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Chapter 5. Developing Your Retirement Pl... > Developing Your Retirement Plan - Pg. 49

Developing Your Retirement Plan 49 4. After you have put your strategy into action, you need to periodically evaluate where you are and make corrections based upon changes in your goal or your ability to stick with your strat- egy. That's why we had you list (in Chapter 4) your answers to the final question: What events might sidetrack your strategy? (The detours of life) All four steps will help us answer the big question: When can I afford to retire? Developing Your Retirement Plan We realize that most people will need help figuring out how much they should be saving to reach their retirement and other financial goals. To help you do that, we have developed two ways for you to answer the question, How much should I save for retirement? Option 1--The Lazy Approach:Save between 12 and 20 percent of your pay. (This would include your employer's contribution as well.) Follow this approach and, depending upon how old you are now, how long you've been saving, and how well your investments do, you may be able to retire at age 62. Note:We don't have a lot of confidence in Option 1. Option 2--Our Recommendation:Use our eight-step process to come up with a plan that is right for you. The best way to learn how to develop a plan that is right for you is to follow an example. You can use ours as a guide when you develop your own plan, using the blank worksheets we've provided in Appendix A of this book. The example and our worksheets will help you to stay on track. Eight Steps to Financial Independence The process involves eight simple steps, which we'll outline and explain through the rest of this chapter. To help out, we'll use our volunteer employee, John Dough. John read somewhere that people should plan to replace between 75 and 85 percent of their current gross income when they retire. This figure is referred to as your replacement ratio . He knows the figures vary according to the type of retirement expected and income levels. Will 75 percent be enough? Should he sacrifice to reach 85 percent? Rather than guess and stake his happiness later in life on some rough figures, John decides to fill out worksheets 1, 2, 3, and 4 using the blank forms found in Appendix A. He would like to retire at age 62. He's currently making $50,000. Worksheet 3 shows him that his annual retirement income goal should be $40,000 which is 80 percent of his current income ($40,000 ÷ 50,000 = 80 percent). Our Advice How much will I need? Only you can answer this question. But how right do you have to be? The answer: It depends upon how close you are to retirement. If you're in your 20s, or 30s, you can stick with our suggestion of replacing 75 to 85 percent of your current pay. If you're in your 40s, 50s, or 60s, it's worth it to work through the numbers. No matter how old you are, fine-tune your numbers every few years.