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Plan the Perfect Retirement

You have three big questions about your retirement plan:

  • Will I be able to retire?
  • Will my money last as long as I do?
  • What will my fallback be, now that cat food is tainted?

They're easy to ask, but not quite so easy to answer. That's because your retirement plan has many moving parts -- at least eight, in fact. Are all your moving parts working together to produce a well-oiled, accelerating retirement plan -- or will your retirement be ready for the scrap heap by the time you arrive at age 65?

In this article, we're going to look at the eight moving parts. Plus, if you'd like more detail and some expert backup if you have any questions, starting Oct. 8, the Fool's Rule Your Retirement team will shepherd subscribers through the "Plan the Perfect Retirement" online seminar. (Sign up for free by clicking here.)

We call these moving parts your "levers," because pushing and pulling them can have a huge impact on your retirement. As you read through them, think about which ones you have the most control over, and get pulling!

1. How much you save
This is the most obvious "moving part," but it can be the most powerful since it's a guaranteed winner -- no need to count on a moody market or low yields to grow your net worth. If you're stuffing your IRA and 401(k), you're getting tax benefits galore.

2. How much you spend in retirement
The less you need in retirement, the less you must have saved before you retire. You've probably heard that you only need 70% of your pre-retirement income, but in my experience, that rule of thumb is missing a few fingers. I know retirees who live on less than $30,000 a year, and I know retirees who spend more in retirement than they did when they were working. You need to develop a retirement budget before you retire, to make sure you'll have enough income to pay for it.

3. When you retire
Every year you delay retirement means another year of contributions to your savings, another year of investment growth, and one less year your plan has to support you. Plus, you'll increase the value of your other retirement benefits, such as...

4. Social Security and pensions
For every year you put off asking for your Social Security checks to start, your benefit will increase approximately 10%. The same goes if you were covered by a defined-benefit plan (a.k.a. traditional pension) at any time during your career. If you don't have enough savings to retire, claiming Social Security and pension benefits early can be a huge mistake.

5. Investment returns and costs
Let's say it's 1997, and you decided to invest your retirement savings in just one stock. You figured that if you picked from among the seven largest publicly traded U.S. companies, you'd be pretty safe.

Well, let's see. Below are the total price returns from Oct. 3, 1997, to Oct. 4, 2007 of the companies that were then kings of the hill:

Company

1997 Market Cap

Return, 1997-2007

General Electric (NYSE:GE)

$226 billion

80.5%

AT&T (NYSE:T)

$192 billion

34.7%

Microsoft (NASDAQ:MSFT)

$163 billion

74.6%

ExxonMobil (NYSE:XOM)

$161 billion

180.2%

Coca-Cola (NYSE:KO)

$155 billion

(7.7%)

Intel (NASDAQ:INTC)

$152 billion

10.6%

Merck (NYSE:MRK)

$122 billion

3.4%

Screening data from Capital IQ.

Each company is still in business a decade later, so that's the good news. But your retirement prospects would be very different, based on which company you chose.

Of course, you'd never bet on just one stock. But the chart shows that even the stocks of the largest, blue-chippiest American companies can have a wide range of returns. Who in 1997 would have thought that shares of global superbrand Coke would be in negative territory after a full decade? That's why, for most investors, a broadly allocated, internationally diversified, low-cost portfolio is the way to offer upside while protecting backside.

That will go a long way to bringing your investment returns into a more predictable range. But they will still be unpredictable; you can't control the stock market. However, you can control how much you pay to play. For every 1% in commissions and fees you hand over to Wall Street, that's 1% less of your savings to compound through the years. That can cost you tens to hundreds of thousands of dollars over the years.

6. Part-time work in retirement
It's amazing what a part-time job will do for a retirement plan. And as the baby boomers retire without qualified employees to fill their shoes, employers will be more willing to offer flexible schedules.

7. A lump sum
Will you sell the four-bedroom house and buy a two-room condo when you retire? Do you figure prominently in your great-aunt's will? Planning to sell your piece of carpet from Elvis' jungle room? Will you take out a reverse mortgage? If you can count on these "windfalls," then factor them into your plan.

8. Your paycheck and how fast it grows
Paychecks, on average, grow a bit more than inflation. However, a real go-getter -- who enhances his or her "human capital" and earns raises and promotions beyond the average person -- will be able to save more, and will increase the value of other benefits, such as Social Security and a traditional pension.

Putting it all together
In the July issue of Rule Your Retirement, we looked at these "levers" in more detail, using our online financial-planning tool to estimate how many years they added to a nest egg's longevity. Each one can add two to 11 years to how long your money will last.

Find out how long your retirement savings will last, and when you can begin living off those savings. Do it on your own, or with our help by reserving a cyber-seat at the "Plan the Perfect Retirement" seminar (which includes unlimited use of our financial-planning tool). All you have to do is give our Rule Your Retirement service a try.

Robert Brokamp, who does not own shares of any of the companies mentioned in this article, does own a piece of rug from Elvis' jungle room. Microsoft, Intel, and Coca-Cola are Motley Fool Inside Value recommendations. The Motley Fool has a disclosure policy.


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