk. Further, should you leave your employer, your contributions plus any earnings go with you. And if you've met your vesting requirements, you also get employer contributions plus any earnings.

Whichever method you choose to fund your retirement, it's generally best to stick with your strategy—even if the markets go down. Studies show that investors who stay the course tend to earn higher returns than investors who move in and out of the markets with regularity.

This doesn't mean, however, that you should set your investment strategy in stone. You should regularly evaluate your investment decisions and adjust them accordingly as your needs change and your time horizon grows shorter.

Remember: Don't procrastinate. Putting off preparing for retirement is like waiting until the last second to cross four lanes of traffic for your exit. It can be very scary and dangerous, and there's a good chance you'll miss your destination.