Free Money Finance

The 10 Worst States for Retirees

MarketWatch lists the 10 worst states for retirees as follows:

• Illinois
• California
• New York
• Rhode Island
• New Jersey
• Ohio
• Wisconsin
• Massachusetts
• Connecticut
• Nevada

These ten were rated the worst by the website TopRetirements.com based on three criteria:  fiscal health, taxation, and climate.

Ha! It's a "bad states" list that Michigan finally didn't end up on!!!! ;-)

Hold on, not so fast. Michigan was listed as one of the ten most troubled states. Then again, that alone didn't make it a top 10 loser for retirement. Must have been the great weather that kept it out of the cellar. Yeah, right.

Just another piece making the point that where you live has a big impact on your finances -- even when you're no longer working.

I'm not sure what we'll do when we retire -- stay here or move. I do know several retirees who have moved on, mostly to warmer weather states with little to no state income tax. Hmmmmmm........now I'm thinking.....

5 Easy Ways to Ruin Your Retirement

Yahoo lists five easy ways to ruin your retirement as follows:

1. Not Running the Numbers. Anybody over the age of, say, 40 should have at least a rough notion of how much money he or she will need for retirement.

2. Having Only One Plan. Even if you retire right on schedule, the economy, stock market, or any number of other forces beyond your control might disrupt your plans. So it's smart to have at least a Plan B and possibly a C, D, and so on down the alphabet.

3. Passing Up Opportunities to Save. Our own surveys have found that if there's one widely shared regret among retirees, it's not saving enough or starting early enough. None of us can go back in time and fix that, of course, but we can make sure that we aren't making the same mistake now.

4. Depending on Your Home Equity

5. Ignoring the Nonfinancial Stuff

Here's where I stand on these:

1. I came up with my retirement number several years ago -- and boy was it a big one! I probably need to re-look at it again just to be sure. (FYI, my number is in the $3 million in investable assets range.)

2. I don't really have multiple plans, but I have built in a margin of safety within my planning designed to protect myself. The factors I've used to do this include: setting my number without counting on a penny from Social Security, assuming a very reasonable rate of return on my investments (6%), and retirement at 65 (though I could work longer if I had to.) That said, I may be taking early semi-retirement well before 65 since it looks like I will be able to financially.

3. Told ya that time is the key to great investing. ;-) You must save as much as possible as soon as possible. Don't worry if you haven't done all you could do so far and if you've wasted years -- get started NOW!!!! As they say, the best time to plant a tree was 20 years ago. The next best time is today.

4. Though my home is paid off, I'm not counting on the equity to help fund retirement. That said, it's likely that we'll downsize at some point in time and that could free up some extra cash.

5. I haven't yet figured out what I'll do when I retire, but that's still far enough away that it's not a pressing matter.

How about you? How do your retirement plans measure up to these five?

How to Retire at 50

Yahoo suggests how we all can retire early (which in this case is defined by them as before 50.) I'll save you most of the details and just give you their keys to doing this:

 

• Save radically (and I mean radically)

 

 

• Spend smartly (just a subset of saving radically IMO, but they have it listed separately.)

 

 

• Invest well

 

In addition to these general guidelines, they offer the following suggestions:

 

• Invest the Maximum Amount into Company-Sponsored Retirement Plans

 

 

• Put Your Money in Long-Term, Low-Risk Investments

 

 

• Avoid the Coasts -- Find a way to have an urban income with a suburban cost of living.

 

I have several thoughts on this issue:

 

• Do you really want to scrimp and save for 30 years so you can eek out an early retirement? I didn't think so. Neither do I. As such, I think they need to add a recommendation to grow your career as part of this process. Doing this will allow you to earn (and thus save) much more during your working career and allow you a bit more leeway in what you buy/spend before you get to 50 (which will make life more enjoyable IMO) as well as help you build a bigger nest egg for retirement.

 

 

• If I had a "guide to retiring at 50" it would probably be the same as the basic principles that make you wealthy over time -- with the focus on generating even more income, controlling spending even tighter, and more savings/investing added in.

 

 

• I'm not sure retiring at 50 is a reasonable goal for most people. Yes, some can do it, but it requires a decent income and a real dedication to save in 30 years enough to live for potentially another 30 or 40 years. IMO, early semi-retirement is a much option for most people -- and can be done MUCH earlier than 50.  

 

 

• Again, a piece that notes the fact that where you live has a huge impact on your finances. And I LOVE this quote: "Find a way to have an urban income with a suburban cost of living." EXACTLY!!!!! This is what I've been able to do (have a GREAT income while living in low cost-of-living places) and I can say from experience that it's very powerful financially.

 

So, what's your take on retiring at 50 (other than you'd like to do it ;-) )?

Five Common 401k Mistakes

The Wall Street Journal lists five common 401k mistakes as follows:

Mistake No. 1: Thinking the most important decision is how you invest your money. Your first priority should be determining how much you need to save—and figuring out how to make that happen.

Mistake No. 2: Investing only enough to get the company match. Save for your future and maximize the tax advantage of contributing to the plan.

Mistake No. 3: Assuming your 401(k) can be invested for you alone because it is for your retirement. At least once a year, you should put your investments and your spouse's together and make adjustments.

Mistake No. 4: Investing too much in your company's stock—even after Enron and Lehman Brothers. Vanguard recommends that your company stock shouldn't make up more than 10% of your retirement-plan money.

Mistake No. 5: Picking funds based on performance alone. Stock and bond returns are largely unpredictable. But the one factor that is predictable is the expense rate. When deciding which funds to invest in, zero in on the ones with the lowest expenses. 

My take on these:

1. I agree. Most people fixate on the return rate of their investments when time and the amount invested have a bigger impact on overall performance. Instead we all should be focusing on saving as much as we can as soon as we can. That's what I've done for 20 years now and it's really paying off big-time now.

2. I've been putting in the maximum amount possible for over a decade now. Again, I've always wanted to save as much as possible as soon as possible. As far as not getting the match for some time (the article notes that some employer matches don't vest immediately), yes, I've had to deal with this in the past (though I've stayed around long enough to collect everything.) Thankfully, my current plan vests immediately.

3. I invest all of our funds -- retirement and non-retirement -- as if they are one big amount, allocating the dollars into types of assets I feel are appropriate for our family as a whole.

4. Back in the day, most 401ks put the match in company stock (it was a way to bump up the price -- automatic, regular purchases of stock.) I had a plan like this. But for the past 12 years I've worked for private companies that didn't have stock, so the entire match has gone into funds I selected (thankfully.) If your match goes into company stock, I think you'd be wise to follow Vanguard's advice and sell it as soon as you can so you have no more than 10% of your investments in your company's stock.

5. Ha! I think I'm on the same page as the author on this one. My 401k is with Fidelity, and I invest in their low-cost index funds (which have an even lower expense ratio since I have an amount invested with them above a certain threshold -- which qualifies me for lower costs.)

How about you? Any of these ring true for they way you manage your 401k?

Is Retirement Changing?

It used to be that retirement went something like this:

• You worked at a company (or series of them) for 40 years or so
• At some point, the person retired -- stopped working altogether
• Some combination of the company, the person, and the government (SS) combined to provide for the retiree's post-work income

But perhaps the face of retirement is changing. Consider these facts I found on a recent piece in my local paper:

• 31 percent of those 50 and older say they would be bored not working.
• 75 percent of workers 50 and older say they are interested in phased retirement, though few workplaces offer it.
• 18 percent of those of retirement age say they work to contribute and be productive; 53 percent say they are working for the money.
• 15 percent have a job they say is fun and enjoyable.
• 32 percent of working retirees made about the same or more than they did before.

My take on these:

• I think I would be bored by complete retirement as well. I'm either going to work part-time, develop some side projects (more FMF!), or volunteer with some organizations I like.
• Hmmmm. Sounds like the idea of early semi-retirement is catching on.
• While some people want to keep working to avoid boredom, many more (the majority) want/need to work simply to keep money flowing in. Not a surprise given the state of most Americans' retirement savings.
• Since "15 percent have a job they say is fun and enjoyable", does this mean that 85% dislike their jobs? If so, that's a big "ugh".
• Yes, income is likely to go down in retirement. Actually, I'm surprised that so many retirees (one-third) made the same or more than they did while working. 

Anything in these facts that stood out to you?

An Argument Against Retirement

Recently I did a series of posts on early semi-retirement (see Is Early Semi-Retirement a Better Option than Retirement?, Eight Steps to Early Semi-Retirement, and An Example of Early Semi-Retirement) on how to retire early. But here's a piece from the New York Times that says retiring early might not be a good idea. Why? Because your mind goes downhill. The details:

Data from the United States, England and 11 other European countries suggest that the earlier people retire, the more quickly their memories decline.

The implication, the economists and others say, is that there really seems to be something to the “use it or lose it” notion — if people want to preserve their memories and reasoning abilities, they may have to keep active.

“It’s incredibly interesting and exciting,” said Laura L. Carstensen, director of the Center on Longevity at Stanford University. “It suggests that work actually provides an important component of the environment that keeps people functioning optimally.”

While not everyone is convinced by the new analysis, published recently in The Journal of Economic Perspectives, a number of leading researchers say the study is, at least, a tantalizing bit of evidence for a hypothesis that is widely believed but surprisingly difficult to demonstrate.

The piece goes on to say that the study is far from definitive and there are many who disagree with it, it at least points to the fact that retirees probably shouldn't totally switch off when they quit working.

I don't think I could totally switch off if I wanted to. I have a lot of interests I'd like to pursue while in "retirement" such as developing websites (much more than I am doing now), volunteering for some of my favorite charities (running programs/initiatives), writing, teaching, and so forth. In addition, I have several hobbies that I think will keep me active and "with it" mentally. In other words, I don't plan to sit in front of a TV for eight hours a day.

The study brings up a topic that's not discussed that often -- how to do retirement "well." Anyone out there either doing a "good job" in retirement or seen someone else do it in a way you think was successful?

How Much do You Need to Feel Rich?

CNN Money asked people how much money they needed to feel rich. As you might imagine, the answer varied widely.

Even answers from the experts varied widely -- they said you needed "somewhere around $2 million to $12 million in savings" to feel rich. The difference makers: what age you are (younger people need more money so it lasts longer) and where you live (you need more money to live in more expensive markets.)

This is entirely the wrong question for me. I don't care about feeling rich. What I'm shooting for is retiring comfortably with a solid income (from investments) and plenty of extra money so there's no danger that I will ever run out of it.

