April 2000

 

Retirement Considerations for Baby Boomers
Jamie H. Thompson, thompsonja@missouri.edu

In 1996, the first Baby Boomers turned 50—retirement is rapidly approaching. At the age of 50, not only does a Boomer’s focus turn towards retirement but they also face the realization that their lifetime dream of retirement at the age of 55 simply is not going to happen. For many, their worry is that they may not accumulate enough funds to retire at age 65.

How much will retirement cost? And how long will I need retirement income? These are the two most important question every Baby Boomer should ask themselves.

If retirement is more than five years away, then the answer to both questions is harder. Our world is changing so rapidly. It has become harder to factor in all the variables that must be considered in calculating the full cost of retirement.

With all the technological advances we have today, many prices have come down. On the other hand, technology will result in new products on the market that we must have. Technology complicates the process. How do we accurately project future costs?

Where your live and how you live must also be considered. Will you stay in your current home? Will you sell your home and move to warmer climates? Often the answer to how much will be needed is not much more than an educated guess.

The first step in determining "how much" is to estimate the percentage of current income that will be needed in retirement. The most commonly used percentage is around seventy-five.

To determine the dollar amount, take net income (take-home pay after taxes and deductions) and multiply it by 75%. Add to this amount, projected annual income taxes. The resulting amount is the gross retirement income required to maintain the desired retirement standard of living.

Remember to increase gross retirement income by an estimated inflation rate for each year between now and the year of retirement. And do not forget to adjust for inflation for each year in retirement.

How long will you need retirement income?—the second question—is just as hard to answer. Baby Boomers are going to live longer than they think they are. "Eight percent of those individuals who are 65 years old will live to be 100." (Hass, 1998) When a husband and wife reach the age of 65, the odds are that one of them will live to be 93 years old. Medical advances are such that we do not know with certainty our longevity.

What we do know with certainty is that Boomers will live longer than they anticipate, they want their money to last as long as they do, and they do not want to reduce their standard of living at any time during their retirement.

For forty plus years (assuming retirement at age 65), our employers have provided us with a paycheck each month. During our retirement we are responsible for providing our paycheck for at least 25 years. Retirement takes careful planning.

 

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