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What It Takes to Be Ready for Retirement Financially:
An Essential Overview


Come age 65, will you be ready to retire? Are you hoping to retire earlier than that, or later? These are questions that many Americans think about, but often don't know the answers to.


One in four baby boomers can't afford to retire.

Admittedly, thinking about retirement can seem daunting, particularly if you're barely scraping by as it is. Yet knowing what it takes to be able to retire comfortably is the first step to getting there.

As it is, a paper written for AARP Public Policy Institute by Sophie Korczyk of Analytical Services, Inc found that baby boomers may be facing some challenges in the coming years. Her report found that:

  • While at least half of baby boomers are on track to a comfortable retirement, substantial numbers are not.

  • As many as one in four boomers can't afford to retire.

  • Many in this age range are unaware how much income they'll need to retire.

  • Boomers who are single when they begin retirement (widowed, divorced) will most likely outlive their resources.

How can you make sure you are one of the people who are able to retire comfortably when the time comes? Find out what it takes to do so ... and start working your way toward it now.

Retirement Finances: What Does it Take?

First and foremost on everyone's mind is income. How much do you need, from savings, Social Security, and pension benefits, to live on comfortably? It used to be said that you need to replace 70 percent of your pre-retirement income. However, Korczyk's study found that this doesn't factor in important circumstances like volatile investment markets, longer than expected longevity and health care spending.

The "new" rule-of-thumb is to base your estimated income requirements on how much you plan to spend. Obviously, if you plan to live simply you'll need much less than if you plan to travel the world. There are a variety of retirement income calculators, such as this one from T. Rowe Price, available online to help you with this portion of your planning.

When you're ready to retire, experts recommend having some cash available right away -- enough to cover up to three years' worth of living expenses. This way, you can delay tapping into your investments; if you tap into your nest egg too early, it can seriously impact how much money you'll have in the coming years. Once you do start to withdraw from your savings, ideally you should have enough saved so that you can withdraw 4 to 5 percent each year and pay all of your bills.

Next you'll need to look into insurance. Most employers no longer pay health benefits to retirees, so expect to pay for at least some of yours out of pocket. Generally, once you've turned 65 Medicare will cover 60 percent of your health care costs, but you'll need supplemental insurance to cover the rest.

To give you an idea of how much you may need, in 2007 Fidelity Investments estimated that a couple who qualifies for Medicare would need $215,000 to pay for health care after retirement.

Experts also recommend considering a long-term care insurance policy at this time, and possibly cutting back on your life insurance policy if your children are grown and your house is mostly paid off.

Finally, keep an eye out for the unexpected. Even the best retirement plans can suddenly go awry. In these circumstances, be prepared to downsize your living quarters or your standard of living as much as you can and still be happy.

Are Things Not Adding Up?

If your retirement portfolio appears to be lacking, don't worry. You can always keep working an extra year or two. In fact, "Working longer is one of the best remedies for the retirement anxiety and fear that exists today," says Brent Neiser, a certified financial planner and a director of the National Endowment for Financial Education, in U.S. News & World Report.


If you're prepared to live simply during retirement, you can greatly cut back on your income requirements.

Even working for one extra year can significantly delay how soon you'll need to tap into your nest egg, and ultimately can increase your standard of living in the years to come. It also helps you to stay active into your later years. According to some experts, pushing back retirement to age 70 is a wise choice financially and also emotionally.

Recommended Reading

Four Common Unpleasant Retirement Surprises and How to Avoid Them

401(k)s: 8 Key Tactics You Need to Know to Get Full Benefit from Your 401(k)

Sources January 2008

U.S. News & World Report July 10, 2008

MSN Money

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