As such, I think $3 million is the right number for me. From that amount I can earn $120,000 per year (at 4%). Since I only need $70,000 per year to live at my current (very comfortable) standard of living, I can still sock away $50k per year and I'll never run out of money. Pretty sweet, huh?

Then again, if I wanted to push it, I could make due on $2,000,000. At 4% I'd still earn $80,000 and not have to touch my principal. But that's a bit too close for comfort for me, so I'll wait until at least $2.5 million before I retire.

Of course, I could plan on spending some of the principal and retire a good amount lower than $2,000,000. But that's too risky for my taste.

Besides I have two big expenses that I need to navigate before I'm "home free" retirement-wise: pay for college for my kids. Once that is done my major expenses will be over and I can really focus on moving towards retirement.

How about you? How much do you think you'll need to feel rich? Or how much do you think it will take for you to retire completely?

Seven Rules for an Enjoyable Retirement

The book The Buckets of Money Retirement Solution: The Ultimate Guide to Income for Life ends with a list of the seven rules for an enjoyable retirement. Instead of financially-related tips, these center more on the quality of life during retirement, which I found both interesting and refreshing. Here they are:

1. Invest well in friendship and good times. Doing so will probably be more beneficial for you than investing in pork-belly futures.

2. Always seek value in how you use your time. Put your emphasis on quality priorities such as travel, hobbies, and family.

3. Spend a lot less than you earn. The secret of happiness is not necessarily found in seeking more but in honoring the capacity to enjoy less.

4. Share the wealth of your abilities. When you give of yourself -- and not just your money -- is when you truly give.

5. Accumulate many memories, not things. The joy you receive in retirement won't correlate directly with how much money you have but with how involved you are with other things.

6. Compound your interest in people and the world around you.

7. Bequeath a valuable inheritance by giving your kids enough to do something but not enough to do nothing.

There's very little written about the "quality" side of retirement. Most articles you read (including mine) cover how to save for retirement but lack the "what do you do in retirement to make sure that it's a good experience" angle. That's why I like this list and wanted to share it with you.

I know that there are retirees who read FMF and I'm especially interested in your opinions on this list as well as additional insights you may have for making retirement "successful." Please share them with the rest of us.

Getting the Most from Your 401(k) or 403(b)

The following is a guest post from Marotta Wealth Management.

For many workers, their retirement account is their largest asset. Having so much of your nest egg in one place means you should watch carefully how it is invested and monitor it regularly. Unfortunately, the average family spends more time planning their annual vacation.

The secret of making it financially used to be joining the right company, earning big bonuses and promotions and letting the firm provide for you in retirement through its defined benefit program. Your benefit in retirement was typically defined by your earnings over the course of your career. But as we all know, those days are over.

Today's average worker will have a dozen employers and work at each job for less than four years. Your career is now your responsibility, and so is your retirement plan.

Instead of a defined benefit program, most companies have defined contribution programs such as a 401(k) or a 403(b). In these you reap what you sow and the growth is subject to the weather of the markets. Nothing is defined.

A 401(k) and a 403(b) are virtually indistinguishable, named after the sections of the IRS tax code that define them. Businesses use a 401(k); schools and nonprofits use a 403(b). Most of the principles for evaluating and managing them are identical.

Some 403(b) plans and many 401(k) plans offer an employer match. Formulas vary, but the most common is to match the first 3% of your salary that you contribute at 100% and the next 2% of your salary at 50%. So if you put 5% of your salary into the company's plan, your employer will give you an additional 4% of your salary.

This is easily the fastest 80% return on your money. No one should pass up an employer match. If you are in the 25% tax bracket, each dollar you contribute will only cost you 75 cents. If you earn $50,000 and contribute $3,000, it will reduce your paycheck by only $2,250, and you may receive an employer match of $2,500. In other words, for $2,250 less in your paycheck, you can get $5,500 more in your retirement account.

Everyone should take advantage of matching plans and contribute at least the minimum amount required to receive a full match into the company plan. Unfortunately, many workers don't. In our example, between age 20 and age 72 at 6.5% return above inflation, the match would grow to more than a million dollars. Your first priority in saving should be to get the entire match.

The next step would be to fund your Roth account, make sure you are growing your taxable savings, and then return to contribute more to your company's retirement account. As we will see, there are good reasons not to contribute everything to your company plan.

The advantage of contributing to a Roth account is that your income (and therefore your tax rate) is probably increasing over the course of your working life. I've written extensively on the benefits of a Roth conversion this year, and that same reasoning makes funding a Roth IRA a good idea.

Many employers allow contributions to a 401(k) or 403(b) Roth. The more common pre-tax contributions are called a "traditional" 401(k) or 403(b) to distinguish them from Roth contributions. You should consider designating the portion you contribute toward a Roth. The portion your employer contributes, either matching or profit sharing, is always put into a traditional account.

If your income is significant, consider maximizing your contribution. The limit for 2010 is $16,500 a year. If you are older than 50, the limit rises to $22,000 to help you catch up on your retirement savings. In addition to your contributions and your employer match, companies sometimes pay bonuses or offer profit sharing as an additional pre-tax contribution. The total allowable contribution for 2010 is $49,000.

Given the amounts of money in retirement funds, it is important to invest them wisely. Every additional 0.01% return lets you retire nearly a month earlier. Thus fees matter, especially the expense ratio of your plan's fund choices. Most plans have funds laden with fees. Some share this revenue with plan sponsors, enticing them to pick more expensive funds to subsidize the costs of the plan or even make a profit.

But after you retire or leave that company's employment, you should almost always roll your 401(k) into an IRA for better investment choices and lower fees. Few plans have choices in every asset class and subsector.

When trying to craft an allocation when the choices are anemic, start by looking at your top-level asset allocation before selecting specific funds. For example, imagine you have decided on an asset allocation of 8% U.S. bonds, 7% foreign bonds, 34% U.S. stocks, 38% foreign stocks and 13% hard asset stocks. The next step is to look at the choices your plan offers.

You may find three U.S. bond funds and no foreign bond funds. One might be inflation protected, one might be intermediate-term treasuries and the other might be high-yield with a higher than normal expense ratio. You might combine the allocation to U.S. and foreign bonds and then split that amount between the first two bond funds, avoiding the third altogether.

There might be a dozen U.S. stock funds and only two foreign funds. The bulk of your asset allocation may fall in one or both of the foreign funds. And you may have to split the allocation to hard asset stocks between the U.S. and foreign choices. Your financial advisor can help you integrate your 401(k) selections with the rest of your portfolio. And as always, you want to evaluate each choice, looking closely at fees and expenses.

Withdrawing Money During Retirement

The following is an excerpt from Personal Investing: The Missing Manual.

After you spend decades living off a paycheck and saving money for retirement, selling investments so you have spending money can be downright unsettling—it's the exact opposite of what you've done your entire life. In addition, you worry about having to sell investments during a down market and hurting your portfolio. Meanwhile, you have enough on your mind wondering whether you'll get to the local diner in time for the early bird special. You can balance withdrawing cash from your portfolio and making sure your money lasts. This section tells you how.

Figuring Out What You Can Spend Each Year

The whole point of a retirement plan is to save enough money so you can live the way you want during retirement. However, when you retire, you have to be realistic. If you want your money to last, you can spend only a certain amount each year. That amount depends on the sources of income you have:

• Social Security benefits.
• Pension benefits, if you qualify for a pension.
• Part-time work.
• Income from your portfolio.
• Withdrawing principal from your portfolio.

If you're lucky and frugal, you may receive enough money from the first four sources to pay your living expenses. However, most people have to withdraw principal from their portfolios to make ends meet. If you fall into this category, here's how to figure out how much you can withdraw from your portfolio in income and principal each year without worrying about running out of money:

1. Figure out the real return you expect from your portfolio between now and when you die.

The real return is the investment return you expect, reduced due to the effects of inflation. For example, if you expect to earn 7% and inflation is 3%, your real return is 3.9%. (To calculate the real return for yourself, use this formula: (1 + investment return)/(1+inflation rate) – 1, and then multiply by 100 for a percentage.) For simplicity, this example assumes the real return is 4%.

2. Use the real return you calculated to figure out how much you can withdraw during your first year of retirement.

Say your portfolio is $500,000. Multiplying your portfolio balance by the real return ($500,000 x 4%), you see that you can withdraw $20,000 the first year.

3. Calculate the withdrawal for each subsequent year by multiplying the previous year's amount by the inflation rate.

In this example, you'd increase your second-year withdrawal by 3%, making it $20,600. You'd withdraw $21,218 in the third year of retirement.

Note: If you opt to withdraw only the income from your portfolio, you may be tempted to weight your portfolio heavily on the bond and REIT side of things. Although you'll be able to withdraw more each year, your portfolio won't grow fast enough during retirement, and you'll run out of money sooner.

Creating a Retirement Paycheck

The withdrawal strategy in the previous section assumes that the annual return is the same each year. But you know that the market has good years and bad years. That's why you set up a cash reserve to cover several years of living expenses. That way, you won't have to sell investments at a loss to pay your bills. As long as you have a cash reserve, you can set up automatic withdrawals to act as a replacement for the paycheck you grew accustomed to.

Using the $20,000 first-year withdrawal from the previous example, here's how you use your cash reserve to set up a retirement paycheck:

1. Set aside a cash flow resesrve for 5 years of living expenses.

To keep things simple, multiply your first year's withdrawal by 5 (totaling $100,000 in this example).

2. Put 1 year's worth of expenses ($20,000) in an ultra-low-risk savings account, like a money market account.

You don't earn much interest, but you don't lose any money either.

3. Invest the second year's living expenses (another $20,000) in a low-expense, short-term bond fund.

Invest in high-quality bonds to keep your risk low (see Section 7.2.1.1). You'll earn a better return than you do in the money market account without much additional risk. If you invest in municipal bonds, your taxes on the income will be low, too.

4. Invest the remaining 3 years of living expenses in short- and intermediate-term bond funds.

These investments are still relatively low risk, but provide slightly higher returns than the rest of your cash reserve, which helps protect your money against inflation.

5. Set up a monthly transfer from your money market account or savings account (the one in step 2) to your checking account so it acts as your retirement "paycheck."

You can live on this money just like you did with your paycheck while you were working. In this example, the monthly amount starts at $1,667. Each year, you increase your monthly withdrawal for inflation, so the monthly amount in the second year is $1,717.

