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A Comprehensive Way To Save For Your Retirement

No matter how far away your expected retirement is—whether it’s next year, five or 10 years from now, or 25 years or more in the future—it makes sense to develop a comprehensive plan based on how you hope to live and the resources you’re likely to have. When you lay out the basics of that plan, you may find you’re on track to meet all of your retirement goals. More likely, though, you’ll need to make strategic adjustments—saving more, investing differently, or otherwise shifting your objectives or your means to achieve them.

To understand how this process might work, consider a hypothetical couple, John and Ann Boomer. For the purposes of this example, we’ll examine their financial situation using an innovative software program for financial planners called MoneyGuide Pro. The calculations are based on the Boomers’ situation as of December 1, 2010.

Suppose that John, one week away from turning age 60, earns $100,000 a year from his job, while Ann, who is 61, pulls down $150,000 a year. The Boomers have established retirement planning as their primary financial goal. John’s ideal scenario is to retire at age 65 in 2015, though he’s willing to push that back two years if necessary. Ann also hopes to retire in 2015, though she, too, would be open to keeping her job until 2017, when she will be 68.  

The software program estimates that John would receive annual Social Security benefits of $27,353 from age 66 (the first year he is entitled to full Social Security retirement benefits) through the end of his projected plan. It estimates that Ann would receive $29,008 in annual Social Security benefits from age 66 (also her age to receive full retirement benefits) to the end of her plan.

John has assets of $900,000 in a 401(k) plan that provides a 50% match on up to 6% of his annual salary. Including that contribution from his employer, John expects to add $12,500 to his account each year. He will invest the entire amount conservatively in cash and cash-alternatives, projected by MoneyGuide Pro to give him an annual 3.5% return (after accounting for 3% yearly inflation). John plans to tap the 401(k) for $60,000 a year in retirement.

For simplicity, we’ll leave aside other assets the Boomers may have. Based on these assumptions, MoneyGuide Pro rates the probability of the Boomers achieving their retirement goals as less than 40%. That’s an uncomfortable scenario. However, they can improve their chances of success by changing a few elements of their plan. Here are two possibilities.
They could work longer.Pushing back a retirement date by even a year or two can make a big difference. It adds to savings and reduces the number of years of financial support needed from the retirement plan. If John and Ann both stay on the job until 2017, that change alone will improve their probability of success to 99%, according to the MoneyGuide Pro software.

They could save more and change the allocation of their investments.The Boomers’ original plan called for a conservative investment strategy for the funds in John’s 401(k) account. But what if, instead of working longer, John accepted more risk in his portfolio and changed the allocation of assets to provide an expected 10% annual return—7% after inflation? If he also increased his annual 401(k) contribution by $4,000, he could boost their yearly retirement income to $80,000 and still improve the couple’s probability of success to 56%.

Of course, these figures are purely hypothetical and don’t represent actual investments, and it’s impossible to know the exact return any combination of investments may provide. The point of this example is to demonstrate how changing the assumptions of a comprehensive retirement plan—by delaying retirement, saving more, or accepting more risk in an investment portfolio—could improve the chances of meeting retirement goals. There are plenty of other kinds of changes that have the potential to get a plan on track. But the success of any approach pretty much depends on adding to a nest egg, increasing the rate at which it grows, and giving it longer to compound.

All of that comes under the heading of retirement planning, and the sooner you establish a comprehensive plan, the more likely it is to take you where you want to go. We would be glad to schedule an in-depth meeting to establish your objectives and to discuss the most practical solutions for your particular situation.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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