Five Questions to Determine Your Financial Future

There are many factors to consider when saving for retirement, such as your life expectancy, desired retirement lifestyle, personal goals and more. With so many variables, is it actually possible to save too much for your retirement? The simple answer is probably not, because the more you save, the better chance you may have to support yourself.

However, if you are overly focused on your retirement savings and ignoring other important financial goals, you may be putting your overall financial stability at risk.

The Big Picture
When saving for retirement, it is extremely important not to lose sight of your financial big picture. Begin by answering the following questions:

• Do you have money saved in an emergency cash reserve in case of a job loss or an unexpected repair? Before you sock away all your savings in a 401(k), IRA or other long-term savings tools from which you receive penalties for early withdrawal, it is important to stash away at least four to six months worth of expenses. These emergency reserve funds should be kept in a liquid account, such as a money market or savings account, for easy accessibility.
• How is your credit card debt and credit score?  If you are carrying significant credit card debt, you should consider paying down your debt quickly. You should also check your credit score. You can get a free credit report and score at www.freecreditreport.com. A good credit score will help you get better interest rates from lenders.
• Do you plan to buy a home? According to a 2005 survey by Coldwell Banker, the average price of a four-bedroom, 2,200 square foot home is less than $300,000, but of course, that price depends on where you want to live. For example, a house fitting that description may cost more than one million dollars in many parts of cities such as Los Angeles, San Francisco, Boston or New York. If buying or upgrading a house is a goal, then you should consider setting up a savings account specifically for this goal, and separate from your long-term retirement savings, where the money will be accessible.
• Do you have adequate insurance including life, disability income, homeowners and long-term care? Insurance is the backbone to any financial plan, and being underinsured or not having insurance can instantly put you and your family's financial security in jeopardy. Remember to not only insure the breadwinner, but also a stay-at-home parent, as the value of their role as child care provider, chauffer, maid, cook, etc. has been estimated at a $70,000 salary, according to 2004 State Farm Insurance report.
• Are you saving enough money for your kids' college education? Including room and board, the average cost of attending a private college is $29,026 per year and $12,127 at a four-year public university, according to the Trends in College Pricing 2005 report. If you are not saving enough for college education, there are many savings and investment vehicles available to help you, such as a 529 College Savings Plan.
• How Much to Save
  Once you have prioritized, balanced, budgeted and planned for these
  other financial goals, you also must estimate how much money you need
  to save specifically for retirement.

  While there is no exact formula to calculate the perfect retirement
  savings, a guide is to save between 70 and 80 percent (some will need
  100 percent of current income) of your pre-retirement salary for each
  year you expect to live in retirement. Of course, this depends on your
  desired retirement lifestyle. For example, if you are planning
  luxurious vacations or have expensive hobbies, then you may need to
  save more.

  Furthermore, the 70 to 80 percent salary guide assumes that
  housing costs will go down (because mortgages generally get paid off),
  as will transportation and clothing costs. However, some costs, like
  medical expenses, tend to go up.

  You also need to save based on your specific life expectancy.
  Life expectancy is based on gender, family history and your current
  health habits. If you are expecting to live long into retirement or
  retire early, you will obviously need more cash. You may also want to
  consider saving enough so that there are funds left over after you die
  to bequeath to your heirs and/or to your favorite charity. Therefore,
  estate planning should be integrated in your retirement planning as
  well.

  Saving for retirement is indeed a major financial priority, and
  in most cases should be your top financial goal. However, you must also
  be careful not to neglect other financial goals that could leave you
  financially vulnerable. A qualified financial advisor can help you
  develop a personalized financial plan and balance your financial goals.

  Dena Shapiro Frenkel is with Ameriprise Financial Services Inc. in Baltimore, Md.

  Source: Daily Record and the Kansas City Daily News-Press. Powered by Yellowbrix.