The purpose of this exercise is to help you understand how much money you will need at retirement to maintain a reasonable standard of living, taking into account Social Security payments, a company retirement plan (whether a defined benefit pension or a plan like a 401(k), and personal savings. Given your age and probable legal and social changes over your working life the results may be too optimistic.
- Go to http://gosset.wharton.upenn.edu/mortality/perl/CalcForm.html. Calculate how long you can expect to live. Remember this estimate is based on current longevity and advances in longevity that are known to be occurring. Medical breakthroughs during your working life are likely to extend the time you have left. [You may want to run the calculator twice, once with entirely accurate data and once with lifestyle data (exercise, seatbelt usage, etc.) at the ideal. This will give you an idea of the impact of lifestyle on longevity.] Write down your expected longevity.
- Go to Quick Calculator or Social Security Online Calculator. The Quick Calculator is just that – it provides a quick estimate of what you may expect to get from Social Security when you retire. The Social Security Online Calculator is more complicated, and allows you to enter in a salary history. If you are not currently working, put in the salary you expect to get the year you graduate. Either calculator will give you an estimated Social Security payment you will get when you retire. You can get reduced payments at 62.5 years, regular payments at age 67, and increased payments if you retire after that, with the maximum occurring at age 70. Just to give you a frame of reference, if you retire at age 70 and have earned the maximum amount taxed for social security, you will currently get about $3350 per month, or about $40,200 annually.
- Note when you would like to retire. Historically the average retirement age has been around 55, but it has been going up in recent years.
- You now have baseline data: when you will retire, how long you have to live after you retire, and Social Security income. You now need to determine how much you need from other sources.
- Go to Choose to Save®. This will provide you with the amount you need to save to reach some specified replacement income. If you expect to work for a company that gives a defined benefit pension, consider that the typical pension pays out about 30% of the average of the three highest years of the last five years of salary. Thus, if you expect to earn $150,000 on average of these three years your company pension would be $45,000 per year. However, many companies are dropping defined benefit pension plans and moving to defined contribution plans, such as a 401(k). In a typical 401(k) plan the company makes a 50% match to the first 5% of your salary you put in these tax-deferred plans. If you make the standard contribution on a $40,000 salary, you would $2000 and the company would contribute half of that, or $1000. The money would go into an investment fund where it would grow until you retire or reach age 70, when required distributions begin.
- An Alternate to “Choose to Save” is the http://money.msn.com/retirement/retirement-calculator.aspx. It makes slightly different assumptions but is worth using as well. It gives you a graphic view of the shortfall in income you will face if you don’t save enough now. To answer question “e”, below, you will need to use the MSN Money site.
Assignment: To turn in. Answer the following questions to turn in for this assignment:
- Given your life expectancy and your preferred retirement age, how long will you have to live during retirement?
- What is your reaction to the amount you need to save for retirement to maintain your standard of living?
- How good an investment do you think your contributions to FICA (Social Security taxes) are? Consider that you currently pay 6.2% of your gross salary up to $106,800 and your employer pays the same amount. (You pay an additional 1.45% on all earnings for Medicare, again, matched by your employer.) Thus, if you make $40,000 a total of $4960 goes into the Social Security Trust Fund.
- How can HR work with employees to make sure they understand the need to save?
- Most 401(k)s or other defined contributions plans allow you to make additional tax-deferred contributions to the plan, Using “Retirement Planner – MSN Money” consider what would happen if you make a 7% contribution instead of 5%. A 10% contribution instead of 5%. Note the % increase in retirement income you can expect from both these actions.
NOTE: I do not want to see personal financial data. The only number I have asked for, in “e,” is a % increase and reveals nothing about your personal financial status.