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Planning retirement? Don’t forget about now

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Plan to live it up in retirement?

Are you sure you really want to?

Maybe that seems like a silly question. After all, everyone hopes to live comfortably in those later years. We want to travel, spoil grandchildren, indulge in hobbies. And we're told that if we work hard, skimp and save and invest wisely, we may well afford all these things.

Assuming, of course, that a bolt of lightning doesn't get you first. Some folks, after all, depart early.

The more real this gloomy possibility becomes, the more you wonder how much present happiness you should skip to save for a future you may never enjoy.

We are barraged with financial advice urging the most aggressive saving, and, of course, many of us will live to be very old and will need lots of money in retirement. But isn't there a middle ground, a balance that permits living well now as well as later?

Most people, I suspect, worry about making the right tradeoffs between the present and future but don't put too sharp a pencil to the issue. We pay the bills, save what we can and hope for the best.

But it doesn't actually take a lot of sophisticated planning to get a quick glimpse of a few "what if" alternatives. Look at the insight you can get playing around with the retirement planning function in Quicken Deluxe 2000, a $49.95 software package.

Suppose you are 40 years old, have $100,000 in investments that earn 8 percent a year and can save another $5,000 a year. If inflation is 3 percent and you increase your annual savings by 3 percent, how much money would your investments spin off if you retire at 65 and spend all your income and principal over the subsequent 20 years?

After paying taxes, you'd have about $25,000 a year in today's dollars. (You'd actually have about $52,500 to spend the year you turn 65, and more each year after, but inflation would give that the buying power that $25,000 has today.)

Suppose all the numbers were the same except you saved $3,000 a year instead of $5,000. Then you'd have about $20,000 a year in retirement instead of $25,000. That reduction isn't very large because so much of the investment's ultimate value is due to the $100,000 already saved today.

So there's the trade-off: You can have $2,000 more a year now, enough for a nice vacation every year, if you give up $5,000 a year in retirement. Clearly, you'd give up more than you'd get in absolute dollar value. Except that the $2,000 you get is guaranteed because you get it now — you know you'll have it to enjoy. Perhaps the $5,000 you give up is something you won't need, anyway. You may have a pension, other savings, Social Security or an inheritance to make up the difference.

This isn't to suggest that everyone raid their retirement accounts to go wild. But it is possible, without a daunting amount of work, to devise a basic long-term saving and investment plan that balances the present and future.

Then, instead of just saving whatever you can and being dogged by worries that it's never enough, you can set a specific saving target that may leave a surplus for enjoying life now — a surplus that can be spent without feeling guilty.

The quick look I've described is really just a start.

But first, think hard about the kind of life you want, both now and in retirement. What does that life cost in today's dollars? Can you trim costs, or substitute one pleasure for another, without really diminishing the joy you get out of life?

Maybe being rich in retirement isn't that important. Perhaps you won't be able to afford a round-the-world cruise when you're 70. But if you'd had 10 great vacations when you were younger, would it matter?