How to Make a Successful Retirement Plan

Even for those people who love what they do, retirement is one of those things that constantly stays in the back of everyone's mind. To determine when you'll be ready for retirement, there are a variety of factors that have to be weighed. What percentage of your income can you be comfortable living on? Do you plan to retire completely or try out a new career? These questions and more help to determine how long you would have to work before retiring. Dave Rowan's L.A. Times article sums up some of the major points made by financial planning expert Craig Israelson on the finances behind a successful retirement.

The first topic he mentions is known as the "4% Rule." According to this rule, it is possible to withdraw 4% of one's retirement savings from an investment portfolio each year without ever running out of money. Financial planners set the optimal amount at 4%, but some retirees have to withdraw less, while others who have saved for longer are able to withdraw more without running out. This concept, however, doesn't really help people in their 40s or 50s, who are planning for a retirement in the distant future. For those closer to retirement, the 4% Rule helps because it allows them to determine if they have enough money in savings to combine with other sources of retirement income and have enough money to cover a projected budget.

Israelson has a different method called "RAM" that allows younger people to plan for retirement far down the line. This method involves a lot more mathematical calculations but gives future retirees a way to calculate how financially stable they would be at each age. RAM, or retirement account multiple, calculates the probability that a retiree would never run out of money if they retired at 65, lived to 100, and withdrew half of their final yearly salary (the salary being earned at 65 based on inflation rate of 3%) as an addition to other retirement income like Social Security. Based on Israelson's calculations, a RAM value of 7 or higher means that the retiree is in good shape and will have over 70% likelihood of never running out of money if they live to 100 years old. A RAM value of 18 or higher means that the retiree will never run out of money, no matter how the economy changes.

The RAM is calculated as follows:

First, the retiree's final salary is calculated based on a 3% inflation rate.

Final Salary = Current Salary x (1.03)^(65 - Current Age)

Next, the total amount the retiree will have in savings is calculated based on an average value of 7% as the increase in the value of their retirement portfolio.

Final Retirement Savings = Current Savings x (1.07)^(65 - Current Age)

Finally, the RAM value is calculated using those two values.

Projected RAM = Final Retirement Savings / Final Salary

The more you are able to save now, the better off you will be in the long run. However, it depends on the person. Some people are comfortable with spending money now to enjoy a higher standard of living, even if it means they will have a RAM score closer to 7. Others look for any way to reduce expenditures today in order to get a RAM closer to 18, to ensure that they won't have to worry about their future finances. Additionally, the previous RAM calculations didn't include additions to the retirement portfolio. If someone were to continuously save and invest more money toward retirement, they would find their RAM value increasing, based on the following calculation:

Extra Retirement Savings = [(Current Salary + Final Salary) / 2] x (Savings Rate) x (65 - Current Age)

Of course, these calculations aren't perfect, since the economy is constantly fluctuating and many assumptions have to be made about future income and changes in saving patterns. However, it should be able to give savers a good look at how well off they will be in their retired years. The RAM is simply an approximation method, not an exact science, but it should give people a sense of whether they will retire successfully and how long they may have to wait to do so. 

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Millennials Better at Saving Than Previously Assumed

Millennials are often stereotyped as being bad with money. Many people view those 20-something-year-olds as frivolous spenders, more concerned with the here and now than with the future. However, according to recent research, Millennials don't actually deserve this classification. According to Jonnelle Marte's L.A. Times article, they are saving much more aggressively than in past years, and in some cases are saving more than their middle-aged counterparts.

In the study, "Millennials" were defined as consumers between the ages of 18 and 29, and the results blew away many assumptions previously made about their age group. About 62% of Millennials are saving more than 5% of their income for retirement, emergencies, or other future financial goals. This is a significant improvement from last year when only about 42% of Millennials put the same portion of their pay toward savings. Comparatively, it was found that about 50% of consumers between the ages of 30 and 49 were putting as much into savings.

Analysts believe that Millennials' interest in saving money for a rainy day may come from personal experience or what they saw family members go through. Many, especially those straight out of college, struggled to get a job during the recession. Others, even if unaffected themselves, watched as family members were hit by layoffs and saw how hard it was for parents or even grandparents to recover. Likely because of this, 40% of Millennials are putting their savings aside for an emergency, rather than for retirement or something else that would matter the most in the distant future. They know how hard it can be to survive if they unexpectedly lose their job, and as such, want to be sufficiently prepared.

How are Millennials able to save more money now than in previous years? Some are cutting their spending, realizing that instant gratification isn't worth potential financial struggles in the future. Others are getting better jobs or being promoted to better-paying positions in the recovering company, and therefore are earning more money and are more able to put some of it toward savings. Some went back to school when they found that they couldn't find work during the recession and are putting their degrees to use in getting jobs now.

Not all Millennials are choosing to put their money aside for emergencies. Many are saving in order to be able to afford big purchases in the near future. About 27% are saving for a future home, 26% are saving for a car, and 36% are saving to go on vacation. No matter what they are saving for, researchers agree that Millennials have come to understand the value of saving, often more than their older counterparts. When asked about their major goals, the majority chose "saving", while smaller, but still significant, portions chose "leading a healthy lifestyle" or "paying down debt." Saving money can have a positive impact on anyone's life, so it's a good thing that more individuals have come to realize the value of saving over spending.

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Find out more about us at www.sepulvedaescrow.net. Any Questions? Contact our Escrow Expert! Sepulveda Escrow Corporation (818) 838-1831. Follow our company on Facebook, Twitter, LinkedIn, and Google+.

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