Retiring? Plan Ahead, Go Out on Your Own Terms

Many valuable staff members from our local schools have passed the torch for this upcoming school year to new, younger teachers.

Among the veteran Caldwell-West Caldwell School District employees who retired at the end of last year were Lincoln School Principal Charles Rees Williams and Ken Trimmer, who retired as a physical education teacher at James Caldwell High School but will remain as the school's longtime football coach.

In addition, others who retired included: Carol Capasso, a physical education and health teacher from Grover Cleveland Middle School; Richard Sparano, a science teacher also from Grover Cleveland; Monica Blumberg, a math teacher from JCHS; Diane Casciano, a Jefferson School teacher; Teresa Matrisciano, a Lincoln School teacher; and Rosemarie Clark, a district special education teacher.

It's hard not to feel sad watching these individuals leave; many have dedicated a good part of their lives to help educate our children. But at the same time, you can feel happy thinking that now they can enjoy what they have been working toward their whole lives.

In a world where layoffs and downsizing have become so common in our conversations, these individuals have been able to retire on their own terms.

Many people dream about the day they can retire. You may even opt for an earlier retirement at the expense of a lower standard of living. There's no right or wrong answer. But your anticipated retirement lifestyle is a critical component in answering the question, "How much savings will I need?"

Estimating how much you should save
 

While creating estimates might not be enjoyable, the work is needed. Some expenses will undoubtedly decrease and others will rise. On the other hand, your income falling is a definite certainty. How that balances out for you is what's important. You should take a few minutes and evaluate your projected retirement cash-flow.

Most people focus on the amounts they have saved. But, another important focus should be on insurance considerations during retirement. Are you retiring before the age of 65? If so, are you aware that while you can get early retirement benefits from Social Security, Medicare still won't cover you until age 65? 

Other critical questions include: How much is Social Security? Will you receive a pension benefit? If you do have these monthly payments, they can subtract substantially from the amount you may have to save.

Getting a good estimate is invaluable as you plan your retirement and determine your savings need. The younger you are when you retire, the longer you can expect to live during retirement. This means you'll need more saved. If you wait longer until retirement, you will have worked more years, meaning you can save more.

If you start early, you would want to invest aggressively, then you can reasonably expect a higher rate of return on your investments, meaning you'll have to save less compared to another individual who insists on keeping all their investments in the bank's savings account.

Rule of Thumb

Although there is no one-size-fits-all answer, there is a good rule of thumb for determining how much money you will need in retirement. After you've determined what you think you'll need to live on during retirement, multiply it by 25. For example, if you think you'll need $40,000 a year, one formula says that you'll need 25 times that amount or $1 million in order to retire comfortably.

On the other hand, if you'd receive $15,000 in Social Security benefits each year and a $5,000 annual pension, you'd only need half of the $40,000 each year from your savings. Since you'll only plan on pulling out about $20,000 each year, you'd need about $500,000 saved by your retirement date.

Still, a rule of thumb is not a rule of law. More importantly, everyone's retirement goals are personal and no one gets into trouble because they saved too much too soon. But this retirement calculator should help.

Altering your retirement plans

Thinking about retirement is stressful—just imagine what it was like for those people who planned to retire on March 9, 2009, the lowest day for the stock market in a decade. Assuming you weren't one of those people, you still have time to make alternative plans.

Most people I help with retirement issues realize they have more options than they'd originally thought. Many even discover that the changes they make turn out to be a blessing in disguise and their new retirement plans are much more fulfilling than their original ones.

I tell them to think hard about what's most valuable to them and likely to make their retirement fulfilling. Is freedom or quality time more important to you than a big house and huge travel budget? If so, you may be among the lucky group of people who can retire at the age you've always planned. If travel or the house on the hill is important to you, consider delaying retirement until you have more saved.

These words make many cringe, but a couple extra years of income can make a huge difference in how much you receive from Social Security and a defined benefit pension, if you have one. For example, someone eligible to receive $1,759 a month in Social Security starting at age 62 can turn that into $2,346 a month by waiting to draw benefits until age 66.

Working a few more years can also contribute dramatically to rebuilding your nest egg. Retiring later gives the market time to recover and you'll have fewer years of retirement to fund.

Contributing the maximum to your retirement plan for an extra two years will potentially add $44,000 to your account; not having to withdraw money to supplement your retirement income will save you an extra $100,000. For some, it may be the only option, especially if you find your lifestyle expectations remain high after re-evaluating them.

Many people retire and move to a less expensive state to spend their golden years. One important issue that many people overlook is that every state has different tax rates and it is therefore important to do your homework before you become set on a state. The Retirement Living Information Center has a guide of taxes by state that could help.

Will Rogers once joked that investing wasn't that hard as long as you "invest in the stocks that go up." Yes, over time aggressive investing generally does bring higher returns, but when you have limited time you take a huge risk of investing too aggressively and losing what savings you had.

Unfortunately, there is no computer model for retirement where we can simply type in the return we want and get it. Actually, it's like most things in life, the more informed you become, the better the decision you will make.