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Planning to retire isn't easy

Workers nearing the end of their careers face complex issues in planning for retirement. Two of the biggest decisions are how much to plan to spend in retirement and how to maximize income through retirement programs, including Social Security.

Many financial planners use flat percentage changes to estimate income needs in retirement, such as 70 percent of the expenses incurred while working, or even 110 percent if retirement plans call for increased travel or changes in lifestyle. Other planners reduce expenses based on the projected retirement income and inflation. This creates a fallacy in retirement planning in that it is assumed all expenses in retirement increase at the same rate of inflation.

One of the first considerations in planning expenses in retirement is knowing what will be needed, or desired. Retirees spend more on health care and leisure and therefore must plan for these expenses to increase either by saving more or decreasing other expenses. This is especially important as health care and leisure costs have been increasing more than the normal inflation rate, tracked by the Consumer Price Index.

Merely planning according to changes in the CPI will not provide an adequate estimate for retirement expenses and may even leave retirees with not enough assets to cover the expenses and result in living a lower standard of life.

In fact, the Bureau of Labor Statistics, which tracks the CPI, has found an index that measures inflation for older consumers rose more than the normal CPI. The best step to take now in planning for retirement expenses is to evaluate current health and expected leisure activities in retirement. If health, or family history, is not well, plan to spend more on health in retirement. If frequent European trips or a vacation home are in the plans, plan to save more for that. Start creating a retirement budget now.

The next step in planning is knowing when to start receiving Social Security. The correct answer is an individual situation that involves medical condition and other sources of income. Most retirees take Social Security as soon as they are eligible, usually 62 years old, even though it results in a decreased benefit by not waiting until full retirement age. This is where expert help comes in to discuss how to optimize Social Security income. Taking it too early can reduce income needed for higher expenses, such as those previously mentioned, and taking too late can result in not receiving enough over a lifetime.

As you can see, financial planning for retirement is just as important as planning for anytime in one's life, if not more.

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