Personal Financial Planning Lesson 3 - Retirement

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Retirement is one of the most significant events that will occur at the end of our working life. And preparing for retirement is by far the most important financial task we all will set to accomplished in our lifetime. Oh, did I mention it is also the most expensive among the goals to achieve?

With all the great breakthroughs in modern medicine, human, on average, are living stronger and longer. Unfortunately, this would also lead to more cases of people outliving their retirement funds.

retirement thumb Personal Financial Planning Lesson 3 Retirement

How much is enough?

It is tough for us to come out with an exact figure that is required for this goal because no one knows exactly how long we will live. Most of the current financial and life insurance plans out there “limit” our life expectancy to 99 years old. And when you rewind 100 years back, who would have expect life expectancy to hit 80 years (or 60% increase).

Retirement funds which might have been sufficient for people some generations back may no longer be enough today due to the increase longevity. We have to factor in the higher cost of living and consider some other source of income to support our retirement lifestyles.

Social Security

The pressure on our Social Security and Medicare system will increase over the next 20 years because the baby boomers are beginning to retire. When the baby boomers retired, there will be fewer people paying taxes to fund the two systems. On top of that, expect many more people drawing out the benefits of the systems. Even though Social Security was never meant to replace private retirement plans, it is currently under incredible strain to meet the needs of its participants.

 

Defined Benefit Retirement Plan (Pension)

Defined benefit retirement plans are the traditional pensions scheme that calculate the retirement benefits based on the salary and number of years of employment with the organization. Amazingly, some of these schemes are required to pay their retired employees every month as long as they are living. These plans are extremely expensive for companies to maintain because people are living longer.

A shift began in the 1980s when many private companies switched much of their responsibility for retirement savings to the employee by changing the retirement programs from defined benefit plans to defined contribution plans.

 

Defined Contribution Plan

The switch to defined contribution plan has put more responsibility on the employee. These plans, require the employees to decide how much of their income they would like to contribute to their retirement account and they also have control on how the money is invested. Generally, the contribution can be invested in one of the several mutual funds or other investments offered with the retirement plans.

In a best case scenario, the defined contribution plan will offer the opportunity to accumulate more in the retirement fund than under a traditional pension scheme. However, there is no guarantee that the money you invested will grow and not suffer a severe loss at the time when you withdraw it. Just look at the current economic crisis and you will know.

 

Setting Tangible Goals

Clearly, setting a monetary goal for our retirement has become more difficult as it is tough to know the definite amount we need in the future. However, it is actually easier if we quantify our goals into something tangible like a home in Cleveland or annual travel trips around the world instead of just money in our accounts. These goals also make our retirement dreams more realistic and exciting to work towards to.

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Last 5 posts by Rendell

January 10, 2009 · Filed Under Personal Finance

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