Retirement is a fairly recent concept. Before the 20th century, most people worked until they were physically or mentally unable to do their jobs. There were no government or employer pensions, and families or communities were responsible for the care of elderly and infirm relatives, neighbors and friends. Barely a century later, we expect to live comfortably in our later years, sustained by financial resources that allow us to enjoy our favorite activities. Our likelihood of success depends on a combination of planning, flexibility and luck.


Planning begins with confronting our mortality—predicting how long we will live. The Social Security Administration (SSA) life expectancy chart tells me I may live for another quarter century or so. I may decide to retire at age 65, a few years later or potentially never. Unless I become physically or mentally unable to earn a living, I may not need to save much for retirement.


Regardless of my intent, creating a plan forces me to make decisions. How do I want to live the rest of my life? How much money will I need? What if I live for 50 more years instead of 25? How will I cover unexpected and unbudgeted expenditures? What if I lose my job or a thief steals my identity and assets?


The fact is that there is no such thing as security. Without luck and the willingness to alter our plans in unexpected circumstances, there is no guarantee that I will have a comfortable lifestyle later in life. But we have to start somewhere, and the first step is deciding how we want to live. Let’s assume that you need an income of $100,000 per year to fund your desired lifestyle. Your employer pension will provide $35,000, and you expect $25,000 in Social Security. This leaves a gap of $40,000.


The “4 percent rule” requires you to create a nest egg of sufficient size to fund that gap for 30 years by withdrawing 4 percent of the balance each year. If you have $1 million, you would be able to withdraw the $40,000 you need. With $2.5 million, you would be likely to generate withdrawals of $100,000 each year, which would cover your needs if the Social Security system collapses and your pension has been underfunded. Only $20,000 would be available annually if you saved a mere $500,000.


This rule only works if you live for less than 30 years and the economy is healthy enough to ensure sufficient earnings for your savings. If you don’t have enough time to build your nest egg, then you will have to wait for an inheritance, win the lottery, start a new business, sell off assets or alter your expectations.


What are your expectations? Most people assume that they will spend less during retirement, but experts estimate that you will need 70–90 percent of your preretirement income to maintain your current standard of living. You may want to travel or buy new toys such as a sailboat or vacation home. Medical expenses may increase. Tax rates are unpredictable. You may be paying off lingering credit card debt or a mortgage. And don’t forget increased expenses due to inflation.


Using a retirement planning calculator prompts you to consider when you expect to retire, how much money you will need and what sources will provide it, and how much you need to save to meet your goals. A calculator for retirement planning and budgeting can be found at www.fidelity.com/non-profits. The SSA (www.ssa.gov) also offers tools for calculating your Social Security benefits and estimating your retirement income. More online resources are available from the Administration on Aging (www.aoa.gov), an organization that provides information on planning for a more financially secure retirement.


The decisions involved in planning for the later stages of your life can be overwhelming. Will you stay in your home or sell it and move to a retirement community? Should you restructure your insurance coverage? Should you build your nest egg with pretax contributions to (and taxable withdrawals from) a 401(k) or 403(b) or after-tax contributions to (and tax-free growth from) a Roth IRA? Will your employer match contributions to its pension fund, or is an SEP IRA your best option? A $2,000 investment at age 30 will grow at 4 percent to almost $60,000 when you reach age 50 and nearly double again by age 60. If you’re already 50 with little saved, is it too late?


As advisers will tell you, it’s never too late to start planning and saving for the future. An experienced financial planner may be the best investment you make in retirement. Next month, we’ll discuss how a professional can help you focus on making decisions that enable you to live the life you dream of during your last (and best) years.