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Retirement Planning Basics

Retirement Planning Basics

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Published by Rachelle Williams
Basic information on planning for retirement (financial planning for retirement).
Basic information on planning for retirement (financial planning for retirement).

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Published by: Rachelle Williams on Mar 09, 2010
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10/16/2010

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Updated 01/08/2007
Retirement PlanningBasics
http://www.investopedia.com/university/retirement/default.aspThanks very much for downloading the printable version of this tutorial.As always, we welcome any feedback or suggestions.http://www.investopedia.com/contact.aspx 
Table of Contents
1) Retirement Planning: Introduction2) Retirement Planning: Why Plan For Retirement?3) Retirement Planning: How Much Will I Need?4) Retirement Planning: Where Will My Money Come From?5) Retirement Planning: Investments For Building A Nest Egg6) Retirement Planning: Tax Implications And Compounding7) Retirement Planning: Asset Allocation And Diversification8) Retirement Planning: Troubleshooting And Playing Catch-Up9) Retirement Planning: Conclusion
Introduction
Retirement is one of the most important life events many of us will everexperience. From both a personal and financial perspective, realizing acomfortable retirement is an incredibly extensive process that takes sensibleplanning and years of persistence. Even once it is reached, managing yourretirement is an ongoing responsibility that carries well into one's golden years.While all of us would like to retire comfortably, the complexity and time requiredin building a successful retirement plan can make the whole process seemnothing short of daunting. However, it can often be done with fewer headaches(and financial pain) than you might think - all it takes is a little homework, anattainable savings and investment plan, and a long-term commitment.In this tutorial, we'll break down the process needed to plan, implement, executeand ultimately enjoy a comfortable retirement.
Why Plan For Retirement?
(Page 1 of 24)Copyright © 2006, Investopedia.com - All rights reserved.
 
Investopedia.com– the resource for investing and personal finance education.
Before we begin discussing
how 
to plan a successful retirement, we need tounderstand
why 
we need to take our retirement into our own hands in the firstplace. This may seem like a trivial question, but you might be surprised to learnthat the key components of retirement planning run contrary to popular beliefabout the best way to save for the future. Further, proper implementation of thosekey components is essential in guaranteeing a financially secure retirement. Thisinvolves looking at each possible source of retirement income.
 Uncertainty of Social Security and Pension Benefits
First off, we need to be up front about the prospects of government-sponsoredretirement - they're not very good. As we all know, the developed world'spopulations are continuing to age, with fewer and fewer working-age peopleremaining to contribute to social security systems.For instance, consider that according to a 2005 study by Stephen C. Goss, chiefactuary of the Social Security Administration, the ratio of covered workers versusthe number of beneficiaries under the U.S.Social Securityprogram has beenreduced significantly over the years. In 1940, there were 35.3 million workerspaying into the system, with only 222,000 beneficiaries - a ratio of 159 to 1. In2003, the number of workers increased to 154.3 million, with 46.8 millionbeneficiaries - a ratio of 3.3 to 1.A similar pattern exists with other pension systems, including those in manyEuropean nations. At the same time, greater and greater burdens are beingplaced on the system, as more and more people retire and, due to advances inhealth care, are living longer than ever before.This "double-whammy" effect holds the potential to put significant strains on thesystem and could leave governments with no other viable option but to reducesocial security benefits or suspend them altogether for all but the poorest of thepoor.Privatepension plansaren't immune to shortcomings either. Corporate collapses,such as the high-profile bankruptcy of Enron at the turn of the century, can resultin your employer-sponsored stock holdings being wiped out in the blink of aneye.Defined-benefit pension plans, which are supposed to guarantee participants aspecified monthly pension for the duration of their retirement years, actually dofail every now and again, sometimes requiring increased contributions from plansponsors, benefit reductions, or both, in order to keep operating.In addition, many employers who used to offer defined-benefit plans are nowshifting todefined-contribution plansbecause of the increased liability andexpenses that are associated with defined-benefit plans, thus increasing the
This tutorial can be found at:http://www.investopedia.com/university/retirement/default.asp (Page 2 of 24)Copyright © 2007, Investopedia.com - All rights reserved.
 
Investopedia.com– the resource for investing and personal finance education.
uncertainty of a financially secure retirement for many.These uncertainties have transferred the financing of retirement from employersand the government to individuals, leaving them with no choice but to take theirretirement planning into their own hands.
Unforeseen Medical Expenses
While the failure of a social security system may not occur, planning yourretirement on funds you don't control is certainly not the best option. Even withthat risk aside, it's important to realize that social security benefits will neverprovide you with a financially adequate retirement. By definition, social securityprograms are intended to provide a basic safety net - a bare minimum standardof living for your old age.Without your own savings to add to the mix, you'll find it difficult, if not impossible,to enjoy much beyond the minimum standard of living social security provides.This situation can quickly become alarming if your health takes a turn for theworse.Old age typically brings medical problems and increased healthcare expenses.Without your own nest egg, living out your golden years in comfort while alsocovering your medical expenses may turn out to be a burden too large to bear -especially if your health (or that of your loved ones) starts to deteriorate. As such,to prevent any unforeseen illness from wiping out your retirement savings, youmay want to consider obtaining insurance, such as medical andlong-term careinsurance(LTC), to finance any health care needs that may arise.
Estate Planning
Switching to a more positive angle, let's consider your family and loved ones for amoment. Part of your retirement savings may help contribute to your children orgrandchildren's lives, be it through financing their education, passing on a portionof your nest egg or simply keeping sentimental assets, such as land or realestate, within the family.Without a well-planned retirement nest egg, you may be forced to liquidate yourassets in order to cover your expenses during your retirement years. This couldprevent you from leaving a financial legacy for your loved ones, or worse, causeyou to become a financial burden on your family in your old age.
The Flexibility to Deal With Changes
As we know, life tends to throw us a curve ball every now and then. Unforeseenillnesses, the financial needs of your dependents and the uncertainty of socialsecurity and pension systems are but a few of the factors at play.Regardless of the challenges faced throughout your life, a secure nest egg will
This tutorial can be found at:http://www.investopedia.com/university/retirement/default.asp (Page 3 of 24)Copyright © 2007, Investopedia.com - All rights reserved.

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