Financial Literacy 2007 - Retirement
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5 steps for figuring out your 'big number'

Why work longer?

Life isn't necessarily getting cheaper for retirees.

Take housing, for example. There was a time when many seniors burned their mortgages after paying them off. But that milestone may be becoming less familiar. More than 80 percent of seniors age 65 and older own a home. But 26 percent of them are still paying off mortgages with a median debt of $44,000, according to Joint Center for Housing Studies at Harvard.

The upshot: add the debts together, the possibility for a long retirement and the potential for pricey health care costs, and it may well prove best to plan on spending as much tomorrow as you do today, says Bill Baldwin, president of Pillar Financial Advisers in Waltham, Mass.

"We believe it costs at least as much in retirement, if not more," insists Baldwin. ""No one ever anticipates a step-down in terms of their standard of living. I've never heard one person say "I'm willing to lower my standard of living."

3. Keep inflation in mind

Now you'll project today's costs into the future. Don't panic, It's not tough to do as most retirement calculators simply let you plug in an inflation rate. Historically, that's been around 3 percent. But follow the advice of financial advisers and they'll likely recommend using a slightly higher number.

"I tell people if they want to be really safe use 4 percent," agrees financial planner Dee Lee, author of several books including "The Complete Idiot's Guide to Retiring Early."

4. Think like a nonprofit

Now that you've got some idea of what you'll spend in retirement, you need to look at where the money's coming from. For most of us, that's a mix of sources, including personal savings and investments, retirement funds like IRAs or 401(k) plans, a pension if you're fortunate enough to get one and Social Security. You can quickly look up your estimated benefit at the Social Security Administration Web site.

Combined, you need to have enough cash to pay out what you need per year over time, without your nest egg evaporating in a year or two. Sounds obvious, but what does this really mean?

To help answer that question, Bill Baldwin, president of Pillar Financial Advisers in Waltham, Mass., recommends individuals view their retirement nest egg not as some big pile of money, but as an endowment fund for a big college or other institution.

As you know, endowments are worth a lot of money. But the financial experts running the endowment don't simply give it away at once. Rather, they need to ensure they'll always have enough so they can continue to fund good causes (such as scholarships or grants) for years to come. For that reason, endowment funds give away an amount that ensures they can be generous and still continue to grow.


That magic amount is generally no more than 4.6 percent of their assets a year, says Baldwin. Not surprisingly, planners also recommend individuals take out no more than 4 to 5 percent of their nest egg a year.

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