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Retirement Reality Check

   

Nineteen ninety five was a great year for investors. After all, who could hope for more than the 30 percent run-up in prices? But don't delude yourself. It isn't going to last forever. Over the long term, stocks increase by about 10 percent a year. Given that cold fact, it's time to think about a realistic retirement plan.

Let's start with what your actual rate of return is likely to be. Let's face it, few people are 100 percent invested in stocks. Even if they are, there are still commissions or management fees and other expenses that will reduce your rate of return.

Don't forget inflation either. Even if inflation remains subdued over the next 40 years (and that is doubtful at least for some of that time), it will take a big bite out of your retirement funds. For example, assume that inflation runs at 3 percent a year and you manage to accumulate $700,000 by the time you retire in 35 years-not too unreasonable if you put away $4,000 a year at, say, eight percent a year. Your actual purchasing power will only be about $255,000 by the time you intend to hit the golf course. So much for that luxury condo in Boca Raton. But inflation will also help you by boosting your salary and your investment income so don't fret too much about it.

Living well past 65 should, however, be a major worry. Given advancements in technology and better environmental conditions, the fastest growing segment of the population are those over 85 years of age. How many years have you budgeted in your retirement plan? Will you need to work longer and retire later given your current investment plan? Given the way companies are shedding workers, will you be able to find a job at an older age?

Bottom line: rather than trust your fate to the gods, isn't it better to find ways of investing more each year in stocks with strong, long-term investment potential? That way, if live to be 100, you won't have to worry about where your meals after 85 will come from.

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