Free Money Finance

Three Big Retirement Myths

Here are three big retirement myths from MSN Money:

Myth No. 1: You should replace a certain percentage of your income in retirement.

"This replacement rate was developed by the industry in order to promote sales of their mutual fund products and is inappropriate for most households," Kotlikoff says.

Kotlikoff advocates what he calls "consumption smoothing." That means spending more in your working years, when there are more mouths to feed, and less in retirement, when it's just you and your spouse or perhaps just you alone.

To me, the "plan on spending 80% of your current income (or whatever percent) during retirement" is simply a very rough guide, call it a rule-of-thumb. It's an estimate for those people who don't want to (or can't) calculate what they will actually spend then.

Instead, I recommend that people estimate their actual retirement expenses by making up a mock budget. Of course there will be several things you'll have to estimate and you'll need to update it every few years, but still, it will give you a better picture of what you'll actually spend then the "80% rule."

One other tip I follow is to assume I'll get nothing from Social Security and I save accordingly. This way, I'll have plenty of cushion in case I estimate too low on my expenses (because, in actuality, I'll probably get something from SS.)

So, I guess I agree with them on myth #1.

Myth No. 2: You should hold a combination of stocks and bonds in your 401(k).

If you have both tax-deferred retirement accounts and regular investment accounts, you should hold stocks in the regular accounts and bonds in retirement accounts to reap the best tax rewards, Kotlikoff and Burns argue. Equities pay their returns as capital gains and dividends, which are taxed at a 15% rate or lower, depending on income. Bonds pay out interest that is taxed at the income tax rate, as high as 35%. But everything you accrue in a tax-deferred retirement account -- be it capital gains, dividends or interest -- is taxed as income at the higher rate when you take the money out.

I have a small percentage of my asset allocation in bonds and all of them are in tax-deferred accounts. This isn't to say that my only investments in tax-deferred accounts are bonds (I have stocks in them as well), just that all my bonds are in tax-deferred accounts (none in taxable/regular accounts).

Now I'm with them two for two. Here's the last myth:

Myth No. 3: A broker can help you get higher returns.

Although many money managers vow to beat the market, the odds are against it.

"About 80% of mutual fund managers underperform the market," Kotlikoff says. "In addition to buying securities that are risky, you are buying a money manager who is risky, and you are also paying a high price."

"You can do all this stuff on your own without paying high fees," Kotlikoff says. "Just invest in index funds for stocks and TIPS for bonds."

Oh yeah, they're singing my song now. ;-)

Seven Ways to Retire When You Can't Afford To

US News lists seven ways to retire during a recession, but the list to me reads more like "seven ways to retire when you can't really afford to." Here's their list:

• Spend less.
• Save more.
• Work longer.
• Don't raid retirement accounts early.
• Downsize.
• Get advice.
• Stick to the plan.

Gotta laugh at the first two. Either that or say "duh!"

Anyway, I think most people will use a combination of working longer and downsizing -- not because they want to, but because they have to. And these two are the only real choices most people will have since they are often unwilling or unable to curtail their spending and start to save more.

Personally, I'm saving like a fiend for retirement -- fully contributing to my 401k, saving in a SEP-IRA from my side business, and putting money in a taxable account to boot. Of course, the stock market isn't helping me any in this pursuit (a friend from work and I joke every day the market goes down, "That's another year we'll get to work together!"), but I still have a 20-year time horizon, so I should be a big investment bump between now and then. In addition, I'm saving as if Social Security will pay me nothing, so if I do receive anything from the government, it will be a windfall.

Is Your 401k Dying?

Check this out:

As the economy worsens, a growing number of small businesses are suspending their 401(k) match, and, in some instances, closing the retirement plans altogether.

While only about 15% to 20% of small businesses offer a 401(k) plan, many added them in recent years to attract and retain workers and to help business owners save for retirement. But the economic downturn and higher health-insurance costs are forcing companies to cut back on retirement benefits.

"It's a cash-flow issue," says Patrick M. Shelton, a partner at Benefit Plans Plus LLC, a third-party administrator of retirement plans in St. Louis. "The companies don't have money to meet payroll and medical insurance, so they're cutting back on 401(k) plans."

Yikes! Anyone out there have this going on with their company?

I work for a small company and our business is booming now, so we're full-speed ahead on everything -- and our 401k isn't changing a bit.

For those of you that do have a change, you may need to consider other job opportunities. Not that you should quit right away (especially in this economy), but if the company is that bad off from a cash flow perspective, it could be on the brink of going under. It wouldn't hurt to keep your options open.

Four Things to Do Before You Retire

Vanguard lists four things to do before you retire as follows:

1. Consider a career change. "Downshifting" to a less time-consuming (and more fulfilling) job may be worth considering, especially if you expect to stay healthy and active well beyond age 65.

2. Make saving your top priority. You've spent a lifetime working and saving in order to enjoy retirement. So make sure it stays at the top of your priority list.

3. Understand your health care and insurance options. Health care may be your single greatest expense in retirement. On a related note, this may be a good time to reconsider your need for life insurance, particularly if you no longer have dependents. Unless you're interested in covering estate taxes on behalf of your heirs, it may be unnecessary.

4. Get out of debt. No one likes being saddled with debt, particularly during retirement.

My thoughts on these:

1. I think the definition of retirement is changing. I believe that most people will go from full-time work at their current career to less-demanding work in another field -- and work until they can't work any longer. The time of saving forever and retiring at 65 with no job is passing many people by. One of the key reasons for this is that many people are unwilling to make the spending sacrifices now in order to have a work-free retirement.

2. You should plan to spend less than you could spend while in retirement to give yourself a savings cushion. In other words, if you can make it on withdrawing only 3% of your retirement savings per year, you'll be much better off than those who need to take out 4% or 5%.

3. Yep, health care is a HUGE retirement issue. It's one of five things that could derail your entire retirement plan.

4. Another reason to be out of debt (completely). I'm sure someone will disagree, but I don't see any benefits to having debt (including a mortgage) when you reach retirement.

Four Retirement Mistakes

Marketwatch lists four retirement mistakes older Americans make as follows:

1. Putting more of their money into risky assets than is prudent
2. Overspending
3. Not owning enough insurance
4. Not having enough inflation-indexed guaranteed income

My thoughts on these:

1. I think we've all seen what can happen to riskier investments like stocks, and if you have a ton in them close to retirement then you're taking big, big risks. Yes, you need some in riskier, higher potential investments because odds are you'll live 15 to 20 years in retirement, but that doesn't mean you need 80% of your portfolio in emerging market stocks.

