Road Signs on the Journey to Retirement

April 19, 2012 - PRLog -- For previous generations, the trip to retirement needed only one road sign, the prospective retiree’s age. At a predetermined age, the retiree would receive a pension. Just as the horse and buggy was replaced by the automobile, employer sponsored defined benefit retirement plans that provided an employee upon retirement a predetermined monthly payment have been replaced by defined contribution retirement plans under which an employer contributes a predetermined amount into a participant’s account. To put this trend in perspective, the percentage of full-time employees in private industry covered by a defined benefit plan decreased from 32 percent in 1996-1997 to 21 percent in 2008. By way of contrast, defined benefit plans cover nearly 80 percent of those employed in the public sector. With federal, state, and local governments faced with trillions of dollars in unfunded pension liabilities, their ability to honor their obligations to future retirees is in some doubt.
More and more people are faced with the prospect of providing for their own retirement needs. This means that they must reduce current expenditures in order to save for their retirement. The sooner one recognizes the need to take responsibility for his/her own retirement and not rely on the largess of one’s employer the easier it becomes to achieve his/her financial retirement goals. Most financial advisors believe that in order to not outlive one’s savings one should not withdraw more than 4 percent of his/her savings per year. This means that one must accumulate twenty five times one’s projected financial needs during retirement. A good starting point in determining what those financial needs might be is to assume that one’s living expenses will not be different during retirement than during one’s earning years. Granted certain expenses will be less during retirement. However other expenses will increase during those years.
Having defined one’s retirement needs, one must determine how realistic the chances of achieving those goals are. If one waits until one he/she is in his/her mid fifties, one would have to save 50 percent of his/her annual pre-tax annual income and achieve annual returns on his/her investment of almost 25 percent in order to accumulate twenty five times his/her annual retirement income. Clearly this, for most, would be impossible. However were one to start saving in his/her mid thirties, it would require saving 12.5 percent of one’s pre-tax annual income and achieving a 10 percent return on investment. By starting in one’s mid twenties to save 10 percent of one’s annual pre-tax income and achieving an annual return on investment of 7.5 percent one could accumulate the funds needed for retirement. The message is clear. The younger one is when starting to save for retirement, the less money needs to be saved and the lower the required return on investment.
Everyone’s road map to retirement is different. However, there are clear stops along the way. For more details on these road signs refer to A Common Sense Road Map to Uncommon Wealth.

About the Author
Experienced as a registered representative, an individual investor and a management consultant to Fortune 500 companies, Doniger has developed his perspectives on the economy from a lifetime of smart investments. His other books A Common Sense Approach to Successful Investing, in which he first introduced stratamentical analysis, a unique approach for identifying long-term investment opportunities, and Common Sense Prescriptions for Financial Health, which introduces Quaestrology, unique perspective on managing one’s finances He is also a regular guest on the Business Talk Radio Network and other radio shows. His articles have been published in media outlets such as Investor’s Digest of Canada and Morningstar

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Marvin Doniger has written A Common Sense Road Map to Uncommon Wealth and A Common Sense Approach to Successful Investing. He is a regular guest on Business Talk Radio Network and other radio shows. His articles have been published in Morningstar.