Academic journal article Journal of Accountancy

Retirement Planning: Ten Key Steps

Academic journal article Journal of Accountancy

Retirement Planning: Ten Key Steps

Article excerpt

Coping with the pressures and demands of everyday practice, some practitioners may not be overseeing their own financial circumstances as carefully as they should. Actually, retirement planning is not really as complicated as it may seem. Although some aspects are best left to experts, such as financial planners, tax specialists, attorneys or insurance and investment advisers, most of your own retirement planning should not be left to someone else. Here are 10 key steps that lead to a "first draft" of your own retirement plan.

TEN KEY STEPS

Step 1: Determine how much income you'll need. The fundamental challenge is to provide a certain level of annual "buying power" (not merely annual income) for the rest of your life and the life of your spouse. Inflation is the major obstacle, and your plan must confront it directly.

Choose a level of income in current dollars that would provide adequate buying power today in the region where you plan to live. Unless you expect major changes up or down in your standard of living, one good rule of thumb is to provide for buying power equal to 65% of your current income. Then decide how soon you would like to retire. Turn to exhibit 1, page 71, and unless you already have done some planning, be prepared for some unpleasant "sticker shock."

Exhibit 1 shows the annual dollars required to provide buying power equivalent to current income from $30,000 to $50,000 at any point up to 40 years in the future, assuming 4% inflation. Most planners assume 3% to 5% inflation, and it would be dangerous to assume a lower rate. The arithmetic is proportional, so to calculate dollars required to provide buying power equal to $100,000 current dollars, for example, multiply the figures for $50,000 times 2.

Exhibit 1: Income Dollars Required to Sustain Buying Power Assuming 4%

Inflation

                 Current income:
Year   $30,000      $40,000        $50,000
 1      31,200       41,600         52,000
 2      32,448       43,264         54,080
 3      33,746       44,995         56,243
 4      35,096       46,794         58,493
 5      36,500       48,666         60,833
 6      37,960       50,613         63,266
 7      39,478       52,637         65,797
 8      41,057       54,743         68,428
 9      42,699       56,932         71,166
10      44,407       59,210         74,012
11      46,184       61,478         76,973
12      48,031       64,041         80,052
13      49,952       66,603         83,254
14      51,950       69,267         86,584
15      54,028       72,038         90,047
16      56,189       74,919         93,649
17      58,437       77,916         97,395
18      60,774       81,033        101,291
19      63,205       84,274        105,342
20      65,734       87,645        109,556
21      68,363       91,151        113,938
22      71,098       94,797        118,496
23      73,941       98,589        123,236
24      76,899      102,532        128,165
25      79,975      106,633        133,292
26      83,174      110,899        138,623
27      86,501      115,335        144,168
28      89,961      119,948        149,935
29      93,560      124,746        155,933
30      97,302      129,736        162,170
31     101,194      134,925        168,657
32     105,242      140,322        175,403
33     109,451      145,935        182,419
34     113,829      151,773        189,716
35     118,383      157,844        197,304
36     123,118      164,157        205,197
37     128,043      170,724        213,404
38     133,164      177,553        221,941
39     138,491      184,655        230,818
40     144,031      192,041        240,051

[ILLUSTRATION OMITTED]

Step 2: Decide when you want to retire. Average life expectancy for middle-aged professionals, both male and female, now reaches well into the seventies, so it is prudent to plan that you will live well into your eighties. Add inflation to the equation, and you may decide to retire later, rather than sooner. …

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