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Personal Finance Chapter 14

Personal Finance Chapter 14 - baj01275_c14_380-403 00:09AM...

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14 PLANNING FOR RETIREMENT Achieving Financial Freedom Starting Point Go to www.wiley.com/college/bajtelsmit to assess your knowledge of planning for retirement. Determine where you need to concentrate your effort. What You’ll Learn in This Chapter Retirement income needs Employer-sponsored retirement plans Social Security Traditional and Roth IRAs After Studying This Chapter, You’ll Be Able To Estimate your retirement income needs Evaluate your future benefits from employer-sponsored retirement plans and Social Security Determine your retirement wealth goal and monthly savings target Assess your alternatives for personal retirement saving Evaluate your options for retirement income payouts baj01275_c14_380-403 02/10/2007 00:09AM Page 380 EPG_Team-C 105:JWQD032:bajch14:
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INTRODUCTION To successfully plan for distant goals, you need to apply many concepts empha- sized throughout this text. Establishing realistic goals, estimating their costs, and evaluating the most appropriate ways to achieve them are essential. Here, we apply the steps in the planning process (from Chapter 1) to funding your retirement. The earlier you begin planning, the more successful you’ll be at meeting your long-term objectives, and the easier it will be to weather the unknowns. You begin the planning process by reviewing your goals. Your objectives for retirement may start out fairly vague—“live comfortably in retirement” or “retire at age 55,” for example—but you need to be much more specific. This chapter also explains how to estimate more accurately your retirement income so that you know how much to save on a regular basis. 14.1 Estimating Retirement Income Needs Retirement may seem to be pretty far off. But most of us find that the time goes by all too fast. And unlike many of your personal financial goals, this one is going to eventually cost you much money, probably more than a million dollars. Consequently, it’s especially important to begin planning for retirement as early as possible. If you do so, you’ll be able to save a smaller proportion of your current income, and you’ll be more likely to meet your retirement objectives. You need to identify your needs, which requires that you estimate how much retirement income your investments will need to generate. You first need to settle on your goals, such as when you’ll retire and how much income you’ll need at that time. From this, you’ll subtract any income you expect to receive from other sources to arrive at the income shortfall your investments will have to generate. These steps are discussed in the following sections. 14.1.1 Determining Your Retirement Goals One person’s ideal retirement isn’t the same as another’s, which implies that the cost of paying for retirement isn’t the same for everyone. And, of course, because you have to save for this future expense now, you have to make a trade-off between current and future consumption. If you’re willing to accept a lower
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