Are you set for retirement? Will you have enough money set aside at retirement to meet even your most basic needs? Do you even know what that amount is? If you don’t know the answer to these questions, you are not alone! This article will serve to help you answer some of these very important questions.
First, let’s determine how much you will need to retire. Most financial experts estimate that the majority of people will need anywhere from 60% to 100% of their annual pre-retirement income to live on each year after retirement. Let’s look at an example of an individual currently earning $60,000 and has 20 years until retirement. Assuming that individual will be receiving full social security benefits, he will need an additional $933,734 by retirement age to support an annual replacement income of 80%.
The most recent projections by the nonpartisan Congressional Budget Office show Social Security running deficits every year until its funds are eventually drained by about 2037. That may sound like a long time away, but 26 years is within most of our lifetimes. Add to that fact, nearly half of the “baby boomer” generation (those born between 1948 and 1954) are at risk of not having enough retirement savings to cover even their basic necessities. The burden is on each and every one of us to insure that we can take care of ourselves in our golden years. Given the current state of the economy, this may seem like an impossible task. However, there may be a very real solution to help to increase one’s retirement savings without having a negative impact on income!
As you may be aware, on December 17, 2010 the Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2011 was signed by President Obama. In part, this Act reduces the 2011 tax rate on the employee portion of Social Security (OASDI) by 2%. The rate is now 4.2%, down from 6.2%. Why not take that 2% and invest it in your employer sponsored 401(k) plan? Even though you would be increasing your deferral percentage by 2%, there will be no effect on your take home pay. What a great way to help insure that your savings will be sufficient for your retirement.
In conclusion, given the uncertainty of our Social Security System, we need to look at ways to provide for our own economic security. If you are lucky enough to participate in an employer sponsored 401(k) plan, seriously consider increasing your contribution percentage. If your employer does not sponsor a retirement plan, you may want to encourage them to consider setting up one. It is never too early or too late to begin planning your retirement.
Becky J. Nicholas, CPC, is President of Penact Associates, Inc. in Chesapeake. Reach her at 757-547-5550. The company’s website address is www.penact.com