6. Every year, replenish your cash reserve.

Remember, your cash reserve has to increase for inflation. So, if you started with $100,000, the next year's reserve would have to be $103,000.

Because you have to sell investments to refill your cash reserve, choose what to sell wisely. If you can sell some investments without taking a loss, sell the investments that also keep your overall asset allocation on target. You can also use these sales to get rid of investments that aren't meeting your expectations. If stocks and bonds are both in the toilet, sell short-term bonds first (they drop the least of any duration bond, as explained on page 138). That way, you give the rest of your portfolio time to recover.

Because you have 5 years of expenses in your cash reserve, you have time to wait out a bear market. If all your investments have lost money, you can wait before replenishing your cash reserve. For example, you may choose to delay adding to your cash reserve for a year. Then, when the market recovers, you can sell investments to top off your reserve.

Tip: If you have money in traditional IRAs or 401(k)s, you have to take required minimum distributions. When you refill your cash reserve, be sure to withdraw your RMDs first. After that, it usually makes sense to withdraw the additional money from your traditional IRAs and 401(k)s, so money in Roth IRAs can grow for as long as possible. (Roth IRAs don't have RMDs, so you can leave the money in as long as you like.)

Making the Most of Tax-Advantaged Accounts

The following is an excerpt from Personal Investing: The Missing Manual.

Tax-advantaged accounts come with a variety of features, but the most common characteristic is delaying the time when you have to pay taxes. Tax-deferred means your money can grow unfettered by taxes, which come due only when you withdraw from the account. You can reinvest the full amount of interest, dividends, and capital gains you earn to compound for years without a dollar going to taxes. Only when you withdraw money during retirement do you pay taxes; at that time, your tax rate might be lower.

Chapters Chapter 10, Chapter 11, and Chapter 12 give you the full rundown on different types of tax-advantaged accounts, but here's a quick introduction:

• 401(k) and 403(b). These tax-deferred accounts (Section 10.2.1) have become the mainstay for employer-sponsored retirement savings, with the majority of employers choosing to offer them over traditional pension plans. You contribute a percentage of your paycheck before paying taxes on it, so your tax savings reduce how much you pay out of pocket for your contribution. For example, if you're in the 25% tax bracket and contribute $10,000 to your 401(k) or 403(b), you save $2,500 in taxes, so your net out of pocket is only $7,500.

In 2010, the maximum annual contribution is $16,500. (If you're over 50, you can add a catch-up contribution of up to $5,500.) You must start withdrawing from your account when you're 70 ½.

Tip: If your company matches a portion of what you contribute, that match is like an immediate 100% return on the portion the company matches. It's unlikely you'll find a return that good elsewhere, so if you can't afford to contribute the maximum amount to your 401(k), at the least, contribute enough to get the full company match.

• Traditional IRA. Anyone with earned income (salary, wages, tips, bonuses, and so on) can contribute to a traditional IRA, another tax-deferred account option. If you've contributed the maximum to your 401(k) or 403(b), a traditional IRA is one way to get more money into retirement savings. In 2010, you can contribute up to $5,000 (plus an additional $1,000 catch-up contribution if you're over 50). Your contributions might be tax-deductible depending on your income. For example, if you're single and your adjusted gross income is less than $56,000, your entire contribution is tax deductible.

You must be younger than 70 ½ and have earned income to contribute to a traditional IRA. As with 401(k) plans, you must start withdrawing when you reach age 70 ½.

Note: If you switch jobs and don't want to keep your retirement funds in your employer-sponsored retirement plan, you can move your money into a rollover IRA to continue the tax deferral.

• Roth IRA. Similar to traditional IRAs, 401(k)s, and 403(b)s, you don't pay taxes on interest, dividends, and capital gains in a Roth IRA (Section 10.2.2.2). What gets everyone's attention is that you withdraw from these accounts tax-free after the age of 59 ½. The catch is that contributions to a Roth IRA aren't tax deductible. That is, you pay taxes on the money before you contribute to the account. With some income limitations, Roths have the same contribution and catch-up limits as traditional IRAs.

Roth IRAs have other features that make them attractive for saving for your later retirement years. You can continue to contribute after you reach 70 ½, and there's no mandatory annual distribution at any time. Because you contribute after-tax money, you can withdraw your contributions at any time without paying taxes or penalties.

Note: Because you contribute after-tax, you can withdraw your contributions without paying taxes or penalties. Before you can withdraw earnings tax-free, you must be 59 ½ and have converted or contributed to the Roth at least 5 years earlier.

• Roth conversion. If you convert a traditional or rollover IRA to a Roth IRA, you have to pay taxes on the tax-deferred contributions you made to the original account. Section 10.2.3 helps you decide whether a conversion makes sense for you.

• Inherited IRA. A beneficiary of an IRA can transfer the money into an inherited IRA to keep the tax-deferral going until the IRS requires distribution. The tax rules for inherited IRAs make Einstein's theory of relativity look like a piece of cake, so consulting a tax advisor is a good idea if you inherit an IRA.

• SEP-IRA. For small businesses or self-employed individuals, the simplified employee pension IRA (SEP-IRA) is the easiest pension plan option. You can contribute up to 25% of your income each year (to a maximum $49,000 in 2010). You can set up a SEP-IRA for a side business even if you already have a 401(k) at your day job.

Note: See Retirement Plans for Small Businesses to learn about other retirement account options for small businesses, such as Keogh and SIMPLE plans.

• Section 529 college savings plan. Investments grow tax-deferred in these popular college savings plans. Withdrawals are tax-free as long as you use them for qualified educational expenses (Section 11.2.1). The contribution limits are high, sometimes as much as $300,000. Whoever contributes to the account is the owner, who can then name a family member as the beneficiary. That's good news for two reasons. First, colleges don't take the 529 investment into account when they calculate a student's financial aid, because the account isn't in the student's name. Second, if the current 529 beneficiary ends up getting a big scholarship, you can change the beneficiary.

• Section 529 college prepaid plan. Prepaid plans lock in future tuition costs at today's rates (Section 11.2.2). They aren't as popular as 529 savings plans, because they make it harder to roll over into another plan or switch to another beneficiary.

• Coverdell education savings account. Investments in these accounts grow tax-deferred, and withdrawals are tax-free if you use them for qualified educational expenses. The big drawback to these accounts is the $2,000 annual contribution limit, a drop in the bucket for college costs.

• Health savings account. If you have a high-deductible health insurance plan, you can set up a health savings account (HSA), described in detail on Section 12.4. In 2010, an individual can contribute up to $3,050 pre-tax with a $1,000 catch-up if you're 55 or older. Unlike with flexible spending accounts, you don't have to use the money you contribute during a specific year. You can invest the money in the same kinds of options you have with an IRA. Withdrawals for health care are tax-free.

Note: Medical savings accounts (MSA) work like health savings accounts, except that only self-employed people or employers with 50 or fewer employees qualify for them.

Kiss The Old Method of Retirement Planning and Saving Goodbye! (MAYBE)

The following is a guest post from Forex Traders.

The 2008 Global Credit Crisis has changed things. The world we live in is different. In the spring of 2008 it became apparent the economy was slowing down and the housing sector was going to lead the economy into a recession. But it definitely was not clear how bad it was about to get. During the spring of ’08, the talking heads on financial news networks, and even economists at the height of power at the Federal Reserve, were beginning to agree that America was about to hit a small economic road bump, but most of them assured the public that economic growth would rebound toward the latter part of 2008, and the economy would, of course, continue in its ascent to higher ground. Oh, how wrong we were. That small economic road bump ending up being a pothole the size of Texas. When the bottom fell out in September of 2008, the entire global financial system nearly failed. And, as a result, a “reset” button has been hit.

This “reset” button that was hit during the global economic recession of the last two years has changed the global financial landscape forever. A great shift in the balance of economic power is currently transpiring, and it will continue to transpire over the next 2 decades. In March of 2009, equity markets in the U.S. hit a low of 6,000 points. At this point, many Americans had suffered drawdowns of 30%-60% of their retirement accounts. Then, suddenly in March of 2009 the economy appeared to begin growing again. The equity markets rebounded and began rising. Unemployment slowly began to peak out and economic reports started to show improvement in the U.S. economy. So, from March to November of 2009, it looked as though the worst of our economic problems in America were now behind us, and growth was again before us. But then things got bad again. Really bad.

Currently, the Federal Reserve is once again raising the possibility of implementing further quantitative easing measures, which basically means they foresee very difficult times in the very near future for the U.S. economy. The Fed recently downgraded U.S. growth prospects for 2010, and they have communicated to the American public that they believe it may take 4-6 years to fully recover from the current recession. That means that economic growth will continue, but it will be very sluggish, unemployment will be stubbornly high, and general economic conditions will be less than optimal. So how has this changed the way Americans may have to plan for retirement?

For several generations in America, people were able to graduate from college, get a good paying job, and begin saving for retirement by investing in U.S. equity markets. Then, after 30-40 years of faithful service in the work force and careful retirement planning, a middle income American was able to retire with quite a bit of money. In fact, most Americans who held average paying jobs over the last 30 years and saved properly could have built a nest egg of $300,000 or more. Not bad. And a good paying job made it possible to save over $1 million. But the ability to grow a retirement account is dependent on the stock market increasing. What if the stock market doesn’t increase over the next 30 years as it has over the previous 30 years? That would make it very difficult to build a retirement nest egg, and this very possibility is why the old method of retirement planning may be dead.

Let’s break down the global economic recovery a bit more. Currently, the United States, England, and the EuroZone are all struggling significantly. Growth is expected to be very slow and general economic conditions in all three regions will be less than optimal for an extended period of time. So, these guys are running very slowly.

Then, you have China, India, Brazil, and other emerging market economies (China is a bit past emerging market at this point. They are a bona fide world power.) These economies are growing at blazing fast speeds. So, over the next decade, if the U.S. and Europe move forward at a very slow pace, and these emerging market economies move forward at a blistering hot pace, what’s going to happen to the economic balance of power in the world? It’s going to shift.

And this is why retirement planning may have to change. If the real growth over the next 20 years is going to be in China and India, then the average U.S. worker may have to be much more proactive about investing in those regions. In fact, only time will tell for sure, but investing in China and India may be one of the best decisions to make over the next 20 years.

