Planning for Retirement

Right now, it might feel like you have your life ahead of you. Someday, though, you'll probably want to stop working and live off the money you've saved up for retirement. You may be thinking, "isn’t that what we have Social Security for? When I retire, won’t I start collecting the Social Security benefit that I am paying for others to have now?"

Your Social Security benefits are determined by how much you contribute to the system and how old you are when you start claiming benefits. The more money you make in your lifetime, up to a point, the more you get back in monthly benefits. Also, the older you are when you start collecting benefits, the larger your benefit will be, based on how much you have paid into the system.

As we discussed in an earlier module, Social Security has some funding issues that may affect how long it will be able to keep going. Regardless, even if it is around when you retire, it won't be enough to fund all the things you'll need or want to do. You'll need some kind of retirement savings of your own to fall back on. According to the National Academy of Social Insurance, Social Security typically replaces about 40 percent of workers' pre-retirement income.

How much will you need? This depends primarily on two things: how much you spend every year and how long you'll live. Since you can only guess the answer to the second question, let's focus on the first. Many financial experts estimate that you'll spend 70-80 percent of your pre-retirement income after you retire. If you make $100,000 a year, that's $70,000. You might spend more or less depending on how big your dreams are.

As for how long you'll live, you should plan for at least twenty years, but it's impossible to know. Of course, it's much better to have your retirement fund outlive you, than the other way around, so play it safe and assume you'll live well into retirement.

Regardless of how much you'll need, your retirement investments are just like other investments: the more you save and the longer you invest it, the more you'll have. And since retirement is so far away for you right now, time is your biggest ally. The earlier you start saving, the earlier you can put compounding interest to work for you. It's a lot harder to play catch up later!

Retirement Planning Options

When you begin working full time in the near future, you'll have to make some decisions about retirement plans if they're offered through your employer. Even if they aren't, you'll need to know about other options that you can pursue. You will examine some of these in this interactivity. Click the player button to begin.

View a printable version of this interactivity.

Now that you have started thinking about some of the things you need to do in order to retire well, see some other changes that you can make to increase your retirement fund. Play countdown to retirement at the Practical Money Skills website.