Six Considerations When Planning For Retirement -Part1

Are we over-estimating our retirement needs?

According to some calculations, it seems that I would need close to 2.2 million dollars in order to retire. This seems just absurd to me. And when it comes to personal finance, one of the major topics that I am constantly interested in is the amount of a nest egg that someone really needs to retire on.

One of the major ways to make money for retirement is investing when you are young and allowing the money to compound for you until you retire. But since this requires doing the right thing when you are young, it is important to plan. And for me, someone who has tons of debt still, it makes little sense for me to go to a financial planner about retirement - given that I’m in my mid twenties.

And although any decent financial planner will know how to handle this type of discussion and calculation with you, it is an extremely complicated process. So, I’m sharing some thoughts I’ve had for myself as I have started planning for my retirement:

1. Age and Life Expectancy:

As time goes on, there will be various health problems that will surface. Whether it is a long-term health problem or something more acute like a stroke or a major surgery, these items will contribute to the fact that there will be a potential for money issues later on in life. Often, professionals will work with you to come to an average age where you are likely to die. And then, throughout your retirement, this age can be adjusted.

2. Investment Risk:

With any type of investment, there is some risk associated with it. Like any large sum of money that is being managed, it can be managed with varying levels of risk ranging from no risk to high risk. In retirement, if you are likely to invest your money with less risk, it is most likely that there will be less reward and therefore interest from the money that will be your nest egg.

However, if the investment risk is high, and you are close to the margin in regard to your nest egg and need every penny, a high risk allocation of your retirement fund could significantly reduce the total sum of money if we enter a bear market. And that reduction could cause you to not be able to handle your expenses. Then, even if the market comes back, you might have taken out too much during the lean years to make it up during the bullish phase. This makes risk and asset allocation quite possibly one of the most important factors when investing for retirement.

3. Distribution Size:

Once it is time to start taking distributions of money from a 401k or other type of retirement fund, the distributions can vary. And those distributions must be considered. If you decide that you want to take 4% from the nest egg yearly, it is likely that you will deplete your nest egg much more slowly than someone taking a 5 or 6 percent yearly. The reason for this is compound interest. As the total sum shrinks, the amount gained from investing it shrinks also. This can make a big difference in terms of quality of life for the retired person.

Furthermore, there are tax implications for those who are taking distributions. These can depend on many factors - income, age of retirement, age of beginning distributions etc. Make sure to consider these factors when investing, and keep track of them. The last thing you want to do is retire early and find out that there is a large (unexpected) penalty for using your retirement money.

Click Here to Read Part 2 of Six Considerations When Planning For Retirement.