So, how can the average investor position himself or herself to take advantage of this global economic power shift? It has been common practice in retirement planning over the last few decades to expose a small amount of one’s investment capital to overseas markets. One practical measure a person could take would be to sit down with a registered financial advisor and allocate a higher percentage of one’s portfolio to overseas exposure. For example, if the average aggressive model currently allocates 5% of capital to overseas markets, an investor may want to possibly increase that percentage to 10%, 15% or even 20%.

Another practical step an investor can take to take advantage of this global shift is to invest in an investment fund managed by a Commodity Trading Advisor that specializes in trading foreign markets. This type of investment vehicle can be thought of as a hedge fund for smaller investors. 

There are numerous other ways to profit from this potential shift in global economic power, but these are two very practical ways to begin investigating possible investment opportunities. Before making any major financial investments, especially with retirement capital, make sure to always consult a registered financial advisor for additional perspective and guidance.

Great Places to Retire in the US

We've discussed five places to retire on Social Security alone -- five foreign locations where you can live completely on the average SS payment of $1,200 a month. But what if you prefer to stay in the US? If you're still strapped for retirement funds and want to retire in America, MSN Money lists five cheap places to retire in the US. I've listed these below along with their cost-of-living index (100 is average -- anything below 100 is good -- the lower, the cheaper) and the nearest big city -- which still could be an hour or so away. The list:

• Rogers, Ark. -- 86 -- Springdale and Fayetteville
• Moon Township, Pa. -- 92 -- Pittsburgh
• Noblesville, Ind. -- 92 -- Indianapolis
• Gainesville, Fla. -- 90
• Mount Vernon, Wash. -- 109 -- Seattle

BTW, they include Mount Vernon despite it being more expensive than average because it's "less expensive than Seattle." Huh? Is "less expensive than nearest big city" the criteria we should be using?

And if you don't like any of these, they tell you how to find your own low-cost retirement paradise as follows:

• Consider the economy.
• Look about an hour outside an urban area.
• Consider a college town.
• Beware of too much isolation.

But let's say money is no object -- or at least that you've saved enough that you don't have to be Polly Pennypincher in deciding where to retire. You just want a great place to spend your golden years. Well, Kiplinger lists five great cities for retirees as follows (again along with cost-of-living index):

• Charlottesville, Va. -- 108
• Dothan, Ala. -- 89
• Palm Bay-Melbourne-Titusville, Fla. -- 100
• Pittsburgh, Pa. -- 92
• San Francisco, Calif. -- 162

I'm not sure what we'll do when we retire. I may take a "partial retirement" early where I work at a non-profit, so obviously we'd need to be in the location where the non-profit was. But out of any of the cities listed above, Pittsburgh (or Moon Township) would be a possible move for us. We've lived in Pittsburgh before (I met my wife there), loved it, and we have family living both there and in Erie, Pa. (two hours away.) Then again, if I was to move I'd probably want a better climate and Pittsburgh isn't that great on the weather front. Gainesville is looking pretty good, though. ;-)

When to Start Taking Social Security

The book Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved gives this advice when asked when a person should take Social Security:

Bottom line: If you can hold off until you reach full retirement age at 66 or 67 (depending on when you were born), great. Wait until you're 70, and that's even better. In fact, quick math reveals that depending on how your retirement accounts are allocated, you may be well advised to spend down your own investments before tapping into Social Security benefits, because few investments can be counted on to provide a yearly guaranteed return that large.

Now before we get into discussion, I need to say that the book also points out that there's no one "right" answer and that the "best" solution for any individual can depend on a variety of factors. But IN GENERAL, they feel the advice above is the best for the largest group of people.

This is my plan for retirement. I'm saving as if I'll get nothing from Social Security any way, so if I get it I'll simply have a windfall. As such, I don't plan on taking it until the latest possible time frame to maximize the amount I get back per month. The one thing that could change that -- if one or both of my parents suddenly dies in their 60's. In this case, it might appear that my genes will conspire against my longevity. As such, I may opt for early Social Security benefits, though I'd still need to see what the impact would be for my wife if I took it early versus late.

How about you? Anyone out there nearing (or passed) this decision? What did you do and why?

Interesting Retirement Stats

The book Money 911: Your Most Pressing Money Questions Answered, Your Money Emergencies Solved has some statistics on retirement that I found interesting. They are:

• 24%: The amount by which Americans entering retirement will have to reduce their standard of living if they don't want to outlive their money.

• $60,000: the typical balance in the retirement plan of a 55-year-old.

• $229: The typical monthly retirement contribution that a $55-year-old makes.

• 70%: the percentage of older workers who are planning to work in retirement years.

Here are my thoughts on these:

• I'm not sure what the first stat means or how it was derived. It's clear that it means the average person is going to have to lower his standard of living in retirement, but I'm guessing this has a very big range (some people won't have to lower at all while others will need to lower by 40% or more.) Anyway, I'm not planning on having to lower my standard of living -- I'm saving to have the retirement I want on my terms.

• $60k? Is that all the average 55-year-old has saved? Ugh. I had that when I was 30 -- and now I have many times $60k (and I'm way south of 55). How can someone hope to retire when they only have $60k saved at 55?

• At $229 per month, the typical 55-year-old isn't making much progress.

• Oh, here's the answer to my question about hoping to retire with so little saved -- they can't retire -- they have to keep on working. Double ugh.

I've got a feeling that most FMF readers are well past these "averages", but I'd like to be proven correct. Use the comments below to tell how well you're doing versus the 55-year-olds quoted above.

Update: After I wrote this post, I found these pieces:

• 47% of early boomers could run shy of cash - "The Employee Benefit Research Institute estimates that 47% of boomers between the ages of 56 and 62 are likely to run shy of the cash they'll need to pay for basic expenses and uninsured health costs in retirement."
• Retirement may mean a lifestyle downgrade - "As a nation, we are far from retirement-ready, so prepare to live frugally or save more."

How to Catch Up on Retirement Savings

We've been talking a lot lately about how most Americans are woefully unprepared for retirement. MSN Money reinforces these thoughts with the following facts:

• One in four workers has nothing or virtually nothing saved for retirement. The Employee Benefit Research Institute, which conducts an annual retirement confidence survey, found 26% have less than $1,000 put aside, up from 20% in 2009.
• More than half (54%) have less than $25,000 saved, EBRI found. Unless you're still in your 20s, that amount of savings is weak.
• Fewer than one in five workers is on track to retire comfortably, according to a recent Hewitt Associates analysis of more than 2 million workers at 84 large U.S. companies. Most won't be able to maintain their current standards of living, and many will have to cut spending dramatically, the study indicated.
• Workers who aren't covered by traditional pensions are on track to accumulate only 74% of the money they'd need to maintain their standard of living. The dwindling number who are covered by pensions along with 401k or other defined-contribution plans are expected to have 91% of what they need.
• Those who aren't saving now are in the worst shape of all. Assuming they start contributing eventually, they're likely to accumulate less than half (43%) of what they need.
• Early retirement (at age 62) "significantly increases the shortfall employees will see at retirement" because of fewer years of saving, higher medical costs (Medicare doesn't kick in until age 65) and a longer period of retirement to cover. On average, early retirees would have just 65% of the funds they needed to maintain their lifestyles, Hewitt found.

Pretty grim picture, huh? So, what is a person to do if they find themselves in a bad spot (like at age 55 and with very little saved for retirement)? Well, MSN Money offers this solution to help them get back on track:

Hewitt found that most workers could accumulate almost all the money they needed simply by boosting their retirement contributions by 1 percentage point every year for five years.

That's right: Go from 5% to 6% this year, from 6% to 7% next year and so on.

That one act would more than double the percentage of people on track to have enough (from 18% to 36%), Hewitt said, and get an additional third within spitting distance of their goals (32% would have a shortfall of one to two times their annual pay).

So, it's the old "increase savings bit by bit over time" suggestion, eh? Yep, it's that simple -- start saving more. Duh.

Ok, I'm being a bit harsh, but it really does come down to the fact that Americans need to save more for retirement. And let me be so bold as to suggest they start by doing this sooner rather than later (how about beginning at age 25 rather than at age 55?) because time is anyone's biggest weapon in saving for retirement.

So if someone begins saving for retirement at 25 by putting away 5% of their pay and adds 1% per year, they'll be at 10% by the time they are 30. And, since their income is likely rising during that time, they are not only socking away a larger percentage of their pay, but a larger percentage of an ever-increasing number. Then, I'd suggest they keep on going -- don't stop at 10%. Work to get to 15% or 20%. That's what I've done and now I'm in a good position to retire early (maybe even 10 years early depending on how the market goes.)

I must say that I have been encouraged lately by the number of young people (college students and those just graduating) who have written me and said they want to get their financial houses in order. These people have many decades ahead of them and they are deciding at the right time (with 40 years or more to go before retirement) to start taking the issue seriously. Good for them! I'm excited for them and the fact that they are so mature at such a young age. Wish I could say the same for myself when I was 25. ;-)

Three Good Reasons for Retiring and Three Good Reasons for Not Retiring

How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire, Third Edition lists three good reasons for retiring and three more for not retiring as follows:

Three good reasons to retire:

• The time is right.
• You've got more compelling things to do.
• Your job is changing.

Three good reasons not to retire:

• Work is your identity.
• You'll miss the people you work with.
• You want to stay in the loop.

Here's my take on these:

• I think it's a good time to retire when you: 1. Have the money and 2. Want to do something else with your life (which could be work 20 hours per week or quit working entirely.)

• The decision is not just to retire or not retire -- there are transitional options. You may want to go from a full-time, do-what-pays-well job to one that leaves you more fulfilled (though probably making less money), like working for a non-profit you love. You could also opt for staying in the "working world" but doing so at 20 hours per week versus 40 or more. I think either of these options is very likely for me as I hope to "ease" into early retirement.

• The "work is your identity" is a valid point. Many people, especially men, determine who they are by what they do. When these guys retire, they seem to lose themselves.

• It would have to be a pretty compelling "loop" for me to give up retirement just to be in the know. ;-)

• I have a lot of things I'd like to do when I retire. I'm knocking some of them off the list now, but it's so big that's I'll have plenty left over for a day when I have more time.

How about you? Do any of these points hit home with you?

Five Places to Retire On Social Security Alone

We've discussed the fact that many people are relying too much on Social Security for retirement as well as how retirees can make their money go farther by moving to a foreign country. Now here's a piece that combines both of these topics. Yahoo lists five places to retire on Social Security alone as follows:

• Boquete, Panama - Resident retirees receive a long list of benefits.

• Granada, Nicaragua - You could live well in Granada on about $900 per month.

