Phil's Personal Finance Tip of the Day:
How Much Should You Have In Your 401(k) To Retire?
By Ryan C. Fuhrmann | Investopedia
The discussion on how much and individual needs by the time they retire used to be pretty straightforward. With $1 million in savings, at a 5% interest rate, one could be reasonably assured of having $50,000 in annual income by investing in long-term bonds and simply living off the income. With $2 million, an individual could assume a six-figure annual income without having to dip into principal. (For more on how you can achieve these targets, read How To Save More For Your Retirement.)
TUTORIAL: Retirement Plans
Unfortunately, interest rates have been on a steady decline for roughly three decades now. Back in 1980, nominal Treasury Bill rates were roughly 15%, but these days a 30-year Treasury is yielding just over 3%. Lower yields on bonds has made the investing equation in retirement more difficult and was only exacerbated by the credit crisis, which has also served to complicate the manner in which individuals save to have enough to live off in retirement.
Primary Retirement Income
The primary savings vehicle for most Americans these days is through a 401(k) retirement plan. Individuals have traditionally been able to also count on Social Security benefits, but the long-term picture for this savings vehicle is murky at best, so ideally shouldn't be part of the savings equation. Deciding how much to save first requires having a retirement goal in mind, such as an overall savings level or annual income target listed above.
Given these retirement goals, an individual can make an attempt to reverse engineer, or back into a current level of savings. Other important considerations include one's current age, current savings levels and estimated retirement age. Other major inputs consist of estimating market return levels, such as the growth rates of stocks, bond interest rates and inflation rates over the long term. (For more on inflation, check out Combating Retirement's Silent Killer: Inflation.)
As you can see, there are a wide array of inputs that are far from certain. Many websites, including Investopedia, bankrate.com and the non-profit organization AARP, provide retirement calculators to help individuals enter and tweak the key variables to come up with annual savings goals. AARP asks individuals to estimate retirement age, current savings levels and percentages of income saved, and desired spending levels in retirement.
To read the entire article from Ryan C. Fuhrmann | Investopedia :
http://finance.yahoo.com/news/much-401-k-retire-120000945.html
Yesterday is but today's memory, tomorrow is today's dream. - Khalil Gibran
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