2. Overspending is a problem at all times in your life and has a huge impact on most financial issues, not just retirement (though I agree that it can be especially damaging at retirement when future income is limited.)

3. The piece says this:

Given all that could and does wrong in retirement, Salisbury also says older Americans should buy more property, life, auto, disability, health and long-term care insurance. Self-insurance, says Salisbury, is a sure way to destroy your savings. Likewise, Laibson said Americans are not setting aside enough to pay for potential late-in-life health and long-term-care costs.

Ok, why is life insurance lumped in here? Once you get to the point where your estate can take care of your dependents, why do you need it? And once you stop working/earning an income, do you need disability insurance? I can see where you'll need the others throughout your life.

4. Inflation is the great, silent money killer. We all need to be fighting it throughout our lives. To me, this is just another reason to keep spending/lifestyles as low as possible.

Retirement and Health Care

As I noted almost two years ago, I think healthcare is becoming the biggest issue in retirement (in fact, it could ruin retirement). As a result, I think we'll be seeing more and more ideas/suggestions on how to deal with healthcare as part of retirement planning.

I found this piece from Newsweek that summarizes the problem in their first paragraph:

Retirement planning usually focuses on "the number"—how much money you'll need to support the kind of life you want. For early retirees, there's a second question, potentially even more important: will you have health insurance to carry you to 65 when you finally come under the protection of Medicare? Without it, your health, savings and standard of living are at serious risk.

Ok, so there's the problem -- what's the solution? How do you get from retirement age to 65 (assuming you retire "early") with health care coverage? Some of Newsweek's ideas:

• If your spouse is still working, you can go on his or her plan.
• Look for a [part-time] job with benefits.
• COBRA benefits let you stay in your company plan for 18 months.
• For individual policies, work with a health-insurance agent.

Of course, all this discussion could become a moot point soon. We'll see what the new president/Congress does to address this issue. Should be "interesting" to see what healthcare will look like in 10 years.

Why I Love 401ks

This piece on 401ks has a few lines that remind us all why they are such a great deal -- even when the market is declining like it has recently. Check this out:

Most 401(k)s shower free money on participants in two ways. First is the employer match. Second is the tax deduction. If you contribute $200 and the boss chips in 50%, that's a free $100. And your $200 costs you only $150 out of pocket, if you're in the 25% tax bracket, because you'd otherwise pay $50 in income tax. So you are up $300 on $150, a 100% gain, before you even get started. Think about it that way, and the next time somebody asks how your portfolio is doing, you'll be able to modestly, and honestly, reply, "Oh, I'm ahead."

In other words, you have a big, big gain simply by getting the employer match. So even if the market drops a ton (which it has lately), you're still ahead overall.

I've contributed the maximum to my 401k for years now and plan on doing the same for the foreseeable future. There's just something about free money that I can't pass up. ;-)

Yikes!

From the Investment News:

Powerful House Democrats are eyeing proposals to overhaul the nation's $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

Someone, please wake me up -- I'm having a nightmare...

Six Steps to Getting Health Insurance When Retiring Early

If you want to retire early, CNN Money says you have to get your health insurance right and they list six steps to doing so:

• Do a reality check. Before you get too carried away with an early-retirement dream, you need a realistic idea of whether you can buy insurance on the open market and, if so, whether you can afford it.

• Get in better shape. The healthier you are, the easier your insurance search will be and the lower your premiums.

• Probe the paperwork. Even if you're in the best of health, your medical records may paint a less flattering portrait due to errors or omissions. So when you schedule your checkup, ask your doctor to set aside time to review your medical history with you for accuracy.

• Stay with the company. Firms with 20 or more employees must give you the option of staying on your insurance plan for up to 18 months.

• Start the search. Launch your hunt for an individual policy a few months before you leave your job or before COBRA expires (once offered a policy, you usually have to start it within a month).

• Look for a last resort. If you can't get individual coverage, you have options, though they're not ideal. By law, states must make last-resort insurance available if you're HIPAA-eligible. But these plans can be limited and costly.

Yes, getting decent coverage at an "ok" price is do-able, but it's getting harder and harder as time goes on. Just another data point that says healthcare will have a huge impact on when people retire, how they retire, and even if they retire.

Housing and Retirement

Here's an interesting piece that talks about how many people are counting on home equity as part of their retirement savings. But that plan has run into a very big snag since home values have dropped recently. A summary of the situation:

The recent and unprecedented decline in home prices is forcing many Americans -- especially those who were banking on the inflated value of their home to make up for paltry savings and falling retirement account balances -- to re-evaluate their retirement plans.

And here's why it's a problem:

One recent study showed that home equity represents 21% of the typical pre-retiree's net worth, second only to Social Security at 41%. Another study found one in five retirees and pre-retirees plan to tap their home equity to help fund retirement.

I don't know which I find more disturbing -- that 1/5 of retirement savings is in an asset with declining value or that 41% (a HUGE number) is coming from Social Security. Why do I find these disturbing? For the following reasons:

1. If 21% of retirement funds are in a home's equity, then the retiree must either downsize their home (and keep the difference between selling and purchase price) or get a reverse mortgage in order to have access to any of the home's funds. I like the first option better, but are that many people really planning to downsize when they retire? Seems to me that most people want to keep living in the same home. As such, the home equity isn't really that accessible in retirement.

2. Who knows if Social Security is even going to be around in a couple decades when some of us start approaching retirement. I'm sure not planning on 41% of my retirement coming from it. I'm banking on 0% from SS -- and if I get anything, it will be a bonus.

3. Add the two up and 62% of pre-retirees' net worths are in two shaky sources. This means that the average person has only saved 38% of their retirement needs? Really? If that is true, we're headed for a big retirement crisis -- especially based on what's going on with health care.

Don't Take Out a 401k Loan

CNN Money asks if it's ever okay to take out a 401k loan. Their bottomline answer:

Don't take the loan unless you absolutely must. You're borrowing against your financial future.

Yep. Only if absolutely necessary!

Interesting Stats on Health Care Costs

This piece talks about what each of the presidential candidates' plans to do to health care but what I found most interesting were some of the facts contained in the article. For instance:

Diabetes, heart disease, cancer and four other diseases account for 75% of all costs.

80/20 principle at work here, but I guess I never thought of it relating to health care.

Spending $1 on preventive care for young women with diabetes can save $5.19 in costly complications for mothers and children.

Seems like there's a TON that can be done in the area of preventative care -- not just for young women with diabetes, but for all of us. An ounce of prevention is still worth a pound of cure, isn't it? Or maybe now the way health care costs have grown and ounce of prevention is worth a ton of cure.

