Have You Considered Your Retirement?

The 3 Things You Need to Retire

First the bad news: The conventional retirement system is rapidly falling apart. Social Security doesn't expect to be able to make all its expected payments starting in 2041. Many of the companies that still have pension plans are either cutting them back or eliminating them entirely.

The trend is clear. Nobody else will take care of your financial future. With the social safety net failing, and guaranteed pensions falling by the wayside, if you ever want to retire, you need to take matters into your own hands. So if you want your golden years to be comfortable, you'd better get started. Now.

Your keys for success

A successful retirement is still possible, if you're willing to make the most of three very important tools:

•· Money

•· Time

•· A strong plan

The first of those should be pretty obvious -- of course you'll need money to retire. Just because you plan to stop working doesn't mean you plan to stop spending. You'll still have to eat, and you may just want to travel the world, spoil your grandkids, or do any number of other wonderful things with your newfound freedom. And all those wonderful things require cash.

So you'll need a target. Let's pick $1,000,000 as a starting point for a goal -- you can adjust it from there to match your own idea of a successful retirement and your own projections for inflation.

Time's a wasting

Of course, if you already had that kind of money, you wouldn't still be reading this. That's where the second tool -- time -- comes in handy. This table shows how much you'll need to sock away every month to reach that $1,000,000 target:

As you can see, the earlier you get started, the easier and cheaper it is to reach your goal.

Get there from here

As for those 8% to 11% potential returns; those numbers weren't just picked out of a hat. Historically, the S&P 500 has earned investors an average annual return of somewhere around 10% to 11%. Even assuming that average return, not all the stocks within it move in unison. For instance, while the index itself has gained about 15% in the past year, check out the performance of some of the individual constituents within that index:

The problem with investing only in stocks, though, is that sometimes, even a broad stock index can fall. To temper that risk, many investors further diversify their holdings into bonds as well as stocks. That risk reduction doesn't come free, though -- the price for calm is a lower overall expected return. Depending on the specifics of your holdings, it's quite easy to see your expected returns fall from the 10% to 11% range to the 8% to 9% range -- or even lower.

Let's talk about retirement

Have you taken the time to consider what you can expect for your retirement income? Have you ever considered how much income you'll need? Another important factor is; how long you will live. That, we don't usually know. So... you need to plan for the unexpected.

89% of Americans rely on Social Security for retirement, hoping to supplement it with IRA or 401k investments. They may be in for a disappointing surprise.

The average Social Security benefit amount is $1,100.00 per month. Can you live on that comfortably? When you add funds from a 401k or IRA, even that (most likely) will not be enough. Many people reaching retirement age right now are realizing their retirement account didn't perform as expected. In the future, more people will experience the same thing if they continue to invest in the traditional fashion or follow the misleading advice of financial planners.

What most people forget to consider is annual cost of living increases. The average, at least in California, is about 5%. That could change but assuming a constant, what will the buying power of the dollar be in 10 years, 20 years or 30 years? You could be looking at needing $2.00 to $3.00 for every dollar you spend now. Also, the Social Security Administration has announced that in the year 2041, they estimate they will only be able to pay 75% of the expected benefit to a recipient.

 Do the math                                

Your monthly income needs during retirement years, factor inflation at that time, how much you'll have to draw on. Are you coming up short? Oh, one other thing that can play a major role; future tax brackets. Of course, this is always an unknown. However, look at the tax tables over the past fifty years. They've increased. What will happen when you start to draw on your "tax deferred" retirement funds? You'll need to draw out more because the cost of living is more. You may also be taxed more because not only are the tax brackets higher, but you need to draw more money for living expenses. I'm feeling depressed. How about you?

The solution

Well, there is a solution to relieve this - land banking. Traditionally, real estate has historically been the best investment for accumulating wealth - particularly in states like Southern California. What many people don't realize is that, over the long term, the greatest gains have been made in pre-development land. If they used IRA funds to purchase property and set up a self managed IRA account, they'd be on their way to a more successful retirement.

Another advantage, depending on the amount rolled over and an individual's current, personal financial situation, is converting a traditional IRA or qualified 401k fund to a self managed Roth IRA. Pay the tax now and avoid much more tax in the future. I, personally, would rather pay tax on a rollover conversion than pay tax on a million dollar property sale in the future. But, again, this may not be for everyone.

Just make sure that you're buying property in the path of growth and development. Do your homework and be sure the development will continue. There are those that have purchased in an area because some development was started and rumors spread that it was going to be booming. Not so. Many experienced disappointment and losses.

Take a serious look at your quarterly retirement account statements. Calculate ahead. What can you expect? Calculate what you'll need for retirement. Consider your options and remember - land!

"Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate." - Andrew Carnegie