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Many of us start dreaming of retirement from the first day we start working. It's a lovely
fantasy, but in reality, many of us haven't saved nearly enough money to retire when we'd
like to. How do you know when you can retire? This is the bottom line on how you can calculate
your retirement age.
Hi, I'm Pilar Gerasimo with a Bottom Line Expert report on figuring out how and when
you are going to be able to retire. Joining me is Tom Henske, partner with Lenox Advisors
in New York City.
Tom, obviously financial planning for retirement is a very big, complicated topic, but when
someone begins to dream of retiring, what is the very first thing that he or she needs
to sort out?
First thing, you have to understand what you spend today, because if you don't understand
what you're spending today, it's almost impossible to figure out what you're going to need to
be spending in retirement. I don't fall into the camp that you need 60% of your preretirement
earnings in retirement; I just think that there are so many problems with that assumption.
Really, you need close to 100% of your preretirement earnings. I also think it depends on where
you're going to live or it might even depend on who you need to take care of. So in today's
day and age, do you need to take care of your kids or maybe even take care of your parents
in their retirement?
Is there some kind of formula...or how do I figure out how much I need to save to be
OK when I retire?
You figure out how much you need today, then you figure out how are those expenses going
to change one way or the other in retirement. Now I like the 4% rule. The 4% rule is what
pot of money do I need to accumulate that at 4% will replace those preretirement earnings?
Let me give you an example—if you had a million dollars and you were getting 4%, that's
$40,000 of income replacement. Depending on how much you need, that might or might not
be realistic. Now you start to rethink—how long am I working for? So maybe it's not 65
and now it's 75. Where am I going to live, or what expenses are going to be necessary,
absolutely necessary? And which expenses can you do without?
Is there some optimal time to retire from a tax point of view?
Taxes definitely play into it, but I don't think it's the big thing to worry about. The
big thing to worry about is, do you have enough money? Have you saved enough? Have you accumulated
enough money to retire?
The bottom line on figuring out your retirement age—a few things you're going to need to
know. One—how much money are you spending now annually? You have to decide how or if
that figure is going to change postretirement. Next, do make sure that you are being conservative
in the amount of interest you think that your current savings are going to generate. On
average, you want to assume no more than 4%.
Thank you, Tom Henske, Lenox Advisors. For more smart money advice from top experts,