Experts estimate that, eight years from now, 60 million people would be uninsured and that total spending on health care would eat up 20% of gross domestic product.

This is if we don't change the current system at all. Then again, "experts" are often wrong, so who really knows the truth? But even if they are off a bit, it's safe to assume that health care costs will continue to go up big-time unless something is done.

As I've said before, it's the biggest issue in retirement for many of us. Interesting story: our FedEx man came in the office the other day and we started talking about retirement. He wanted to retire (he's at that age), but health care costs were too much for him to risk/pay. So for now, he was staying at work (and keeping his health care benefits.)

The Most Common 401k Features

I found this piece on the most common 401k features interesting. In particular, these facts stood out to me:

Among those with fixed matches, the most popular formulas are 50 cents per dollar up to the first 6 percent of pay (26 percent of plans), one dollar for every dollar up to the first 4 percent of pay (10 percent), and dollar for dollar up to the first 3 percent of pay (8 percent).

Mine is dollar for dollar for the first 3%.

The typical plan has approximately 65 percent of assets invested in equities. Top investments are actively managed domestic equity funds (29 percent of assets), indexed domestic equity funds (10 percent), stable-value funds (9 percent), and balanced stock/bond funds (8 percent).

I'm almost all in equities. Index funds, of course.

Most eligible employees (82 percent) have some kind of balance in their 401(k) plan. Pretax participant deferrals average 5.6 percent of pay for non-highly compensated workers and 7 percent for highly paid workers.

I certainly have a balance in mine. :-)

How about you? How does your 401k compare?

Maybe Social Security Isn't the Issue

After sharing my thoughts on Wednesday about how I think we need to fix Social Security, it turns out that maybe SS isn't the issue we need to address. Instead, maybe it's healthcare (what a shocker, huh?) A summary from CNN Money:

Social Security is actually a relatively small and fixable piece of the entitlement puzzle. Medicare for the old and Medicaid for the poor are the programs that really threaten to swallow up the budget.

The federal deficit, not counting interest payments, could eat up 9% of GDP by 2050 if business continues as usual. According to Brookings Institution economist Henry Aaron, the two big federal health programs account for nearly all of the gap.

The main problem is not the demographic bulge of baby boomers, says Aaron. It's that health-care costs overall, for private payers as well as in Medicare, are growing about 2.5 percentage points faster than the economy every year. New drugs, procedures and technologies keep upping the ante, even when we aren't sure if they work better than what came before.

If we could get a grip on runaway cost growth throughout the system - not just for old folks - we'd solve much of the budget problem. And we could even afford to cover everybody. As a practical matter, Aaron argues, the two reforms must go together.

The piece goes on to say that both Obama and McCain don't really have a workable solution at this point. I wonder if we'll ever get a workable solution. After all, it's a huge issue with trillions of dollars at stake and many special interests involved. To get a good solution, we'd need our politicians to make tough choices in the best interest of the country (not their own best interests) -- something that's virtually impossible to do. If they ever do address the issue (which will likely occur only when it gets so bad that there's no other choice), we're likely to end up with an everybody-gets-his-own-special-interest-into-the-program sort of plan that makes the cure worse than the disease.

As you can tell, I'm not optimistic.

Looks like I'm going to be right about healthcare and retirement.

Using Your Health Savings Account as a "Super Roth" Investment Vehicle

The following is a guest post from Mr. ToughMoneyLove from Tough Money Love.

Health Savings Accounts (HSA for short) have become all the rage in recent years, particularly for small businesses like mine that struggle to balance benefit cost control with taking care of our employees.   So, several years ago we introduced a high deductible insurance plan with an HSA.  We fund most of the deductible for our employees with quarterly contributions.  We also allow our employees to make additional contributions on their own, subject to the maximum contribution allowed by IRS regulations.  The maximum contribution (the aggregate of employer and employee contributions) allowed in 2008 is $5650 for a family plan like mine.  I can contribute an additional $900 this year because I am over 55.  All of these contributions are "above the line" meaning that they are not included in your taxable income on your Form 1040.

For the first two years, I followed conventional practice and used HSA funds to pay for all of our medical expenses, including approved expenses that were not covered by our insurance plan (over the counter medications and such).  However, at the end of 2007 I began to think about the conventional wisdom and studied various government rules and publications about HSA contributions.  It was then that I realized that I could likely obtain a greater long term financial benefit from my HSA funds by NOT spending them now.  Instead, I could let them accumulate in the account and withdraw those funds when I retire later (including any investment earnings and appreciation), absolutely tax free.  In other words, I was going to use my HSA account as a "super Roth" account.

Why do I refer to my HSA as a "super Roth" account?  We all know that funds that are deposited in a Roth IRA (or that are contributed to the Roth component of a 410k plan) can be withdrawn in retirement tax free, including accumulated earnings and appreciation on the contributions.  The only drawback is that the contributions are "below the line" i.e., they are included in your taxable income.  Nevertheless, that is still a good investment strategy for many because tax rates are expected to go way up for future generations.   (If you don't believe this, do some more research!)  Turning to the HSA, we now see that you can get the tax-free benefit both going in and coming out.  You don't pay any tax at all on those HSA funds, as long as they are used for qualified medical expenses.  Thus, it is a "super" Roth.  For me, its really a double super-Roth because our income is over the limit allowed for contributing to a Roth IRA.  For the HSA "super" Roth, there are no such income limits.

Right now readers are thinking "wait a minute - how are you going to get all of that money out of the HSA without paying taxes unless your future medical bills are astronomical."   That brings me to the second part of the strategy.  First, we are saving all of our receipts for every qualified medical expense we incur and putting them in a file.  There are lots of them, believe me: aspirin, bandages, ointments, eyeglasses, dental bills, etc., along with all of the typical physician bills and prescriptions.  We are going to save these until we retire and need some tax free income.  I checked IRS regs and publications and there is no rule against withdrawing HSA funds accumulated (and grown) over many years and applying them to unreimbursed qualified medical expenses that you incurred in past years, as long as they were incurred after you set up the HSA.  So, if I want $5000 in tax free income in 2015, I can pull out $5000 from my HSA and match those funds up with $5000 in receipts from my file.  Because we already paid those old bills, I can use the $5000 withdrawal in 2015 for anything I want, tax free.

Now readers are thinking "what's the big deal you - you are just withdrawing funds later that you could have withdrawn earlier, also tax free." My response is not to forget about the accumulated investment earnings. If the market has been decent, I will have a nice pool of money to use for other medical expenses. Thus, the second part of this strategy is that when I am 65, I will have to pay Medicare premiums.  These premiums are increasing faster than the rate of inflation.  Even though HSA funds cannot be used to pay conventional health insurance premiums now (or for Medigap coverage when I retire), the IRS will allow me to use HSA funds for Medicare premiums and for some types of long-term care insurance.  I will also have other health care expenses that Medicare does not cover.  That's where the accumulated investment earnings (I hope!) will go.  Again, its all tax free.

