Retirement planning made simple

Retirement planning can be complicated, but it doesn't have to be. If you

properly address the four following questions, you will have the essentials

of your plan.

1. How much will you need? Don't assume that your financial needs in retirement

will be considerably less than what you need to live on pre-retirement.

Although there is wide variation among individuals, retirement experts say

that you need about 80 percent of your pre-retirement income to live on.

That is a good rule of thumb to use when planning for retirement. Your mortgage

might be paid off, but as you grow older, your medical expenses are likely

to increase. On the other hand, other major expenses such as utilities,

taxes, food and clothing, will probably not change much from what they are

now.

The bottom line: When you retire, your cost of living will not be substantially

lower from what it is now. That means you will need to have sufficient savings

to finance your retirement or your golden years could become a struggle.

2. Where will your retirement income come from? Investing for retirement

through the government's Thrift Savings Plan (TSP) will help provide you

with much of the income you'll need when you retire. The size of your retirement

fund will depend on your investment decisions. The more you are able to

earn on your investments during your working years, the more money you will

have when you retire.

Once you stop working and earning income, your standard of living will depend

on the size of your retirement fund (your TSP plus your own investments),

your Federal Employees Retirement System (FERS) or Civil Service Retirement

System annuity and your Social Security benefits. To properly figure how

much you'll have to accumulate in your TSP, you'll need to consider your

present age, the amount you currently have in savings, the amount you plan

to save each payday, your expected rate of investment return, the age of

your planned retirement and your best estimate of what the average rate

of inflation will be while you're working. How much money will be in your

TSP on the day you retire depends on these variables.

Ask your personnel office to "run the numbers" for you and provide different

"what if" scenarios, such as how much you'll have to save each payday if

your portfolio grows at a 9 percent clip and inflation averages 3 percent,

how much more you'll have to contribute if the rate of inflation picks up

from what you originally estimated, and what your contributions should be

if you decide to retire sooner (or later).

It's a good idea to visit your personnel department regularly to get a "checkup"

on the status of your retirement savings plan. If your investment returns

aren't what you expected, or you change your estimate of inflation, you

can make a mid-course correction and remain on track toward a comfortable

retirement.

3. What can you contribute to your tax-deferred plan? Thanks to compound

interest, the greater the amount of time you have to invest, the smaller

the amount you'll need to invest each month in order to build an adequate

retirement fund. The sooner you begin saving, the better. Don't waste precious

time. It can never be recovered.

4. Which investments offer the best chance for satisfactory investment growth

without excessive risk? To create a retirement fund that will meet your

retirement needs, some risk must be taken. If you invest all your money

in a "safe" money market fund earning 4 percent or 5 percent annually, you'll

never have enough to retire on.

Investing in stocks through the mutual funds offered by your retirement

savings plan has the potential to deliver the highest returns in the long

run. During the past 71 years, the average annual return on the S&P

500 is 10.7 percent. During the same period, investing in corporate bonds

would only have produced about half that retur

Sure, there are risks associated with investing in stock mutual funds. However,

without risk, there may not be sufficient reward to provide you with a secure

retirement. Try to strike an acceptable balance between risk and reward

by investing in several mutual funds — some that invest aggressively and

some that invest conservatively. That will allow you to sleep at night.

— Zall, Bureaucratus columnist and a retired federal employee, is a freelance

writer based in Silver Spring, Md. He specializes in taxes, investing, business

and government workplace issues. He is a certified internal auditor and

a registered investment adviser.