for inflation?
The cost of retirement will likely
What will my investments return?
go up every year due to inflation — that is, $40,000
Any calculation must take into account what annual
won’t buy as much in year 5 of your retirement as it
rate of return you expect to earn on the savings you’ve
will the first year because the cost of living usually
already accumulated and on the savings you intend
rises. Although Social Security benefits are adjusted
to make in the future. You also need to determine the
for inflation, any other estimates of how much income rate of return on your savings after you retire. These you need each year — and how much you’ll need
rates of return will depend in part on whether the
to save to provide that income — must be adjusted
money is inside or outside a tax-deferred account.
for inflation. The annual inflation rate is 2.1 percent
It’s important to choose realistic annual
currently, but it varies over time. In 1980, for instance,
returns when making your estimates. Most financial
the annual inflation rate was 13.5 percent; in 1998, it
planners recommend that you stick with the historical
reached a low of 1.6 percent. When planning for your
rates of return based on the types of investments you
retirement it is always safer to assume a higher, rather choose or even slightly lower.
than a lower, rate and have your money buy more than How many years do I have left until I retire?
you previously thought.
The more years you have, the less you’ll have to save
each month to reach your goal.
U.S. Department of Labor Employee Benefits Security Administration 9
SAVINGS FITNESS A GUIDE TO YOUR MONEY AND YOUR FINANCIAL FUTURE
How much should I save each month?
A spending plan is simple to set up. Consider
Once you determine the number of years until you
the following steps as a guide as you fill in the
retire and the size of the nest egg you need to “buy”
information in Worksheet 5–Cash Flow Spending Plan
in order to provide the income not provided by other
in the back of this booklet.
sources, you can estimate how much you need to save. Income. Add up your monthly income: wages, average It’s a good idea to revisit this worksheet at
tips or bonuses, alimony payments, investment
least every year or two. Your vision of retirement,
income, and so on. Don’t include anything you can’t
your earnings, and your financial circumstances may
count on, such as lottery winnings or a bonus that’s not
change. You’ll also want to check periodically to be
definite.
sure you are achieving your objectives along the way.
Expenses. Add up monthly expenses: mortgage
or rent, car payments, average food bills, medical
“Spend” For Retirement
expenses, entertainment, and so on. Determine an
Now comes the tough part. You have a rough idea of
average for expenses that vary each month, such as
how much you need to save each month to reach your clothing, or that don’t occur every month, such as retirement goal. But how do you find that money?
car insurance or self-employment taxes. Review your
Where does it come from?
checkbook, credit and debit card records, and receipts
There’s one simple trick for saving for any
to estimate expenses. You probably will need to track
goal: spend less than you earn. That’s not easy if
how you spend cash for a month or two. Most of us
you have trouble making ends meet or if you find it
are surprised to find out where and how much cash
difficult to resist spending whatever money you have
“disappears” each month.
in hand. Even people who make high incomes often
Include savings as an expense. Better yet, put it at the have difficulty saving. But we’ve got some ideas that
top of your expense list. Here’s where you add in the
may help you.
total of the amounts you need to save each month to
Let’s start with a “spending plan” — a guide
accomplish the goals you wrote down earlier in
for how we want to spend our money. Some people call Worksheet 1.
this a budget, but since we’re thinking of retirement
Subtract expenses from income. What if you have
as something to buy, a spending plan seems more
more expenses (including savings) than you have
appropriate.
income? Not an uncommon problem. You have three
choices: cut expenses, increase income, or both.
Cut expenses. There are hundreds of ways to reduce
expenses, from clipping grocery coupons and bargain
hunting to comparison shopping for insurance and
buying new cars less often. The section that follows on
debt and credit card problems will help. You also can
find lots of expense-cutting ideas in books, magazine
articles, and financial newsletters.
Increase income. Take a second job, improve your
job skills or education to get a raise or a better paying
job, make money from a hobby, or jointly decide that
another family member will work.
10
BOOST YOUR
BFINANCIAL PERFORMANCE
Tips. Even after you’ve tried to cut
expenses and increase income,
you may still have trouble saving
enough for retirement and your
other goals. Here are some tips.
Pay yourself first. Put away
first the money you want to set
aside for goals. Have money
automatically withdrawn from
your checking account and put
into savings or an investment.
Join a retirement plan at work
that deducts money from your
paycheck. Or deposit your
retirement savings yourself, the
first thing. What you don’t see
you don’t miss.
Put bonuses and raises toward
savings.
Make saving a habit. It’s not
difficult once you start.
What’s the difference between “good debt” and
Revisit your spending plan every few months to
“bad debt”? Yes, there is such a thing as good debt.
be sure you are on track. Income and expenses
That’s debt that can provide a financial pay off.
change over time.
Borrowing to buy or remodel a home, pay for a child’s