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Dhanesha & Associates

5 Reasons For Retirement Planning

Ashwin Dhanesha

Ashwin Dhanesha , CPA, EA, CFP, PFS, CFA, MBA |

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Retirement is an inevitable life event that marks the end of your full-time employment and its resulting income. Whether you are in the early or middle stage of your career, nearing retirement, or already in retirement, achieving a financially secure retirement should always be one of your most important financial goals.

Here are five reasons why you should plan for your retirement:

You are living longer: According to the CDC/NCHS statistics, the average life expectancy of Americans at birth has increased from 47 years in 1900 to 79 years in 2014. This trend is likely to continue, or even accelerate, given the continuous advancements in health science and technology. A man has a 50% chance of still being alive at the age of 81 (and a woman at the age of 85), a 25% chance of living to nearly 90, and a 10% chance of getting close to 100. While living longer means enjoying your life for a few more years, usually it also means a longer retirement. Living more years in retirement requires a bigger retirement nest egg and longer income planning for living expenses, healthcare costs, and other necessities in retirement. A sound retirement plan can help you accumulate and distribute your retirement nest egg so that it will last your lifetime.
Government benefits are not enough: According to the Social Security Administration, the average Social Security benefit for retired workers in 2016 was $16,049 for the year, just about a third of the annual retirement income a typical retiree needs. In addition, according to the U.S. Centers for Medicare & Medicaid Services, Medicare does not cover all medical treatments and health-related costs in retirement, leaving retirees to pay, on an average, 20% to 30% of their medical expenses out of their pockets. To make matters worse, there is a possibility that Social Security benefits and Medicare coverage may shrink even further in the future. In short, you cannot rely solely on government welfare to take care of your financial needs in retirement. You need to accumulate retirement assets that are sufficient to produce 60% to 90% of your total income needs throughout your retirement.
Social dynamics are changing: What are social norms today may not be the same when you retire. Gone are the days when children were entrusted with taking care of their ageing parents. You should no longer want to be financially dependent on your children; regardless of whether they feel you are a welcomed responsibility, or a burden they simply cannot afford. Planning to save a sufficient nest egg to take care of your financial needs in retirement is a responsible thing to do, not just for you and your spouse, but also for your children and other family members.
Cost of living is rising: Inflation erodes the value of money over time. To maintain your current lifestyle, you will need more money in the future than what you need at present. While you are working your salary may keep pace with the inflation, but in retirement, that may not be the case. Retired people feel the effects of inflation more than others, since they are on a tighter budget and have more fixed expenses. Retirement planning considers the true value of your savings in future terms, both during accumulation phase and distribution phase of your retirement, to ensure your retirement nest egg lasts your lifetime.
Your retirement nest egg is not automatically guaranteed to last your lifetime: Retirement planning involves two phases: accumulation phase and distribution phase. The distribution phase is also known as retirement income planning phase. Even if you are well on your way to accumulating your needed retirement nest egg, or have already accumulated it, you still need to plan to ensure that your retirement nest egg generates the income and cash flow you need throughout your retirement. Retirement income planning considers withdrawal, cash flow, investment, and various other financial strategies to do just that. Retirement income planning must begin at least 10 years before the retirement.
Each day that you are working is a day closer to your retirement, no matter how far away it may seem now. The sooner you start planning for your retirement, the better chance you have of achieving your retirement goals.