Now skeptics are saying "what if Congress enacts a national health plan for all Americans. You won't have any future premiums or medical expenses."  My answer is that (a) don't count on 100% reimbursement with any future plan and (b) I still have my old medical receipts file.  Plus, even if I want to use HSA funds for non-medical expenses, I can do so without penalty (paying ordinary tax rates) after I turn 65.

Of course, before you implement the HSA "super" Roth strategy, you want to make sure that you have access to suitable investment vehicles for your contributions.  Our HSA provider is Wells Fargo.  It offers a handful of decent (not great) mutual funds for HSA deposits.  I have selected a balanced fund that I hope will show 6%-8% annual tax free growth over the next 10 years.  If so, our HSA funds will give us additional flexibility in managing the tax burden of withdrawing and spending taxable and tax free retirement assets in the future.

In summary, if you can afford to delay using your HSA funds and instead leave them invested, your payoff in retirement will be substantial. You will receive tax free benefits that surpass those of even a conventional Roth IRA or Roth 401k.   The "super" Roth!

Three Ways to Lift Your Retirement Savings

MSN Money offers us three sure ways to lift retirement income. As they say in the article, these three "aren't bets, they are certainties" that will help your retirement savings grow faster and bigger than what it would otherwise. Their suggestions and my thoughts on each:

Lever No. 1: Cut investment expenses.

I've been saying this for quite some time. Check out How Fees Eat Your Lunch -- It Still Adds Up To Dollars, Costs Matter If You Want to Maximize Investment Returns, and Why I Like Index Funds for details.

Lever No. 2: Delay taking Social Security benefits.

We've talked a lot about whether you should take Social Security early or late, but the middle ground appears to be "if you don't need to take it, then don't take it early." The best way to not need it is to spend less than you earn and save throughout your lifetime. FYI, this is also the way to get rich.

Lever No. 3: Downsize your shelter.

This is an interesting suggestion -- one I haven't come across before. The idea is that you may not need as big of a house as you have (especially if your kids have moved out), so why not sell it, buy a smaller one, and take the difference and invest it for retirement. It's an interesting idea, though the current real estate market is unfavorable for people looking to downsize their housing.

Struggling Americans Raiding 401(k)s

Yikes! Details:

A study finds middle-class families are turning to retirement money to get through financial crises such as unemployment and medical emergencies.

Bad idea.

Retirement is Changing

Bankrate says that the definition of retirement is changing -- and here are the reasons why:

The notion of a traditional, leisurely retirement is undergoing a transformation. It's likely to happen later in our lives, and it may involve working at least part time. There's a multitude of underlying reasons for this likely outcome: rising health care costs, a dearth of traditional pension plans, faltering Social Security and Medicare systems and, most of all, the fact that Americans are just not saving enough for retirement.

The article then goes into a bit of detail on the issues driving this change. One worthwhile quote:

One popular explanation for our moribund personal savings rate is the replacement of the work-and-save culture of the past with the ubiquitous spend-like-there's-no-tomorrow mentality.

Then, there's this ominous thought:

The oldest of some 78 million baby boomers, those born between 1946 and 1964, are eligible for Social Security benefits starting this year. The rest will become eligible over the next 18 years. Many will find themselves working past age 62 because they won't have enough saved or they'll need to keep company medical benefits.

But things are looking up:

Ironically, the good news is that American attitudes toward retirement savings may have turned a corner -- as a result of the bad news all around us. Hebeler says that as the national attention is focused on the credit crunch, failed mortgages and the souring economy, many of us are starting to ask more questions about saving.

It is ironic that the bad economic times are waking people up. I wonder what will happen when things get better -- will people remember the tough times and keep saving or forget them and go back to spending, spending, spending?

The path to riches (and a good retirement) is rather easy, but it requires one financial trait that most Americans don't have: discipline.

Six Smart Ways to Retire Sooner

MSN Money lists six smart ways to retire sooner as follows:

1. Start as early as possible.
2. Check your lifespan.
3. Get real.
4. Make your hobbies pay.
5. Set a target.
6. Taper, don't quit.

My take on this list is that #1 is the key. If you can save early and often, you'll not only have plenty for retirement, but you'll end up being rich due to the power of compounding.

After #1, I think #6 is key. If you're having trouble saving enough for retirement, a great way to help yourself out is to work longer, even if it's a part-time job at lower pay. The more time you're earning a salary, the bigger and better impact you'll have on your retirement savings/investments.

This said, I'm shooting to retire EARLY (mid 50's or so) with at least a partial reduction in work hours and time.

Great Advice on Healthcare Costs

Here's an excellent comment left on my post titled Is Too Much Treatment Hurting Your Health and Your Wallet? that I felt was worth sharing with everyone. Here goes:

Let me tell you from my personal experience.

My husbands suffers Reflex Sympathetic Dystrophy (RSD) and I know first hand how frustrating the search for appropriate and adequate medical care could be.

If you get a serious medical condition (God forbid!) you just can't educate yourself enough.

Fist, look for a local and/or national support group for your condition. You can learn from people who suffer the same illness about the right tests, the most helpful medications and the best specialists nationwide or locally.

Don't waste your time by going from doctor to doctor until you get further damages from doctors who are inexperienced but arrogantly wouldn't admit it. Save yourself from unnecessary painful and costly procedures and trail-and-error treatments. If you got a serious medical condition, you don't have time or money to waste.

My advice, channel your anger and frustration into a productive energy. Take charge because nobody will care more than you and your family about your suffering.

Get on line and ask, ask and then ask again those who went there before you, people who already went through this. Most medical conditions now have support groups. Do the search.

Find doctors who are real experts. They usually have published articles on whatever your illness is in medical journals. You can call or e-mail them and you will usually hear back from them or their staff.

Most importantly, learn to smell and avoid enterprising doctors. Enterprising doctors are driven pretty much by their profits and would do anything to maximize their bottom line, with little regard for real needs of their patients.

Whatever you do, stay positive. There is no advantage of being negative or giving up. Learn from any experience in life no matter how harsh it might be. Do the best you can every day. And remember you are in charge of everything that happens to you.

As this issue gets bigger and bigger -- especially for retirees -- we're all going to need to seek out and follow good advice like this reader shared.

Maximum Safe Withdrawal Rates in Retirement

The following is a guest post from Marotta Asset Management.

