Taking A Closer Look at Retirement Expenses and Your Nest Egg

More than ever before, the quality of your life in retirement will depend on the actions you take today. Saving regularly, and investing in the right vehicles can make a huge difference in your future lifestyle. It wasn't very long ago that people could expect their retirement years to be funded by a nest egg made up of a combination of generous company pensions, Social Security benefits, unprecedented appreciation in the prices of their homes, and personal savings.

As the economy has changed, though, so has the way we save for retirement. Today, most of the burden of planning and financing retirement is falling to individuals - not the government and former employers. In addition, Social Security payouts are comprising smaller percentages of retirement income. In fact, some believe that Social Security may one day be non-existent. Fewer companies are offering corporate pension plans. Many investment professionals predict that over the next ten to twenty years, the value of homes may not appreciate as much as in the past. Today, in fact, many people have a mortgage balance that exceeds the value of their home. What this all adds up to is that your personal investments will most likely have to account for the majority of your retirement income.

We are taught that we should begin putting something aside for retirement from the first day we enter the work force. The reality, however, is that few people in their 20s can look that far to the future; their financial horizon may be as immediate as paying off student loans or saving enough to move out of their parents house. Today, it is difficult enough for most people to just pay the monthly bills. Young people today have far different spending habits, too. But if they paid attention to demographic trends, which indicate that most of us will spend 25% to 30% of our lives in retirement, they would know that they should begin saving for the future as soon as possible.

Here is an example of how saving early, can really pay off in the end. If you save $1,000 a year for 30 years at an 8% rate of return, your nest egg will reach $113,282. If the same amount is invested at the same rate for only ten years, the nest egg will be worth only $14,487, an amount well below one quarter of the first example. (This is a hypothetical illustration only and is not indicative of any specific investment performance. Sales costs and taxes are not included in this example.)

One big question people may ask themselves, is how do you know when you will be able to afford retirement? Part of the answers lies in that your first step is determining what your expenses and your income will be. If you plan to remain in a big city and keep up a big-city lifestyle, you will, of course, need a greater income than someone who seeks a simple life in the country. As we grow older, however, expenses change. For example, as we age, we tend to spend more money on medical care. In addition to changes in health, our activities tend to also change as we age. For example, retirees tend to spend more on travel and recreational activities.

Many investment professionals believe that retirees need as much as 75% to 80% of their previous working years income to maintain a comfortable retirement lifestyle.

To determine your needs better, look at the chart on this page. In the left-hand column of this chart find the number of years until retirement, then find today's income along the bottom. Read up to see how much annual income will likely be required at that future date in order to match today's buying power. (Based on a 5% inflation rate.)

Source: Provided by Index Funds