Monday, May 16, 2011

3 New Retirement Rules You Can’t Ignore

By Neal Frankle

Some people do everything right, play by the rules, and still end up unprepared for retirement. That’s because the retirement rules have changed quite a bit over the past generation. Make sure you are aware of these changes in order to adequately prepare for retirement.

1. Savings isn't enough. Not so long ago, you could save and invest enough to create a tidy nest egg by the time you retire. Then you would invest that money and live off the interest. Your investment income and Social Security benefits could generate a comfortable retirement. But now Social Security doesn’t feel secure to many people and high yield savings are just a fond memory.

Interest rates are so low right now that it would take an extremely large amount of money in order to create significant retirement income. If you only earn 2 percent on your money and you have $1 million saved, you’ll earn $20,000 in interest every year. That’s not enough to finance anything but a frugal retirement. If you are extremely conscientious and save $3 million, you’ll earn $60,000 a year. That’s certainly better. But if your net worth is $3 million, you’re probably going to want more than $60,000 to live on.

2. Extended or second careers. Due to these low returns, most people are going to work longer. There is nothing wrong with this and some studies have found that working longer is beneficial for your health and longevity. But if you’re going to be working longer, it’s important to enjoy what you do.

Consider creating a side income to supplement your retirement savings. Start to build an income stream outside your job while you are still working. If you can build a business that reliably generates $20,000 a year, that’s equivalent to having an extra $1 million in savings because that’s how much you’d have to invest in order to create $20,000 annually. But you don’t need your second job to generate a significant amount of income right away if you think of it as a long-term project and help your business to grow over time.

3. Track your spending. People often think that as long as they don’t have credit card debt, they don’t need to watch their spending. But keeping tabs on how much you spend is the most important tactic you can implement if you want a secure retirement. By tracking your spending you’ll discover how much, on average, it costs you to live. This will help you see if you are saving enough to maintain your lifestyle in retirement and, if not, what you can do to fix the problem. Think of budget tracking as an early warning system for retirement savings problems.

The retirement landscape has changed. You can no longer rely solely on the interest your retirement savings generates to fund your future. Consider developing a side business now to offset retirement costs and track your spending to make sure you are saving enough.

Neal Frankle is a certified financial planner and runs Wealth Pilgrim, a personal finance blog that helps people make smart decisions about their money. As a start, he suggests that you strive to understand your credit score range.

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