• Hangzou, China - About $1,000 a month could buy you a comfortable and super-exotic new life in Hangzou.

• Morelia, Mexico - You could retire on a budget of about $1,100 per month in this colonial city full of charm and history.

• Cuenca, Ecuador - The average monthly Social Security check could buy you a pleasant new life in Cuenca.

Of course, there's a lot more to the decision to move abroad than money. I've listed the issues to consider in my post titled How to Afford Retirement: Move to a Foreign Country.

A few thoughts from me on this subject:

1. If a large portion of Americans will be counting on Social Security as their only or primary form of income in retirement, they likely face a lower standard of living in the US than what they've been used to. Moving to a foreign country offers them the chance to live a middle to upper class lifestyle for relatively little money.

2. Other than Hangzou, China, all of these cities are close to the US, making it relatively easy to visit relatives. In fact, you may live closer to family in some of these locations that you would be if you lived on one side of the US and your family lived on the other.

3. Personally, I don't want to have to consider this as a retirement option -- I want to retire where I want (in the US). That's why I'm saving to make that happen. People who aren't saving are limiting their options.

4. We have friends who spend several months of the year in Costa Rica (not because they need to save money, because Michigan winters can be a bear) and LOVE it there. Remember that the US does not have the corner on the "great places to retire" market.

Does anyone know someone who's tried this (or are you thinking about it)? It would certainly to hear about their (your) experiences.

Balancing Enjoying Your Money Now Versus Later

In my post titled The Joy of Wealth, FMF reader Old Limey (who's retired) made the following comment:

To give you an idea of how I spend my days. Yesterday was the day my hiking group rents a luxury motorcoach that costs us each $30. Thirty five of us were driven to a beautiful county park on the California coast between Santa Cruz and San Francisco where, in gorgeous weather, we hiked through a beautiful Redwood forest. The group splits up into small groups according to ability. I go with the fastest group, that the others call, "the Rabbits", and we did a hike I estimate to be about 12 miles. I can't say for sure because my GPS lost satellite coverage in several of the steep canyons we went through. There were just 5 of us, myself and two old friends and two newcomers (each 46) that were still working but had flexible hours. One was a PhD in electrical engineering, the other was an Iranian lady that was also a PhD and a clinical biologist at a local hospital. What more can you ask than to be doing something that's very healthy, great for the psyche, have intelligent conversations, and to meet two very interesting new friends, all for $30.

This is the retirement many of us imagine -- days filled with fun and excitement. But to enjoy a retirement like this, you need two things: money and your health.

Let's consider various money and health combinations and what sort of retirement they give you:

• Enough money and good health -- The great retirement described above.
• Enough money and poor health -- Depending on how bad the health and how much money you have, it could be an ok retirement or quickly turn into a big mess.
• Not enough money and good health -- Though far from ideal, at least you can still work (which is what many people are counting on.)
• Not enough money and poor health -- You're counting on the government and/or family to take care of you.

Thankfully, one of the key factors to retirement success is fairly controllable. If you take a few simple steps (and avoid some others), it's likely that you'll be wealthy when you retire. But having your health is less certain. Sure, you can eat well, exercise, get enough rest and so on, but accidents, heredity, "fate", and a variety of other things can still conspire against you.

This gets to the "do you spend your money now or later?" question that people bring up here from time to time. The "spend it now" group argues that you have your health NOW, so why not enjoy what you have while you're young. It's not often said but it's certainly implied that retirement can take care of itself later. Unfortunately, we know that this is not usually what happens.

The other point-of-view is the "save now and enjoy life in retirement" group. This way of thinking focuses on putting money aside for that one day when you can enjoy a lifestyle like Old Limey's. The one problem here: you never know if you'll have your health or not when you retire.

So what's the solution? I believe it's balance. If you make the gap between your income and your expenses large enough, you can both enjoy life and have plenty of savings. No, you can't spend everything every year on one big party after another, but you can have a ton of fun while also not sacrificing the future.

That's my opinion. What do you think?

Too Many Relying Too Much on Social Security

We've discussed Social Security's place in retirement planning quite a bit here. Several commenters have brought up the fact that Social Security is meant to be a supplement to retirement savings, not the majority (or even all) of it. I agree -- that's what it's meant to be.

But that's not how it's being used/counted on. Here are some facts from How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire, Third Edition that I found quite interesting:

• Social Security was the major source of income (providing at least 50 percent of total income) for 53 percent of aged beneficiary couples and 73 percent of aged nonmarried beneficiaries.
• Social Security provided 90 percent or more of the income of 21 percent of aged beneficiary couples and 44 percent of aged nonmarried beneficiaries.

The implication of so many depending so much on a system whose existence (at least in its current form) is questionable is quite distressing.

Anyway, I'm planning on receiving nothing from SS when I retire -- and I'm saving accordingly. Then if I do get something I'll consider it a bonus.

How about you? Anyone else out there not counting on SS for retirement income?

The 12 Most Important Decisions You Must Make Before You Retire

How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire, Third Edition lists, as you may have guessed from the title, the 12 most important decisions you must make before you retire. Here's their list (stated as questions):

• Am I ready to retire?
• Can I afford to retire?
• When should I apply for Social Security?
• How should I take my pension payments?
• What should I do with the money in my company savings plan?
• When do I have to take money out of my IRAs?
• How should I invest during retirement?
• What should I do about health insurance?
• What should I do to prepare for serious illness?
• Where do I want to live after I retire?
• How should I arrange my estate to save on taxes and avoid probate?
• How can I age successfully?

I'll post a few more tidbits from this book in the days to come, but for now I'll address my thoughts on some of these questions:

• Am I ready to retire? I think I will be. I always have a large list of interests I'd like to pursue if I had the time, so I don't think I'll be bored in retirement.
• Can I afford to retire? Not yet, but I'm working on it. Should be able to retire early (well before 60) in 10 years or so if all goes well.
• When should I apply for Social Security? There's great debate on what the "best" time to take Social Security is. I'll make that decision as the time approaches, but for now I'm not counting on SS income to help me in retirement and my plan is to delay taking it for as long as possible.
• What should I do about health insurance? I've said before that I'll likely work at least a bit during retirement. One key consideration of where to work could hinge on where I can find health care coverage.
• Where do I want to live after I retire? A big, big question. A few options: stay where we are, move homes but live in the same general area, move to a nicer (warmer) part of the country, move to where one (or both) of our kids live (depending on where they end up.) Lots to decide when it gets to that time.
• How can I age successfully? Man, if you had the answer to this, you'd be a billionaire. ;-)

What about you? Did any of these questions stand out to you?

The Number One Obstacle to Retirement

US News lists the number one obstacle to retirement. Want to guess what it is? I'll tell you in a minute, but do you want to take a shot before the answer is revealed?

Before reading this (and even after reading it) I would have said "not having enough money" would have been the biggest obstacle to retirement. Yes, this could have many different meanings -- not enough saved, too much debt, too many expenses (health care), etc. -- but the result is the same, the person can't retire because he/she doesn't have enough money to retire.

It's one of these sub-points that US News lists as their biggest obstacle. Their words:

At first it would seem that the biggest obstacle to retirement is not having enough money. Most people simply don't have enough in the bank to retire comfortably. While that is certainly a big part of the equation, it's just the tip of the iceberg. Why don't many people have enough money to retire? They didn't save enough, of course. But why didn't they save enough? And that brings us to what is, for many, the biggest obstacle to retirement--debt. And the problem isn't just any debt. The problem is non-mortgage debt.

Non-mortgage debt creates a triple-whammy when it comes to retirement. First, during your working years you have less to save toward retirement because you must make payments on your debt. Second, unlike a mortgage payment that goes toward a home that over the long term goes up in value, consumer debt usually goes to pay for things that have no lasting monetary value. And third, in retirement you need more income because, in addition to your regular monthly expenses, you must keep making payments on the non-mortgage debt you've racked up. As a result, many save less during their working years and need more during retirement.

You might disagree, but my opinion is that the average American is not a great manager of his/her money. As such, they ignore the basics that are required to do well financially (and thus retire). And to add more fuel to the fire, many then compound their problems by making horrible money mistakes. Poor money management + bad financial mistakes = you're not retiring anytime soon.

Sure, debt is a major problem (and especially "bad debt" like credit card debt). But it's really just an indication of the main issue -- people can't control their spending.

What's your take on the issue? What do you thin the #1 obstacle to retirement is?

Three Steps to See If You're Ready for Early Retirement

A reader writes in to CNN Money with the following situation:

• He's 50 years old
• He "absolutely hates" his job (it's stressful, requires long hours and he has a tough boss.)
• He has about $1.6 million dollars saved.
• The only debt he has is a mortgage on his house that equates to less than half its value
• He also leads a very frugal lifestyle.
• He's wondering if he can retire early.

The columnist is wise in counseling him to be VERY careful before jumping off the career track. After all, your career is your most valuable financial asset, so letting go of it is a very big financial move (and potentially disastrous.) In addition, there are several costs/challenges associated with retiring anytime and retiring early makes these even more difficult. Here's how Money says it:

Before you leave you want to be sure that you're prepared. Otherwise, you could find yourself in the uncomfortable position of having left work without adequate resources to support yourself only to realize that finding another job with comparable pay and benefits may be harder than you think, especially when you're 50 or older.

This isn't a decision you want to make on impulse, no matter how much you may detest your job. Step back and do a clear-eyed and methodical analysis of whether you're prepared to retire.

I couldn't agree more. Retirement at 65 with $3 million in the bank isn't an easy decision. Retiring at 50 with $1.6 million plus some debt is a HUGE move.

Here are the three steps Money suggests he take to determine whether or not he's ready to retire:

1. Do a status report. What really matters is whether the savings you've accumulated can provide what you feel you'll need to maintain an acceptable standard of living. The only way to really know is to crunch the numbers.

2. Make an exit plan. If, after going through the analysis above, you find that leaving your job at age 50 wouldn't give you the comfort level you need, the single most effective thing you can do is continue to work and save. Each year you stay on the job gives your $1.6 mill a chance to grow, and you also get to fatten your retirement accounts with new contributions (up to $22,000 this year in a 401(k) and up to $6,000 to an IRA, if you're 50 or older).

First consider whether you could improve your situation by holding out a bit longer. Maybe you've got stock options that will vest. Or perhaps working an extra year or two could mean a larger pension. Maybe there's the chance your company could downsize, in which case you could collect a nice severance package. The point is that you don't want to leave any easy money behind by making too hasty an exit.

