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Are you are currently on track to have enough resources that you will be comfortable in retirement? Will your expected benefits materialize? Do you really know how much of your income you will need to replace in order to fund your retirement? Will your retirement income be adequate to last for your lifetime? Well if you are like the great majority of Americans you probably don’t know the answer to any of these questions. The 16th annual Retirement Confidence Survey fact sheet from the Employee Benefits Research Institute tells us that most American workers are very unsure of their futures. Only one out of four workers, according to the survey, is very confident that they are saving enough for their retirement. That’s not surprising given the fact that over half of workers saving for retirement have investments, not including their homes, of under $50,000. While these confidence numbers are up significantly from a decade ago they still suggest that most workers need some help in planning for their retirements. One key finding from the study was that workers, in general, have no idea of how much money they need to save in order to achieve their goals. When it comes to financial planning only four workers out of 10 has ever taken the time to undertake some type of retirement calculation. This crucially important step can’t be overlooked. This is the basic building block for most financial plans. It’s imperative to understand how much money will be needed in retirement and if you are on track to achieve it. This assessment will help answer the big three questions about retirement planning: How much do I have, how much do I need, and what can I do about any gaps? If you have a company-sponsored retirement plan you are probably in better shape than the average saver. Almost half of all workers say they receive advice on retirement planning through their employer. This professional investment advice is usually delivered by an adviser or through the use of corporate-sponsored educational resources. Research shows that by doing a savings need calculation you will be much more likely to take any needed steps to correct deficiencies in your plan. The simple step of making your planning estimates err to the conservative side will go a long way toward avoiding many unpleasant surprises in the future. If you use overly optimistic assumptions about income, costs or expense you run the risk of saving too little for the future. The benefit of using conservative projections is twofold. One, if your plan seems to be working better than you anticipated you can always cut back your future contributions, or increase spending. Two, conservative estimates act as a built in buffer for unanticipated events, such as job loss or forced early retirement. In order to make good estimates you should carefully assess whether promised future benefits, from any of your retirement programs, will materialize without any significant reductions. How safe is your company’s promised pension benefit? How much should you rely on Social Security? These are questions that deserve a reasoned discussion. Thousand of companies over the last few decades have scaled back on their promises of benefits to retired workers. Some 67 percent of worker report that they are not confident that Social Security benefits will be equal to what is promised today. If you have any uncertainties about your future benefits then you should make some adjustments to you plan to prepare for that possibility. I would suggest a few simple adjustments that can help account for future uncertainties. The first is to assume that all future social security benefits will be fully taxable when you receive it. While Social Security benefits started out as being nontaxable, the trend over the last several years has been to make greater percentages of this benefit taxable. While this might not be significant to everyone it might be considerable to people on a limited income. The second adjustment would be to assume that in the future Social Security cost of living adjustments will no longer keep pace with inflation. This has been widely discussed as a fix for some of the funding shortfalls in the program and there is a good chance that in the future this will happen. You do this by assuming that the growth of payments will be a certain percent, say 1 or 2 percent, below the expected cost of living index changes. This seemingly small adjustment will have large planning implications over long periods, and 30-year horizons are not unreasonable for Social Security calculations purposes. In fact, for young savers, Social Security planning horizons can easily exceed 70 years. By using a reduced expected benefit, the accuracy of your retirement calculation should be greatly increased. Do you really know objectively how much will you need to spend when you retire? Over 50 percent of workers believe that their spending in retirement will be less than 70 percent of their pre-retirement income. This is called the replacement ratio. This 70 percent number might be a vastly low estimate for planning purposes. Many recent studies have shown that new retirees often have no significant drop in spending for the first several years after they retire. In fact, spending may often increases for the first several years after retirement. A conservative estimate for future needs is to assume a replacement ratio that is equal to your current spending. If you don’t use a budget you can start by subtracting all of your retirement savings from your income and use that as a starting point. Let’s say that you currently save 15 percent of your pre tax income and spend the rest. You would then assume that you will need a replacement ratio of 85 percent of your pre-retirement income for your retirement spending. After using these adjustments, you can then check to see if there are any substantial shortfalls. If there is a gap between your expected needs and your expected resources the earlier you fix the problem the less of an adjustment you will need to make. It is the compound interest problem in reverse. Seemingly small adjustments in assumptions and savings over long periods can make a tremendous difference in the final results of your retirement planning. These are just a few of the dozens of adjustments you can make to have your plans try to account for future uncertainties. But the first big step to take, to improve your confidence about your retirement plan, is to do a self-assessment. If you are among the 60 percent of workers who has never calculated the assets needed for your retirement, the sooner you do an analysis the better. Remember, it is relatively easy to make adjustments when you have lots of time. It’s just like trying to fix the Social Security deficit problem – the longer we wait to make our adjustments, the greater the pain we will encounter.WILLIAM Z. SUPLEE IVis the president of StructuredAsset Management Inc., afinancial planning andinvestment advisory firmlocated in Paoli, Pa. Hemay be reached at 610-648-0700 or [email protected]

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