Are your retirement planning assumptions correct?

by Jim Sloan

A recent survey by the Transamerica Center for Retirement Studies in Los Angeles found that nearly 40 percent of the workers plan to work long past normal retirement age--an increase from the 28 percent who asserted that in 2010. Many, blaming the staggering losses they suffered to their investments and retirement savings accounts during the Great Recession, say they won't retire at all.

But now the Wall Street Journal is warning workers that many of the assumptions they have been making in their retirement savings accounts plans--such as staying on the job into their 70s--have to be re-examined in light of new research. For instance:

  • If you're expecting your income to continue rising as you approach retirement, think again. The Journal notes that latest government data shows that the average worker's pay levels off in their 40s and remains stagnant for 15 years--for white collar workers as well as blue-collars. Even common retirement planning tools assume salaries will climb and that inflation will remain low. But those assumptions are often false.
  • You may want to work into your 70s, but will you still have a job? The unemployment rate for people 55 and older has increased from 2.9 percent in 2008 to 6.8 percent in May 2011, and older workers remain out of work an average of 41 weeks--six weeks longer than their younger counterparts. That kind of idle time can have a devastating effect on your savings accounts and money market accounts.
  • Your expectations for Social Security may be overblown. Many of us have looked at our Social Security statements and been reassured. We can see what we're going to get, particularly if we can hold off taking benefits until we're 66 or even 70. But according to the Journal, if your wages do fall in your later years, you could be looking at less coming in each month.

Step up your savings rates

The advice from the Journal is to start making adjustments now by spending less, saving more and pretending like your income has dropped by 20 percent. Most people plan for retirement with a best-case scenario, but those who assume the worst--and plan for it--not only survive nicely but often are unexpectedly rewarded.

Other options:

  • Instead of paying for your child's education, tell them to take out student loans and then help they pay them off if your retirement investments yield more than expected.
  • Stay in the workforce as long as possible, even with a lesser salary; your Social Security benefits may not be drastically affected, and you won't start tapping your retirement investments as early. Even when lower-earning years are factored in, someone receiving $1,700 a month in Social Security benefits at 62 will get $2,400 at 66. The Social Security Administration lets you review the different scenarios at www.ssa.gov/estimator.
  • Consider changing careers. Even at the age of 50, if your industry is dying and your prospects are not good, get some training and reinvent yourself. Education may be one of your best investments.

In general, don't forsake your employer's company 401(k) savings account match. It's never too late to start saving, even if it feels like you're being forced to climb an awfully steep hill. Company matching policies can be tough to figure out, but find out what the maximum amount is they will match and make sure you're putting in at least that amount. According to Smartmoney.com, three out of 10 workers don't participate in their company's 401(k) plan.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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