3. Make an entrance plan. Here, I'm talking about a plan for entering retirement. You'll boost your odds of having a fulfilling retirement if you think about how you're actually going to live once you leave the workaday world.

Overall, it's pretty good advice. But I'd offer a few more options including:

• How about looking for another job? I've had jobs I've absolutely hated. Twice I worked in them for two years (each) while I looked for a better opportunity, and each time I found a much better option.
• What about finding another position in the same company? That would get him out of the "bad job" and "bad boss" messes.
• How about finding a part-time (or maybe "easier" full-time) job so that he won't need to draw on his savings much (or at all.) Perhaps he can now do something he's always wanted to do and take a pay cut to do it. It would be better than having no income at all and would give him a chance to get rid of his mortgage debt.
• He needs to think whether or not he's really ready for retirement. At 50 he's still got a lot of life left ahead of him -- is he really going to be satisfied being retired? Maybe, maybe not. But he really needs to think it over.

My sense is that he has a job that he hates and is desperate to get out of it. But if he takes some of the steps I suggest above, it's likely he can find a job he likes and keep working. Then he can build his nest egg, pay off his debt and still retire early (7 to 10 years from now) with a boatload of money in the bank.

What do you think about the situation? What would you advise him to do?

What Social Security Pays and When

Here's a GREAT piece from Vanguard that lists:

• How your age and birth date affect your benefits (what you get at various ages depending on when you were born)
• If you will lose benefits if you keep working (and how much you'll lose)
• Other factors you should consider (Your current health and family's longevity history, plans for you and/or your spouse to continue working while collecting benefits, your spouse's age and earnings history, and your other income sources.)
• Some other options for receiving benefits (file and suspend, restricted application, or reset)

It's a wonderful resource -- one you may want to bookmark and refer to later and even point older family members and friends to.

Like most readers here (I'm guessing), I was born after 1960, a fact that puts me in the last group. I can start collecting full benefits at age 67 with each year I decide to collect early costing 5% or 6% off of that amount. If I started collecting at 62, I'd only receive 70% of my benefits. Yikes!

I've said several times that I'm not counting on Social Security as part of my retirement planning, but if I receive it, I'll count is as gravy to my already funded retirement savings. Maybe that can be my "take a nice trip every year" money. ;-)

Regular Adjustments Maximize Retirement Success

The following is a guest post from Marotta Wealth Management.

Retirement planning consists of a wild scatter plot of potential projections. Navigating successfully through possible outcomes requires regular corrections and adjustments.

Most retirement software runs hundreds of possible retirement scenarios, called a Monte Carlo analysis. Success is defined as achieving 80% or more of investment outcomes where blindly following your planned strategy means staying solvent until you die. Keeping an 80% success rate ensures that your average is much higher than depleting your portfolio. You are prepared to deplete the portfolio, but over half the time you will leave a significant legacy.

Although these projections are useful, they are seriously limited.
 
One software vendor includes wild stock returns, often called black swan events, that might swamp your portfolio. So the allocation recommendation given the best chance of success for long periods of time is an all-bond portfolio, exactly the opposite of what you would expect.

I pressed the software makers to explain why their program gave such a strange result. They had tried to simulate black swan events in the stock markets. But they admitted they hadn't included any unforeseen bond or inflation events.

They did not consider a possible excessive bond default. And they simply assumed constant straight-line inflation at whatever input was provided. Muni bonds may default en masse. In fact, the United States may go the way of Greece. Alternatively, hyperinflation may return. In any of these scenarios, the all-bond portfolio doesn't seem so attractive for long-term investing.

At age 65, retirement projections are like Lewis and Clark leaving St. Louis heading for the Pacific. They start out due west but know they will need to alter their route as they navigate the terrain. And they can also rely on their Native American interpreter and guide.

Straight-line projections don't work within Monte Carlo. And you can't anticipate every unexpected event. The best approach is to diversify your portfolio to reduce the risks associated with one type of investment and to make continual course corrections.

We recommend a safe withdrawal rate based on age. At age 65 that rate is 4.36%, assuming portfolios with sufficient appreciation and projections adjusted regularly.

Age -- Withdrawal Rate -- Allocation to 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%

Assume you have a million-dollar portfolio as you retire at age 65. Your safe withdrawal rate is 4.36%, or $43,600 for the first year. Inflation averages about 4.5%. A balanced portfolio might earn 5% over inflation, or 9.5% total. So in an average year you would spend $43,600. The remainder of your portfolio would gain $90,858 for an end value of $1,047,258.

Our safe spending rate at age 66 increases from 4.36% to 4.43%. If you'd only earned 3% over inflation, you would receive an approximately 4.5% cost-of-living increase at $45,562 per year. Because you earned 5% over inflation, your safe spending rate increases to $46,394 annually. The extra $832 a year is available because 80% of the time the average return for your portfolio is above our planning.

The market typically appreciates more than planned and you get an increase greater than inflation. But some years the market drops significantly. You then have to hold your spending constant, waiting for your portfolio to catch back up with average market returns.

Our minimal expectation is 3% over inflation. That is the average return of a bond portfolio. When inflation is running at 4.5%, a bond portfolio offers about a 7.5% return. Investing everything in bonds, however, is a poor idea. It gives your portfolio no average excess return to come back from bad bond markets or hyperinflation. With all bonds, your failure rate is 50% or more, too high for a safe retirement plan.

Adding stocks to your portfolio will boost your average return. If bonds earn on average 3% over inflation, stocks earn 6.5% over inflation (11% if inflation is 4.5%). Adding stocks provides an engine of appreciation over 30 years of retirement.

A million-dollar portfolio at age 65 with average returns from a 30-70 tilt toward bonds will produce $4.0 million in spending through age 100. But tilting 70-30 toward stocks will produce $6.1 million. The decision to tilt toward stocks produces over $2 million more lifestyle spending over 35 years.

Investing in fixed income gives you peace of mind. You know 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 when your time horizon is at least five years or longer. Being overly fearful of the markets may jeopardize your retirement lifestyle.

To balance your asset allocation, we recommend keeping the next six years of spending in fixed-income investments and the remainder in stocks. You can keep five years of spending in fixed income if you are aggressive and seven years if you are conservative.

Now 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. Not only do you have a maximum safe withdrawal, you also have a suggested 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.

Thus at age 65, 25% of your portfolio should be in fixed income. This gives you six years of safe spending. Your fixed income allocation could range from a more aggressive 20% to a more conservative 30%. Outside of this range gives you a smaller chance of maximizing your lifetime retirement spending.

Outside of this range you must reduce your withdrawal rate. If you reduce your spending, you can afford to allocate more to fixed income because you don't need the growth. You can also allocate more to appreciation because the investments are really being managed for the next generation. If the markets drop significantly, you won't need the money to meet your lifestyle needs.

Small adjustments in asset allocation and withdrawals provide the constant course corrections necessary to reach your goals. And these regular adjustments give your retirement plan the greatest chance of maximizing total retirement lifestyle spending and the smallest chance of depleting your assets prematurely.

Spending Retirement Income Can Be Risky

The following is a guest post from Marotta Wealth Management.

Calculating safe spending rates in retirement is challenging. Everyone wants to be conservative and be sure they will have enough money. But understanding what numbers to use is not simple.

The most common request we get is for a back-of-the-napkin calculation of future yield, interest or income. People assume they can safely spend the income and thus refrain from touching the principal. But rather than being conservative, this strategy may actually lead people to spend too much.

Consider Michael and Jennifer Madison, a newly retired 65-year-old couple who want to play it safe. They have $1 million that they invest entirely in bonds paying 6%. They believe if they can live off the interest, they won't need any of the principal. Every year they spend $60,000, confident about their conservative choices. But after several years, they begin to feel strapped for cash. They have not provided for the inevitable increase in the cost of living. Too late they realize that inflation is eroding their buying power. The idea of leaving their principal intact is not working.

In just 10 years, the couple's $60,000 only has the purchasing power of $36,000. Their lifestyle has dwindled to 60% of what it used to be. With inflation averaging 4.5% over long periods of time, they need their principal to appreciate. Each year their dollars stay constant, they lose their buying power.

Additionally, although their bond portfolio was getting a 6% return when they started the process, bond yields fluctuate as much as stocks do. When the Madisons find themselves in a low-yield environment like today, they don't know what to do. Inflation has eaten the principal. The Fed has swallowed the yields.

Leaving the principal untouched is even more difficult to interpret when you consider the difference between stocks and bonds. If your investments are in bonds, your principal has no growth to help keep up with inflation. But the interest payment may be higher than you should be spending.

If your investments are in growth-oriented stocks, however, they may pay no dividend at all even if they double in value. Without a dividend it isn't clear what keeping the principal intact means. We don't distinguish between more value from income and more value from appreciation. In either case, spending all of your growth leaves nothing to keep up with inflation.

From an investment point of view, a stock that appreciates 6%, a stock that provides a 6% dividend and a bond that pays 6% interest are equal. Some companies provide a better return by reinvesting earnings in the business. For others it is better to distribute those earnings to shareholders. Attempting to live off the income and preserve the principal often leads people to create asset allocations that are all income and no appreciation. They mistakenly believe this is the best of all worlds. It seems like both overly conservative investing and overly conservative withdrawal rates, when in fact it is neither.

Because retirement may last more than 35 years, you need significant appreciation just to keep pace with rising costs. With inflation averaging 4.5%, spending at age 100 will be more than 4.5 times what it is at 65. So if you get no interest or appreciation on your portfolio, you can spend only a tiny fraction the first year. You will have to save 4.5 times the dollar amount to have the same lifestyle your final year.

Put another way, if Michael and Jennifer stuff their million dollars in the mattress, they will only be able to spend 1.16%, or $11,606, the first year. They must save the remainder for the $54,168 that same standard of living will cost if they live to 100.

Note that because no interest is paid in your mattress, even this ultraconservative 1.16% withdrawal rate is depleting the principal. And any higher withdrawal rate depends on some level of income or appreciation.

Also bear in mind that any specific asset allocation including an allocation entirely to U.S. Treasuries will produce fluctuating returns. Sometimes even bonds drop in value. Long-term government bonds lost 7.03% in 1994 and another 8.6% in 1999. Even short-term Treasuries lost 0.58% in 1994.

