Pub. 6 2015 Issue 3

www.wvbankers.org 16 West Virginia Banker F ortunately, through utilizing tools available on the web, calculating your retirement income replacement ratio can be a relatively simple exercise. These online calculators commonly use factors such as current age, household income, and current retirement assets to develop an annual retirement savings target. Usually included in the results is a "desired income replacement rate," which is the percentage of your annual income you would like to replace in retirement. Most financial advisors suggest that your retirement income replace approximate- ly 50-70 percent of your pre-retirement income. Living on 50-70 percent of your pre-retirement income can be achieved due to the fact that, in retirement, expenses such as mortgages, as well as work-related expenses that came out of your pocket, usually have been eliminated. (Bear in mind that there may be other outstanding obligations, such as college loans or car payments, which should be included in these calculations.) Ultimately, you will end up with a retire- ment savings "gap," which is calculated as the difference between what you need to have in retirement savings plans and the amount that can be received from your current retirement plans. This exercise need not be a negative or "scary" experience. If you are a participant who is already enrolled in a 401(k) plan, your company may be providing you with a Retirement Readiness Analysis to deter- mine if you are meeting your retirement savings goals. These Retirement Readiness scores may, however, vary wildly for par- ticipants of the same age and at the same stage in life. As an example, let's look at Jane and Robert. Both are 50 years old, earn the same salary, and maintain the same rate of contribution to their company's 401(k) plan. Jane has been with the company since she was 21 years old, and has con- sistently contributed to her 401(k) plan, so her Retirement Readiness Analysis score should be pretty high. Robert, however, just joined the company two years ago, and, as a result, has far less invested in his current 401(k) plan ... consequently, he has a much lower Retirement Readiness Analysis score. To learn more, contact Mark Hogan, Regional Director, via email at mhogan@pentegra.com or by calling 800.872.3473. Calculating How Much Money You Need to Retire By Mark Hogan, Regional Director, Pentegra Retirement Services For an increasing number of participants who may have signed up for their company's 401(k) plan late in life, concerns over whether they will be able to save enough to "afford" to retire can be significant. Saving for retirement is, of course, crucial ... but exactly how much annual income will you need to sustain a fiscally comfortable retirement? R ETIREMENT S ERVICES P entegra When participants see low scores, should they panic? Probably not ... or, at least, not necessarily. Someone like Robert has pre- sumably held other positions over the pre- vious 30 years or so and may have savings in a former employer's 401(k) or pension plan. These assets are likely not reflected in his Retirement Readiness Analysis. Any IRAs or expected Social Security income should also be considered (both in Robert's case and Jane's); while by themselves they may not represent much in the way of income replacement, together, they can contribute significantly towards one's income replacement rate goal. Also worth noting is the fact that the defi- nition of "retirement" has been evolving and the average retirement age has been gradually increasing. A generation ago, people tended to work at the same compa- ny for most of their adult lives and retired between the ages of 55 and 65. Post-retire- ment, those people may or may not have downsized, and often could rely on a nice pension along with whatever savings they had accrued plus Social Security. According to Social Security Administra- tion data, the average life expectancy for someone turning 65 in 1950 was 78.1 for men and 81.2 for women. In 1990, those figures had increased to 80.3 and 84.6, respectively, and for 2012 they increased to 82.9 and 85.5, respectively. As a result, people today tend to be more active in their older years than their ancestors were; many times they continue to work, either at their current company if policy allows, or at another venture. Receiving a “post-65” paycheck represents further opportunity to invest in one's re- tirement fund so that when the time finally arrives to kick back and relax, one is better positioned financially. The message here is that, no matter what your circumstances are when you sign up for your company's 401(k) plan — the ear- lier the better, of course — there are viable options for calculating how much money you need to retire comfortably... and for achieving that goal. n