Here we discuss how to determine maximum safe withdrawal rates that will not compromise a long retirement.

Imagine you knew you were going to die peacefully in your sleep at the end of your 100th year. Becoming a centenarian is more common these days, and it's a much safer assumption than using average longevity. Half the people live longer than average, and a significant percentage live much longer. So our best case scenario is not just a fantasy.

As you turn 100, you could plan to spend 100% of your portfolio. At the end of the year when you run out of money, you also run out of life, literally dying broke. It makes sense to keep all of your assets in cash or a money market account. Investing in stocks risks a market correction that could leave you short on funds and make your last days miserable.

Now back up a year. You are 99 and could spend about half of your portfolio's value, reserving the other half for your final year. You will keep money for your 99th year in cash. Money reserved for your 100th year could be put in a CD or a bond for more interest. You should be making a real return on your investments that is greater than inflation.

Imagine you planned on reaching your 99th birthday and several years ago bought bonds to mature at the beginning of each of your last two years. The bond for your 99th year has just matured and is waiting in cash for you to spend. The bond for your 100th year has one more year to mature and is earning about 3% over inflation. So after factoring out inflation, you can spend 50.70% of your portfolio this year, knowing the 49.30% of your portfolio left in the bond will grow by inflation plus 3% to cover a cost-of-living increase for your final year.

Back up yet another year. You can spend a little over a third of your portfolio for your 98th year, just over a fourth for your 97th year and just over a fifth for your 96th year. Gradually as you work backward, the amount of interest over inflation you are earning becomes more significant. Once you establish a laddered bond portfolio of five to seven years, putting those assets with a longer time horizon into the stock market is a good idea.

Investing in fixed income gives you peace of mind, knowing your lifestyle for the next few years will be relatively stable and not depend on the whims of an inherently volatile market. Investing in stocks is appropriate only when your time horizon is at least five years or longer. Therefore, we recommend keeping the next five to seven years of spending in fixed-income investments during retirement. You can keep five years of spending in fixed income if you are aggressive and seven years if you are conservative. Five to seven years is an appropriate range. If you keep whatever you feel like based on an emotional risk tolerance, you may jeopardize your retirement lifestyle.

In our examples we assume you have set aside six years of spending for stable investments in fixed income and allocated the remainder of your portfolio in appreciating equity investments. This money is invested in quality fixed-income investments. There is no reason to invest in "high-yield" junk bonds for the stability side of your portfolio. Junk bonds act like stocks and are liable to fail when you need them most. With your fixed-income investments in quality bonds, you can safely afford to put more of your portfolio in appreciating stocks.

Knowing your retirement spending is relatively secure for the next six years, we suggest putting the remainder of your portfolio into more volatile stock investments to achieve a better long-term rate of return. With this technique, not only do you have a maximum safe withdrawal, you also have a maximum allocation to fixed income: to balance the need for six years of stable spending with the need for appreciation to cover the seventh year and beyond.

For your stable investments, we have assumed a rate of return consistent with fixed income, about 3% above inflation. Assumptions for the equity portion of your allocation are more problematic. In the long run, stocks average about 6.5% over inflation, but in that long a run both your retirement and your life are over. Stocks are inherently volatile. Do not count on any reliable rate of return during your retirement. Past performance is no indication of future results. Just because a 30-year loss in the U.S. markets hasn't happened yet doesn't mean it couldn't happen during your retirement.

You can handle uncertainty in two different ways: throw lots of dice and see what happens or make conservative assumptions. What we learn from the first can help us with the second.

In the financial planning world, throwing lots of dice is called Monte Carlo analysis. It involves running a retirement projection against many randomly generated investment returns to see if that portfolio growth outlasts many random lengths of life. Sometimes returns are selected from history; sometimes they are generated mathematically. Hundreds of assumptions are built into Monte Carlo simulations. As a result, the method illustrates risk better than it actually predicts or protects against it.

We learn from Monte Carlo that every plan has some small chance of failure, and you must accept the possibility that you will need to adjust your lifestyle. We also discover that a string of early bad returns with a high withdrawal rate makes for a difficult recovery. Monte Carlo analysis has so many associated problems, we advise taking the lessons learned and simply making some conservative assumptions.

Assume your stock investments will only average bond-like returns, about 3% over inflation. Normally the markets do much better, but sometimes they do much worse. Working backward from 100, at age 90 with 11 year of spending remaining, you should be able to spend 10.42% of your portfolio.

Continuing to work backward from age 100, we can compute exactly what percentage of your portfolio you can spend if you are retired at any age. Here are those maximum safe withdrawal rates by age, along with the maximum percentage you can safely allocate to fixed income and still leave enough in appreciating equities to keep up with inflation:

Age -- Withdrawal Rate -- Maximum Fixed Income
50 -- 3.64% -- 18.4%
55 -- 3.82% -- 20.4%
60 -- 4.06% -- 22.4%
65 -- 4.36% -- 25.0%
70 -- 4.77% -- 32.2%
75 -- 5.35% -- 36.4%
80 -- 6.22% -- 42.4%
85 -- 7.66% -- 51.6%
90 -- 10.42% -- 67.8%

The safe withdrawal rate never drops lower than 3%. If your portfolio appreciates 3% over inflation and you take 3% out, your portfolio will have grown exactly by the rate of inflation. You can retire the day you are born if you can live off 3% of your trust fund. A 3% withdrawal rate can continue indefinitely as long as your portfolio appreciates annually by at least 3% over inflation.

Every year your portfolio earns greater than 3% over inflation, your standard of living can go up. If your portfolio loses money one year, you may be able to keep your spending constant and wait for above-average portfolio returns to get you back on track.

In this way you can adjust your standard of living dynamically and avoid a "plan once and blindly follow," on the one hand, and "let my standard of living bounce between feast and famine" on the other. This middle ground keeps lifestyle spending appreciating when the market returns are typical and keeps spending constant in terms of dollars during down markets.

Withdrawal rates lower than these maximum safe rates provide an even safer retirement plan and also allow more of your portfolio to remain invested and appreciate. In addition, withdrawal rates lower than the maximum permit greater flexibility in your asset allocation. With conservative enough withdrawals, you can afford to put more assets either in fluctuating equities or in less appreciating bonds.

Staying under these maximum withdrawal rates in conjunction with a diversified asset allocation gives you an excellent chance of having enough money during your retirement. And if your portfolio experiences average market returns (as opposed to the average bond returns used for planning), you will also leave a nice legacy for your heirs.