Given these shifting returns, the rate of return we assume for our projections is critical. Even if you are ultraconservative, put no money at risk and have a withdrawal rate of 1.16%, you may still run out of money. You may live to be 101 or older. And inflation may exceed 4.5%. There is always a chance of failure in the infinite combinations and permutations of returns, inflation and longevity.

For this reason, financial planning doesn't guarantee with 100% certainty that you can withdraw a certain amount of purchasing power for 35 years and not outlive your money. Instead, astute financial planning seeks an 80% chance and then relies on annual course corrections over the next 35 years to adjust your spending to cover the remaining 20%.

This is an excellent approach. First, keeping 80% of the wild scatterplot of returns exceeding your safe withdrawal needs means the average is much higher than you need. Most of the time, returns that fall in the bottom 20% are more than compensated by the 80% that do not. And because the average return is higher than you need, your portfolio will most often be able to make up for poor returns early in retirement.

Second, if 80% exceeds the needs of your safe withdrawal rate, it produces a lot of excess returns. So although you are planning to deplete the portfolio, 80% of the time you will leave a significant legacy. What you are trying to accomplish is your best chance at enjoying your preferred lifestyle. And your best chance of achieving it is aiming to deplete the portfolio in less than 20% of the wild scatterplot of returns.

This 80% success rate sounds more threatening than it actually is. In truth, it means you will be able to increase your spending rate by more than inflation 80% of the time. But 20% of the time, you will have to defer any spending rate increases by inflation until excess returns have helped your portfolio rebound. These annual adjustments allow a near 100% success rate by adjusting your standard of living by a small amount based on how your portfolio has actually performed.

At age 65 the safe withdrawal rates using this method are 4.36%, or about $43,600 for a million-dollar portfolio.

Five Retirement Considerations

MarketWatch gives five things to consider at retirement as follows:

• Work - Deciding on whether to and how long to continue working is a primary decision about retirement.
• Leisure time and activities - Determining the proper balance between work and leisure time and identifying your personal retirement goals - are important to make sure you enjoy leisure in retirement.
• Relationships with family and co-workers - Consider the importance of your relationships with co-workers when making a decision to retire. And consider how the various aspects of your retirement might positively or negatively affect the relationships you have with your family and friends.
• Obtaining employer and federal benefits - Getting a handle on your benefits, especially your health insurance in retirement is an important part of the planning process. In some cases, you might need to keep working to maintain your health insurance. Assess whether full-time retirement would be financially feasible for you at this point in your life, evaluate how changes in the economy will affect your pension, investments, and retirement benefits, and determine the steps that are necessary to receive company, government, or other benefits you're entitled to in retirement.
• Planning for the future - The hard part about planning for retirement is you really don't know the span of the plan. It could be one year or 30 years or even more. But that doesn't mean you shouldn't create a plan and, especially, contingency plans. Determine the factors that are critical to maintaining a personally satisfying retirement, develop an alternative plan that could get you through a considerable and unexpected setback in your retirement, and evaluate whether your retirement plans meet the demands of personal, social, and financial changes.

I'm still a long way from retirement, but I am closer to it than many of you reading this post. Here's what I'm thinking about my retirement as of today:

• I don't see myself going from a "regular" job to no job at all. I see a transition from the job I have now to a lower-paying though still "decent" job at a nonprofit of some sort. From there I might keep at it for awhile or downshift again to simply a volunteer status (or even start my own business), but I don't think there will ever be a time when I'm not "working" in some way (paid or not), health permitting.
• I'm not sure what I'll enjoy doing when I retire -- maybe more of what I do now (growing roses, swimming, reading, writing, etc.)? I still have some time to figure this out.
• Probably the biggest relationship issue to sort out is with my wife -- will she be able to stand me being at home more often? ;-)
• I'm planning on zero financial help from the government for retirement (and I'm saving accordingly), though there may be some medical benefits I'll want to take advantage of. Will need to check into that as the time draws near.
• From a planning standpoint, my biggest issue is making sure I have good insurance -- especially long-term care and medical coverage. If those two are set, I think much of the uncertainty in retirement can be planned for. And of course I'll have my final back-up plan -- our kids! ;-)

How about you? Anyone out there been thinking about retirement and the associated issues? And for those of you who are retired, what issues are you facing/considering these days?

The Top Five Unexpected Costs of Retirement

Yahoo lists the top five unexpected costs of retirement as follows:

1. Living Longer
2. Adult Children With Money Problems
3. Higher Taxes, Higher Inflation
4. Health Costs and Dental Care
5. Repairs for Your Older Home

Here are my thoughts on these:

1. Living Longer - This is what makes retirement planning so difficult. You can make assumptions about how long you'll live which then leads to how much you'll need. But if you live longer than that, you're out of money with no real way to earn more. And if you're conservative and save for when you think you'll live plus five years, what happens if you live 15 years extra? The solution? Save and lower expenses enough where you can live off the earnings of your retirement savings without touching the principle. I know, not an easy thing to do. That's why you need to start now and follow proven steps to make yourself wealthy.

2. Adult Children With Money Problems - Another wildcard. I'd like to be able to say "they're on their own", but real life doesn't happen that way. That said, kids will need to mostly provide for themselves even in the worst of times. After all, they still have the ability to work/earn (unless they have an accident/illness that prohibits them from doing so.)

3. Higher Taxes, Higher Inflation - I think we can all bank on both of these being higher in the next decade or longer. And yes, they are both retirement savings killers. Save more, save more, save more.

4. Health Costs and Dental Care - Being healthy is a HUGE advantage in retirement and, unfortunately, one you can't count on. Of course you can improve your odds by exercising, eating right, and so on, but still there's no guarantee. So it's medical and long-term care insurance to the rescue, huh? As for dental care, I have one word: floss.

5. Repairs for Your Older Home - A good argument for downsizing to a newer place during retirement -- preferably a condo or something similar that doesn't require lawn care, repairs, etc.

Anything I'm missing? Does anyone else have more/better suggestion on how to deal with these retirement wildcards?

The 10 Biggest Sources of Retirement Income

Yahoo gives us the ten biggest sources of retirement income as follows:

• Social Security
• Retirement Accounts
• Pensions
• Savings Accounts and CDs
• Stocks and Stock Mutual Funds
• Home Equity
• Part-Time Work
• Inheritance
• Annuities or Insurance
• Rent and Royalties

Here's where I stand on each of these:

• Social Security - We've previously discussed whether Social Security is an insurance program (which it was designed to be) or a retirement program (which was what it seems to have morphed into.) Well, it looks like more and more people are counting on it as a major source of retirement support. Check out this from Yahoo:

According to a recent Gallup survey of 1,020 Americans, 54 percent of retirees say Social Security is a major source of income. About 34 percent of current workers expect Social Security to largely fund their retirement, the highest Gallup has recorded in this decade-long annual survey, and up 7 percentage points since 2007.

Personally, I'm counting on zippo from Social Security and anything I get will simply be a bonus added to my other retirement income.

• Retirement Accounts, Savings Accounts and CDs, Stocks and Stock Mutual Funds, Annuities or Insurance - I'm lumping all these into one group because they all result from the same source -- money we all save for retirement. This money can be put into retirement account (which then can buy stocks or mutual funds), saved in CDs and savings accounts, or used to buy annuities/insurance. Personally, this is where I'm keeping my retirement funds. I'm saving in my 401k as well as in IRAs, a SEP IRAs, and "regular" (taxable) accounts. I have set my retirement number and am now counting the years until I have saved what I need.

• Pensions - I have no pension. That's why I'm saving as much as possible myself.
• Home Equity - It won't be a major source of retirement funds for me since my house isn't worth that much (it's not like I own a $750,000 home with no mortgage -- my house is worth probably $170k right now). That said, I can see us down-sizing at some point where we buy a smaller, cheaper home. This will free up some cash to help fund retirement.
• Part-Time Work - I don't know if I'll ever fully retire (as in do no work). I might work for pay or I might simply volunteer (as I do now, just more of it), but I don't think retirement for me will be job-less.
• Inheritance - Ha! I wish! If anything, I may need to help provide for my parents (which I'm happy to do, BTW. They took care of me for much of my life and I'm fine with helping them if need be.)
• Rent and Royalties - No rent, but I could have some royalties that develop over the next ten years or so. We'll have to see what transpires.

How about you? What are your major planned sources of retirement income?

Five Savings Tips for Soon-to-Be Retirees

Smart Money lists five savings tips for soon-to-be retirees -- which I'll cover in a minute -- starting with the following facts about what Americans actually have saved up for retirement:

About 65% of people age 55 and older have less than $100,000 in retirement savings; just 37% have saved less than $25,000, while around one-third have less than $10,000, according to Employee Benefit Research Institute’s 2010 Retirement Confidence Survey.

We've talked a lot here about Social Security and whether it's a retirement program or an insurance program, but from the looks of it, most people are counting on it as a retirement program -- using it to fund a major portion of their retirement. Otherwsie, wouldn't they be saving more?

Ok, that's getting me a bit off track. Here are five ways Smart Money says anyone can boost their retirement savings:

• Max out your contributions
• Use your catch-up provision
• Set up a side, tax-free savings account
• Consider rolling over to a Roth 401(k)
• Hold off taking Social Security

My take on these:

1. I've been maxing out my contributions for years and plan to keep doing so for a long, long time.

2. One advantage of turning 50 is that you can save even more in tax-advantaged accounts. I still have a few years to get to that point, but when I do, I'll be saving as much as I can.

3. We have some IRAs that we've rolled-over from 401ks on the "side", but that's it.

4. I still haven't decided whether or not to roll over some or all of our IRAs into Roth IRAs. Everything I find seems to put it at a wash or slightly advantageous to do so, but all the costs are up front. I'm not sure I want to pay a hefty amount now and hope for a good/profitable outcome 20 years down the road. Anyone made a roll over to a Roth this year? Why or why not?

5. I'm not even counting on Social Security for retirement. I'm saving like it won't be around (whether it will be or not is still TBD) and if I get anything, that will be "found money" to me. As such, I should be able to postpone taking it for a good amount of time, though I'll need to run the numbers to see when taking SS is the best deal.

Anyone else out there thinking of retirement? What are you doing to save for it?

Social Security Math

Here's an interesting look at 20 years of Social Security payments versus what else you could have done with the money had it been yours. The summary:

• If you paid in the maximum amount for the past 20 years and your employer did the same, you would have paid in $231k into the system.

• If you had taken that money and invested it yourself in an S&P 500 Index Fund, you would have $739k.

