In Your 40s? It's Not too Early to Plan for Retirement

Dear New Frugal You,

My husband and I are beginning to think about retirement. It's still years away, but we read about people who wait until the last minute and regret it. We're in our 40s and our kids are out of school. What can we do now to make sure we have a comfortable retirement? 

- Looking Ahead

Dear Looking Ahead,

Good idea! You don't want to be among those who wait too long to plan for their retirement. By starting now, you can more easily make changes that are required to assure that your later years really are golden.

Let's break our task into two areas: income and expenses.

First, the income side. The Social Security Administration will help you estimate how much you can expect from them at retirement with its "Estimate your retirement benefits calculator."

Consider what other sources of income you'll have available. Speak with your company's human resources department to find out what your pension or 401(k) accounts might provide. HR might not be able to provide answers, but they can put you in touch with people who can.

You may want to consider a "retirement career." Many people use retirement to fulfill lifelong dreams that weren't financially practical when they were younger. Since they only need a part-time income now, a second, lower-paying career or hobby business is possible.

It might seem too early to think about a retirement career. But by starting now, you'll have time to take any college courses you need, do some business planning or obtain the appropriate accreditations. Just allowing your mind to make future plans is healthy.

Putting all these pieces together will give you a general idea of what your post-retirement income will look like. Don't worry about making your plans too detailed at this point. No forecast will be completely accurate when you're looking 20 years into the future. What's important is to get started now and fine-tune your plan as you get closer to retirement age.

Next take a look at your expected expenses. How much money will you need in retirement? Traditionally experts have estimated that retirees would need an income of about two-thirds of their pre-retirement level. More recently, some say that's too low, given how active today's seniors are.

One way to tell how much you'll need is to consider what you expect from retirement. Happy to stretch out in a hammock in the backyard with a glass of iced tea? You'll spend less than the couple that wants to travel and play golf three times a week. If you're among the latter, you may need to target an income level between 80 percent and 100 percent of your pre-retirement income.

Another way to estimate how much income you'll need is to guesstimate what your expenses will be. For most families, the biggest items in their budget are housing, transportation and food. Let's concentrate on those areas. Again, we're not looking to put a detailed plan together. Prices will change in 20 years. At this point, we just need to begin the process of preparing.

The first stop: housing. Owning your home without a mortgage is key to a comfortable retirement. Mortgage payments often consume 25 percent to 30 percent of your income. A paid-off home will go a long way toward absorbing a cut in income.

If you still owe on your home, work up a plan to pay it off before you retire. You may already be on track to do that. If not, use a mortgage calculator to see how much you'll need to add each month to accomplish that goal.

Next: transportation. Your needs will probably change. With no daily commute, you probably can sell the second car. As you get closer to retirement, keep your changing needs in mind. Don't buy a vehicle three years before retirement that will be unsuitable for your new lifestyle.

Your eating habits may change dramatically, too. Many dual-income families find that they eat a lot of restaurant food. A more leisurely lifestyle may change that. Who knows? You might even want to take some cooking classes or begin collecting recipes in the years leading up to retirement. Current restaurant bills should help you estimate how much your food budget will change.

Look for other major items that can upset your plans. For instance, what would happen if one or both of you needed long-term care? Statistics from the Long Term Care Insurance National Advisory Center indicate that about half of Americans will. They estimate that in 2030 (roughly when you'll be in retirement), 23 million Americans will be in long-term health care and the cost will be $300,000 per person annually! Granted, they'd be happy to see you buy insurance. But, you probably should talk to an unbiased financial adviser to work through your options.

And, don't forget credit card accounts. Having all balances paid off before retirement makes life much easier.

Putting the big pieces together should give you some type of estimate of how much income you'll need. If you find that you're significantly short of income, you can begin a savings program now to make up the difference.

Again, don't worry that you're working with rough numbers. As you get closer to retirement age, you can make your estimates more accurate. For now, you just want to make sure that you don't have any glaring gaps in your plan.

Beginning now gives you a big advantage over someone who waits just a few more years. I hope by the time you get to retirement all your plans will put you in a wonderful position to enjoy your golden years!

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