More on Not Borrowing from Your Retirement Accounts

One of the main comments I received in Don't Borrow from Retirement Accounts was along the lines of, "as long as I pay the money back myself, what's wrong with borrowing from myself (my own retirement fund)?" Kiplinger's addresses this issue as follows:

Let's say a 35-year-old, who has been contributing $264 a month and has a $30,000 balance, takes out a $10,000 loan at current rates for five years (assume contributions stop for the life of the loan, as usually occurs). The borrower will forgo $145,000, or 20%, at retirement age -- even though the loan plus interest is plowed back into the 401(k), according to calculations by T. Rowe Price.

Here's the main issue that makes this a bad move: "assume contributions stop for the life of the loan." Doing this, the person loses both the company match as well as the growth on the money they and the company would have contributed if they'd stayed in the plan. Compound that over a few decades and it can add up to some big money.

Retirement Dicey for Many Americans

Some retirement facts from Bankrate. First of all, the bad news:

Only about three in 10 workers (28 percent) expect to have enough money to retire comfortably.

Conversely, nearly seven out of 10 Americans have set low expectations about their retirement prospects. The breakdown:

• One-third (33 percent) say they'll have just enough to get by.
• Two out of 10 (17 percent) say they will not have enough money to retire without worrying.
• Nineteen percent say they are afraid they'll never be able to retire.

But there is good news:

Here's a surprise: One out of six Americans have increased their retirement savings as a result of the slumping economy.

Not so shocking was the discovery that the faltering economy has pushed about 15 percent of people in IRAs and workplace retirement plans into lowering their contributions. Meanwhile, three out of four workers (73 percent) kept contributions the same.

But experts are stunned that nearly 16 percent have actually increased the amount they're saving as a result of the current economic downturn.

I'm not surprised by the numbers, but I also think people are a bit pessimistic now because of the economy. That said, most Americans are not great savers, and it's probably true that their retirement will not be what they once hoped for/expected.

Retirement Assumptions Are Critical

The following is a guest post from Marotta Asset Management.

If you put the same assumptions into 10 different retirement calculators, you will most likely get 10 different results. The largest number may be more than twice as much as the smallest. Retirement doesn't give you a second chance. Measure twice and retire once.

The variations among retirement projections result mostly from differences in their assumptions. Six assumptions are significant in calculating safe withdrawal rates during retirement: inflation, average return, portfolio volatility, investment mix, longevity and lifestyle. Furthermore, these assumptions are interrelated and interdependent.

Many people wrongly suppose they can safely withdraw and spend from their portfolio whatever they earn on their investments. Nothing could be further from the truth.

Imagine you retired in 1973 with a portfolio producing a $10,000 annual return. In today's dollars, that amount of money is equivalent to $48,400. But spending all of your dividends and appreciation each year means your portfolio will not grow to keep up with inflation. Now, at the end of your retirement, your portfolio is still only generating $10,000 a year and your lifestyle is impoverished. Your withdrawal rate must be low enough to permit some funds to remain in your portfolio so future withdrawals can appreciate with inflation.

Inflation is a huge assumption, and most projections don't handle it well. Retirement plans tend to forecast the rate of portfolio returns and inflation separately. On average, stocks earn 10% to 12% and bonds earn 6% to 8%. Inflation runs about 3% to 5%. Those are huge ranges and can produce very different results. With so much wiggle room, the most favorable assumptions allow you to withdraw and spend about twice as much as the worst cases.

A better retirement planning method is to factor inflation out of your investment returns. Whatever inflation is currently running, stocks earn on average a 6.5% real return over inflation and bonds earn about 3% above inflation. Factoring inflation out of average investment returns removes some of the wobble factor in retirement projections.

You should also inflation-protect your portfolio through asset allocation. Some asset classes offer protection against loss of purchasing power, and at least half of your portfolio should be in these asset classes. Hard asset stocks provide an inflation hedge. So do foreign bonds and foreign stocks.

Stocks may earn, on average, 6.5% over inflation, but this estimate is too optimistic for planning purposes. To talk about "average stock returns" is like noticing that the average number on the roulette wheel is 18.5. Stocks may average 10% to 12%, but only four times in the last 70 years have stocks actually returned in that range. More commonly, they return +18% or –10%.

Reducing the volatility of your investments is one reason why asset allocation is so important. Dividing your investments among asset classes with low or negative correlation is the best strategy to reduce portfolio volatility and boost returns.

Most retirement projections assume your portfolio will have a fixed asset allocation that doesn't change during your 30-year retirement. But in fact, your asset allocation should start with a strong equity bias and gradually grow more conservative as you age. Static asset allocation assumptions may range anywhere from 40% to 25% of fixed income. Over the past five years, the average annual return for U.S. bonds was only 4.0%. The greater the allocation to fixed income, the less likely the portfolio will keep up with inflation and provide adequate growth for a long retirement. Maintaining an equity bias is critical during the early years of retirement.

Many plans assume the equity allocation will be primarily large-cap U.S. stocks such as those found in the S&P 500. But a more balanced allocation would include small cap, foreign stocks and emerging markets.

In the past five years, the S&P 500 has averaged 10.1%, S&P Mid-Cap 14.9% and the Russell 200 Small Cap 12.9%. The EAFE Foreign Index averaged 19.7% over the same period, and emerging markets averaged 31.5%. Obviously, with such disparate returns, asset allocation matters a great deal. We recommend investing significantly in equities for appreciation but diversifying both for safety and to boost returns.

Most retirement strategies make an assumption based on your age at retirement. The earlier you stop working, the lower the percentage of your assets you can withdraw and still have money until you reach 100 years old.

Many retirement plans are predicated on a 30-year retirement. At age 65, your average life expectancy is 86, or 21 years. But half of today’s retirees will live longer, some well over 30 years. If a husband and wife both retire at age 65, the odds are 40% that one of them will live until age 95.

Average life expectancy makes a poor planning statistic. Compare it to making a doorway 5 feet 10 inches tall to accommodate the average person. Men will bump their heads on the average doorway, and women will run out of money in the average retirement projection. Doorways are 7 feet tall and ceilings are 8 feet tall for a reason.

Your specific demographics can skew your life expectancy significantly. Not only do women live longer, but so do those who have enough money to plan. Readers of this column probably live longer on average than those who don't, and we recommend planning to have enough resources for a comfortable lifestyle until age 100. My grandmother was mentally sharp and the best read member of the family. She missed becoming a centenarian by only six months, despite having smoked for much of her life. With medical advances, the likelihood of living for 100 years with an excellent quality of life continues to increase, and the possibility of reaching 110 is becoming much less remote. A 30-year retirement may be adequate, but we recommend planning to have money until you reach at least age 100.

