An issue that plagues many retirees is how to manage retirement income in the face of the increasing cost of living. Even with moderate inflation, costs of living tend to increase over time. This can reduce the retirement income retirees can obtain from fixed income investments, even while they must meet higher expenses. Where can you find a source of retirement income that can keep of with inflation, along with your expenses?
Our suggestion: consider putting some of your money into a portfolio of large capitalization dividend-paying stocks as an income generation alternative. This retirement investment could help to provide you with a retirement income that keeps pace with the rising costs of living. For the 30 years ending 12/31/04, the stream of dividends from an investment in a basket of stocks representing the S&P 500 index generated a growing stream of income. During that same period, interest rates from CDs fell 7.42% to 1.85% (the S&P 500 is an unmanaged group of securities considered to be representative of the stock market in general; it is not possible to invest directly in an index).
Data 1/1/75 through 12/31/04. Dividends based on a $10,000 investment 1/1/75 in a basket of stocks representing the S&P500 from American Funds Distributors. Interest rates from Federal Reserve year end rate on 6 month CDs. You cannot invest directly in an index. Past performance is not a guarantee of future results and an analysis of a different period may have revealed different results.
Although publicly traded stock can help you to manage inflationary risks, the dividends that these stocks pay out are highly dependant upon the overall profitability of the issuing company. Therefore, you will want to strongly consider the dividend payment history of the company prior to making such a retirement investment.
A few additional things should be considered about stocks and CDs. First publicly-traded stocks tend to be suited for investors that are seeking asset appreciation and are willing to take on the additional investment risk. On the other hand, CD's are suited for investors that are concerned about preserving their principal investment and are adverse to market risk. With this in mind, it should be remembered that CDs are FDIC insured while publicly-traded stocks are not. The values of publicly-traded stocks fluctuate in value and may result in either a gain or loss upon sale.
The retirement income from these investments is also subject to differing income tax rules. Stock dividends are generally subject to federal income tax of 15%, while CD interest is taxed as ordinary federal income tax rates, which can range anywhere from 10-35%. CDs may have an early withdrawal penalty if money is taken prior to maturity. On the other hand, the stock of most largely capitalized companies can typically be purchased and sold at any time when the market is open.
But as you can see from the chart at http://www.retirement-income.net/income_basics.html, stocks beat CDs hands down for retirement income.
Early retirement is becoming an "in" thing these days that a lot of people no matter what age brackets they belong to are not just very open in talking about retiring early, but are actually doing it. All of a sudden, talk of retirement is not just for the elderly anymore since even the younger ones are becoming interested in it.
When people plan for their retirement, the first thing that crops up in the mind of many is how to live the dream lifestyle, one has always yearned for? Many people dream of spending their post-retirement years in luxury resorts or by playing golf to their hearts' content and so on.
The time you retire and how really depends on how you plan it but the question is how to calculate retirement income and assess if you will be able to live the sort of lifestyle which you want to live. Few people have modest tastes during retirement, after all it's the time to accord yourself most of the stuff you never had the opportunity of doing when you were younger, so most people like to dream and get a plan that fulfills their dreams.
Calculating your retirement income goes beyond just thinking about it. You should look into some factors whether you can realistically afford early retirement and settle on whether you are ready to work as hard as you need to afford early retirement. This is where a retirement calculator can help you identify your income as it will determine how you will be able to enjoy living comfortably and retire early.
The most important part in getting the information you require is to identify the payout period. This is the length of time which you require your retirement funds to last for. In getting your payout period, you need to estimate your probably life expectancy. The IRS can provide you with a wonderful tool for this but you might want to pin on an extra 10 years or so to arrive at the payout period.
After you have calculated your payout period, you next job is to assess the rate at which you are likely to withdraw funds. Take the inflation into consideration when you do this calculation. You would also like to assess the various investment risks that you would have to take for the fund to remain healthy and viable.
Retirement income is usually calculated on an annual basis taking into account your early requirements for funds. Take your annual expected expenditure and then add a further 5 to 8% to keep a comfortable buffer, for living well year after year. Taking into consideration the historical inflation data, it would be wise to take the inflation trend to be around 5% per annum.
It can also be easier to calculate your retirement income by searching on the internet and find resources which provide online retirement calculators. These financial calculator tools range from very simple to complex but the bottom line is they will help you in providing most of the answers to your queries and take you nearer to your luxurious retirement dream.
Both Larry Klein & Raymond Cheung are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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