Finally, lifestyle assumptions can skew retirement projections. Many assume your lifestyle in retirement will be only 70% of the lifestyle you enjoyed while you were working. Others assume you will be in a much lower tax bracket, and they fail to discount the assets of your traditional retirement accounts adequately. It is just as likely, and much safer, to assume that spending and taxes in retirement will continue to rise.

For our retirement assumptions, we try to play it safe but not to an extreme. We assume longevity to 100 years old and earnings of at least a bond portfolio, about 3% over inflation. These assumptions will not always be met, and even with these conservative assumptions, blindly following them will result in about a 7% failure rate.

Therefore, we urge you to update your retirement plan annually to make adjustments and course corrections. These adjustments include changes not only to your asset allocation but also to your lifestyle and thus the amount of your withdrawals.

How to Retire on $12,000 a Year

Most people would consider it impossible to retire on $12,000 per year, but MSN Money says it can be done. The key to their strategy is that people move in with others and share the costs of living (thus reducing the burden on any one person.) The details:

The solution is social. It is called sharing, having enough social skills to multiply your effective income to a level far greater than it could be made with ordinary cash.

Though two people can't live for the price of one, the cost of living doesn't double when you get married. Divorce, on the other hand, involves returning to the dis-economies of nonshared living. That's why it's common for one ex-spouse, or both, to have a lower standard of living after divorce.

The piece goes on to compare a person living alone:

Imagine a single retiree living in a 55-and-over trailer park. She has a monthly net Social Security benefit of $1,000. From that she has to pay $400 for land rent and $300 for the loan payment on the manufactured home. That leaves only $300 a month for food, clothing, transportation and everything else. It's not a pretty picture.

To someone who lives with one, two, or three other people (relatives, friends, or whatever.) Here are the results shown when our imaginary retiree moves in with just one other person:

With one roommate with the same net income, household income doubles to $2,000. That leaves $1,300 after shelter expenses. That's tight, but two people can eat and buy other necessities with $1,300 a month. In effect, each person has $650 a month to live on after shelter expenses, simply by living together.

With two roommates, the monthly amount leftover is $2,300 and with three roommates it's $3,300.

The main impact in the numbers above deals with the cost of housing. But the piece argues that other expenses could be shared (such as a car) to make living together even better financially.

Of course, such tactics have their downside:

Note that this is not a utopian commune or a spiritual community. It's just four retirees figuring out how to get along in a trailer park. Some readers -- perhaps R.S. -- will say that making such arrangements isn't that easy.

They'd be right. But sharing offers a major "return" for being creative and flexible. Cooperation is a wonderful but generally overlooked substitute for money.

But at least it's a worthwhile consideration. Many of us had roommates at one times in our lives, why not do the same at retirement?

Anyone with any thoughts on this suggestion?

Inflation and Its Impact on Retirement

The following is another guest post from Free Money Finance reader Rod Ferguson.

Retirement is every working person’s goal - specifically, to retire as early as possible and with as much wealth as possible.  Dreams of living a carefree life, doing what you want without the need to work a daily job to survive, to travel, to volunteer or to just catch up on all that reading you’ve been promising yourself over the last 20 years. 

Unfortunately, not everyone plans for retirement.  Even more unfortunately, those that do might be planning ineffectively if they do not take into account inflation - when living on a fixed or semi-fixed income, inflation has a profound impact on your retirement quality of life.

Merriam-Webster defines inflation as, "A continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services." Basically, inflation makes goods and services more expensive and decreases the value of your money.  When you are working, your wages generally rise as the costs of goods and services increase. Your earnings try to "keep pace with inflation", so nominal inflation is not generally an issue. However, when you are living off savings, inflation literally robs you of wealth as it destroys your purchasing power.

Most people underestimate the impact inflation will have on their retirement plans. Even with the official figures (known as the Consumer Price Index, or CPI) showing low inflation rates, through the magic of compounding, even 3% over 20 years nearly triples your savings needs.

Doing the math

One thing to remember when calculating your yearly retirement needs is to factor a) your expected lifespan, b) your standard of living and c) the age at which you wish to retire.  For example, if you are currently 35 years old, male, anticipate needing $35,000 a year in today’s dollars to survive and wish to retire at 55, you would need approximately $700,000 to retire, not factoring in inflation.  Starting now, and assuming an average rate of return of 6%, you’d need to start saving about $750 per pay period ($1,500 a month) to reach that goal (this is assuming no pension, no Social Security, etc. Just savings.)  Now, if you add that 3% inflation over the same period of time, your total would be in the ballpark of $2.1 million dollars and you’d need to start saving – today – $2,300 per pay period or just under $4,600 per month.  Add one percent to that inflation rate, and your numbers are now at $3.3 million at $3,500 per pay period or just over $7,000 per month.

Now, before you have a heart attack, the example above is a pretty aggressive retirement plan, with only 20 years of savings, a life expectancy of 75 years (or 20 years of retirement) and a somewhat low rate of return.  These numbers can be managed by extending your retirement age to 60, 65, 67 or whatever and by including things like Social Security, extra income streams, etc.  And, the good news about Social Security and some pension programs (though fewer as time goes on) will adjust your benefit for inflation. The bad news is that the CPI is grossly underestimated; you will require far more money to support your lifestyle in the future.

How CPI is measured

The Consumer Price Index is a measure of the average change in prices paid by consumers for a fixed market basket of goods and services.  Started after WWI, the CPI was used to assist businesses and laborers in tracking cost of living adjustments to wages.  The statistic served its purpose well until the 1980’s, when Michael Boskin and Alan Greenspan proposed changes to the calculation; no longer should the CPI be based on like-for-like calculations, but should instead be calculated with equivalencies.  Their argument was that when something became too expensive, then the public would substitute something with a lower cost.  A popular example of this is the “Steak to Hamburger” analogy:  when steak gets too expensive, the consumer would substitute hamburger for the steak.  The inflation measure then should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. The old system told you how much you had to increase your income in order to keep buying steak whereas the new system assumes you will stop eating steak and start eating hamburger.  This keeps the CPI low (hamburger costs less than steak) but doesn’t really reflect inflation.  Additionally, the CPI is now weighted geometrically: things rising in price are given lower “weight” than things decreasing in price.  The logic behind this is that when prices decline, consumers stockpile more of the lower cost goods than the higher cost goods.

In 1975, the CPI was first used to calculate payment increases in Social Security (prior to this, Congress needed to approve benefit hikes.)  Since this began, it has been in the government's best interests to keep inflation low.  Since the government really can't control inflation, it has decided to control the inflation calculator.  A recent best guess on Social Security estimate that payments should be roughly 50% higher than they actually are today and the disparity is growing.  When planning for retirement, it really isn't such a bad thing to discount Social Security payments; you'll have no idea what they will actually be and what purchasing power that amount will have.

What does this mean?

Inflation is much greater than is currently being reported; current CPI is stated at about 4%.  Using the non-weighted pre-Boskin/Greenspan model, CPI is close to 12%.  Which feels more accurate to you?  When calculating your retirement numbers, it would be advisable to run them with both the official CPI and the older model calculations; if you can plan using both, you have a much less chance to be “caught unawares” once your retirement approaches – it’s better to have more then you need than not enough.  By accepting the official inflation rate as the standard, people may be shortchanging their retirement and they won’t realize it until it’s too late.

My opinion

I have come to trust the pre-Boskin model much more than the post-Boskin model for calculating inflation.  I agree that there is some logic behind the move, but I believe that the model should have been scrapped and completely re-worked rather than modified.  People had come to rely on the CPI for generations; by making modifications without changing the model, the new system was able to “borrow” that trust, even though the model has become much less accurate in calculating inflation.  People may buy hamburger more than steak when steak is more expensive, but to take this phenomenon as proof that prices aren’t rising is deceitful; are we still going to report inflation as low when people start buying dog food because they can no longer afford hamburger?

As I stated above, you can create a retirement plan by manipulating the categories surrounding retirement.  One way to plan is to save lots of money.  Another way is to reduce your retirement years.  Another is to reduce your expected monetary needs; this is the avenue that is the most inflation-independent.  By owning your own home versus renting, any inflation will only impact your taxes and maintenance.  By learning a few farming skills (growing, harvesting, storing), you can grow a reasonably sized garden that can greatly reduce your food cost.  By investing in renewable or “green” power technologies (solar, hydro, geothermal), you can reduce your dependence, and therefore cost, for energy.  Reducing your overhead will stretch your retirement dollar much more than saving more of them.

Don't Borrow from Retirement Accounts

Every so often, I have a person ask me about borrowing from their retirement account (401k, IRA, etc.) for this or that reason. My response is always the same: don't do it. Kiplinger's agrees that you should never borrow from your retirement account. Here are their thoughts:

Even if you can access any of this money for a down payment, it's generally better to search for other sources of cash -- and keep the funds growing in the account for your retirement.

Exactly. There are three simple steps to getting rich. Borrowing from your retirement account interrupts one of these steps -- letting time and compounding work for you. Even if you replace the money in a few years, that loan will be very expensive based on the earnings/growth you've given up during that time.

A couple alternatives to borrowing from your retirement account:

• Buckle down harder and create more of a surplus from your income. Almost everyone has some ways they could save more money.

• Increase your income.

The Top Five Risks You Face in Retirement and How to Handle Them

MarketWatch lists the top five risks you face in retirement and how to handle them. We'll cover them one-by-one:

Risk #1: Inflation

How to handle: Retirees and would-be retirees should consider investing in equities, a home and other assets, such as Treasury Inflation-Protected Securities (TIPS) and annuity products with a cost-of-living adjustment. In addition, the SOA recommends would-be retirees "stage a semi-retirement to delay tapping retirement assets."

Risk #2: Outliving one's assets

How to handle: The SOA recommends strategies that preserve principal, including investing in joint-and-survivor annuities and deferred annuities that commence at high ages, such as 75 or 80.

Risk #3: Loss of spouse

How to handle: Use income-producing investments, including joint-and-survivor annuities, and purchasing life insurance.

Risk #4: Declining health

How to handle: [Healthcare] costs can be mitigated by committing to a healthy lifestyle that includes eating right, exercising on a regular basis and using preventive care. In addition, the SOA says long-term care insurance can pay for the cost of caring for disabled seniors. And the SAO suggests -- not without reservation -- that retirees look for a continuing care retirement community that caps monthly costs for assisted living and skilled nursing care.

Risk #5: Medical expenses

How to handle: Retirees and would-be retirees manage this risk by purchasing medical insurance and Medicare supplemental insurance.

Here's my take on the situation:

1. There are a lot of factors that can derail your retirement.

2. As such, the best bet is to be very conservative in what you think you'll need for retirement. For instance, if you think you'll need $2 million for retirement, try to save much more than that -- something like $2.5 million or more. Another option: save for retirement assuming you'll get nothing from Social Security -- then if you do it will all be gravy.

3. Delay retirement as long as you can. Every year you do, especially at the end where your investments are very large, will significantly help your finances.

4. Live well below your means and decrease your spending as you get older. The less you need to spend, the less you'll need to save.

That Rebate Check Could Ruin Your Retirement Part 2

Here's a gust post from Marotta Asset Management.

Last week's article explained the wrong-headed decisions behind the current tax-stimulus package, its deleterious effects on an already fragile economy, and how consumers delude themselves in the ways they spend the money. This week I explain the effects of the rebate checks on the savings for retirement. Anyone who spends more than 4% of their rebate will actually lose ground saving toward their retirement.

Retirement is the ability to continue your current standard of living solely through the growth of your investment assets. Raising your standard of living is the fastest way to fall behind your retirement goals. Every time you increase your spending by $1, you need $23 more in your investments when you retire.

So if you spend even half of your $1,800 rebate check and put the other half in savings, you fall $19,800 further behind in your retirement. Spending the extra $900 means you are expecting to continue living a lifestyle $900 greater than the lifestyle you have been living. To support that lifestyle, you will need 23 times that amount, or $20,700 more, in the bank at your retirement. But because you are only putting $900 more in your retirement, you fall $19,800 behind.

The problem worsens with every dollar of rebate you spend. Spend the entire $1,800 and you fall $41,400 behind on your retirement savings. Get tricked by the windfall effect I discussed last week, and you will increase several smaller purchases and spend 2.5 times your rebate check. Spending $4,500 more means you have fallen $103,500 behind in saving for your retirement.

Even back at only spending half of your check, you've spent $900 and only saved enough to do that again next year. You've saved like there's only one tomorrow. To support a constant lifestyle increase and not simply a two-year binge, you can only spend about 4% of the $1,800, or $72.

At this point, I can hear your objections: "But I'd just be spending the $900 this year. I'm not really increasing my lifestyle."

Unfortunately, lifestyle is tricky to calculate. It is easy to ratchet up but nearly impossible to trim down. Just try cutting your spending by $900 this month and adding that amount to your investments if you think it's easy to economize. Whatever your standard of living, there are people living $900 below you who are considering using their rebate check to add the one thing they believe they are missing from your lifestyle.

You can't spend money apart from your lifestyle because that's