Seems like a big rip off (you paid in $231k and could have had $739k), but the benefits don't seem that far apart. Note this:

• At a 4% withdrawal rate, the ($739k) account would kick off nearly $30,000 in income the first year ($2,500 per month).

• According to the Social Security website, the maximum benefit in 2010 is $2,346 per month (at age 66).

Ok, so not much difference between $2,500 and $2,346 -- assuming you only contribute for 20 years and that you get the max payout. But what happens if you contribute for 40 years? You'll have much more in the system and thus a lot more you could have generated with the invested amount, while the max Social Security payout remains the same.

Obviously Social Security is more than a simple retirement plan for one person. It's a system designed to have those that make more (in this case these people would "make more" because they're paying in the maximum amount) fund safety-net levels of retirement income for both themselves and others. That said, it looks like it's a bad investment for those people (versus what they could have done with the money on their own.) Or is it?

What's your take on the issue?

Retirement Lessons: Sail Away into the Sunset Years

The following is a guest post by FMF reader Amanda S.

Ever caught yourself saying “I would love to retire to some faraway tropical island and spend my days in the sun doing absolutely nothing”?  Lots of people daydream about visiting exotic locales in retirement; we found a way to do just that for less money than you think – we bought a boat.  Sure, it sounds crazy.  When we told our friends and family about our idea we got a lot of incredulous looks, as we both loved traveling but had never done much sailing.  But we put together a plan, saved up some additional money before retiring, and educated ourselves beforehand by taking a week-long sailing course and then chartering a boat just to be sure we could “do it” on our own. 

My spouse and I have been blessed with good-paying careers; each year we have maxed out our retirement accounts and invested any additional savings in index funds.  We did not end up having children so that meant we could put even more money in savings and investment accounts.  Most importantly, we have lived very frugally for our income.  When we started out on our cruising adventure we knew we had the finances to do this indefinitely but we wanted to keep our options open, so we rented out our modest two-bedroom house.  We also didn’t have specific goals like circumnavigating the globe, although some couples do set these kinds of goals.  For us it wasn’t really about the sailing; we just wanted to spend an extended amount of time traveling in the Caribbean, an area we’d never been to before.  Living aboard a sailboat was a cost-effective way to accomplish our goal.

If your priority in retirement is travel and you want to minimize costs you might consider retiring aboard a boat.  Although we don’t plan on staying aboard forever, we have met plenty of couples who intend to live out their golden years in what is essentially a floating RV.  Here are some of the lessons we learned:

1. Buy Used.  Lesson number one: A Boat is Not an Asset.  It’s worth repeating: A Boat is NOT an Asset.  If you buy a well-used boat, the depreciation curve will be at a gentler (but still downward-trending!) angle than if you buy new.  The key point to remember is that in a corrosive saltwater environment, boat parts will constantly be breaking down whether your boat is a $4M mega-yacht or an $80K sailing sloop.  So you will save a lot of money at the outset by buying used over buying brand new.  That said, do your research!  We bought a ten-year-old sailing catamaran.  The price tag for our boat was a bit higher than most monohulls but the catamaran had additional amenities that were a priority for us like more space, no heeling over, a watermaker, large fridge/freezer and other comfort upgrades.  However, we also met many other people who were just as happy with less costly and less-equipped monohulls.  Know what kind of day-to-day comforts you can (and cannot) do without, and then shop around until you find a used boat that meets most or all of your needs.

2. Pay Cash.  Just like buying a car, it is generally much better to pay cash than take out a loan.  If the boat of your dreams costs more than you can afford, consider waiting to retire for a few years to save up so you can own it free and clear.  You will have a ton of unbudgeted repairs and maintenance items once you live aboard (more on that in a minute) so minimizing any ongoing expenses is important.  If you or your spouse is handy with woodworking or D-I-Y repair, you can save even more by buying a boat that needs a little work at a reduced price.  While our boat did not need any major repairs when we purchased it, we have made some nice improvements (a cherry dining table, installing a single side-band radio) that have increased the comfort level of the boat.  We also paid cash and are very glad we did.  Not having a monthly payment means you aren’t wasting valuable cruising dollars on interest.  Every penny counts, especially when you consider my next point.

3. Make a Budget and Include Contingencies.  A typical cruising budget can run anywhere from 20K to 50K per year depending on where you take the boat, and what you plan to do when you get there.  With a decent galley (kitchen), you can save a lot of money by eating most meals (especially dinners) aboard.  We saved a lot of money this way and we were able to explore the Caribbean island chain as tourists without incurring costs for airfare/hotel, and minimizing the costs of dining out.  Looking at Quicken, our biggest annual expense by far was actually the category of “Boat Maintenance and Repair”, averaging 8K per year.  Those big-ticket repairs can come out of the blue, like when our generator broke down and needed a refit in St. Maarten, or when we had the rigging replaced in Grenada.  The rest of our budget probably looks a lot like a typical retiree’s budget but this one category is unique to owning a boat.  You can really put a crimp in your travel plans if you don’t budget enough.

4. You Don’t Have to be Rich.  We had a pretty sizeable net worth before we set out to do this.  We’re fairly conservative and risk-averse.  But we have met cruising couples and families of every age and socioeconomic stripe since we started this adventure.  We befriended a family of five, living aboard a catamaran, with three kids under the age of 12 being homeschooled.  What an education!  We also know a retired couple in their late 60’s who invite their teenage grandchildren, one at a time, to sail with them for the summer.  That’s a fantastic summer vacation.  We have an artist friend who teaches outdoor beginner art classes to other cruisers for a fee.  And we knew a Canadian couple in their late 20’s who owned their own boat but worked as captain/crew for other boats during the charter season – a great way to finance the lifestyle.  If it’s really something you want to do, you don’t need a ton of money, just a well-thought-out plan.

5. Be Prepared for Culture Shock.  If you travel to the Bahamas or the Caribbean, you will experience all the joys and frustration that come with living abroad.  Unlike the typical tourist, the first question you will ask when you arrive in a new place will be something like “where is the grocery store/hardware store/laundromat?” instead of “which way to the beach?”.  Service in a restaurant will probably be slower, much slower, than you are used to in the States and you will have to ask for the bill at the end of your meal.  You will probably notice more trash littering the roadways and the non-tourist areas.  The car in front of you may stop without warning so that the driver can have a ten minute conversation with the guy waiting for the bus.  It can be exasperating.  On the other hand, strangers will greet you with a smile and a “Good Morning” as you pass by on the street.  If you appear to be lost someone will notice and give you directions, or – and this has happened to us several times – they may just offer to take you where you need to go.  You may be invited to someone’s home to have a drink or share a meal.  The average tourist doesn’t usually get the opportunity to experience anything other than the resorts and tourist attractions because they simply don’t have time in a one- or two-week vacation.  When you live on a boat, you control the schedule and can spend as much or as little time getting to know one place as you like.

6. Be Willing to Make Do.  This lifestyle is not for everyone.  It can be inconvenient and even heartbreaking at times.  It can be especially difficult to be away from family and friends for extended periods of time.  You “miss out” on some of the big holidays and life events back home.  For some, a trip home once a year to see the grandkids is not enough.  Video Skype, while a great tool for keeping in touch, is a poor substitute for face-to-face interaction with loved ones.  To add to the frustration, sometimes an ordinarily simple task (like buying groceries) can become an ordeal that takes all afternoon – lowering the dinghy, finding a secure place ashore to lock the dinghy, walking to the grocery store in the heat, ferrying back all the groceries back to the boat without smashing the bread or getting everything wet, raising the dinghy, and unloading everything only to discover you forgot the milk.  And let’s face it, there are lots of things that are completely out of your control.  Sometimes the supply ship doesn’t arrive on time and an entire island will be out of gasoline, tomatoes, propane, or batteries, and your mail won’t arrive as expected.  You will just have to make do with what you have on board or borrow what you need from a neighbor (as a group cruisers are very generous and will usually help out someone in need).  It helps to be the type of person who can go with the flow, otherwise you are setting yourself up for some major disappointments. 

7. Love and Respect Your Partner.  Honestly, this is the most important tip of all.  You will be spending nearly 24 hours a day together in a confined space.  So if you and your spouse are the type of couple who argue constantly or sweat the small stuff, this lifestyle may not be for you.  We were uniquely suited to spending inordinate amounts of time together – we had lived together, commuted together, and worked in the same department while we were dating.  We had already learned to work as a team to accomplish our goals, to support each other emotionally , and to settle disagreements without arguing.  For a typical American couple, going from living in a 3000 square foot home to sharing a living space roughly the size of a 2-car garage can be quite an adjustment in and of itself.  If your marriage adds a lot of day-to-day stress to the equation, it can spell disaster. 

Everyone has different ideas of what their “ideal retirement” would look like.  We chose to travel and now have five years of cruising and over 12,000 miles of ocean behind us.  Spending your retirement traveling to exotic locations may not be for everyone but it is a completely achievable financial goal.  The same holds true for any retirement goals you may have – planning and preparation are the keys to success. 

Monthly Income or Rollover? Choose Wisely

The following is a guset post from Rick Rodgers, CFP®, President of Rodgers & Associates.

All employer plans are required to offer you an income payout in the form of monthly income from your retirement plan.  The amount of monthly payment will depend on the balance in the account and your age. When considering early retirement, the annuity payouts will be smaller, because you have a longer life expectancy. The payments are taxed as ordinary income and don’t qualify for any special tax treatment for federal income tax purposes.

In most cases, annuity payments aren’t eligible to be rolled over (transferred) to an IRA. Rolling over distributions from an employer plan to an IRA avoids taxation. The one exception is if the annuity payouts are for a period of less than ten years.

When you’re asked to choose a payout option upon retirement, choose wisely! With most retirement plans, this is an irrevocable decision.  Income payout options vary among plans, but the following choices are the most frequently offered:

• Life Income: This option will provide an income for as long as you live; however, the pension dies with you. So while life income will give you the maximum monthly income available, there are no benefits available to your heirs.

• Joint and Last Survivor (J&LS): With this option, you’ll receive an income for life and provide a survivor income for the life of your spouse. This survivor income will usually represent a percentage of your pension income, typically anywhere from 50-100%.  Your monthly pension will be reduced when you add a beneficiary. The greater the benefit to the beneficiary, the smaller your pension income will be to you.

• Life Income with Guarantee: This option will also provide you with an income for the rest of your life; however, if you die before the end of the guarantee period, the remaining payments left in this period will be paid to your beneficiary. For example: If you died in the 8th year of a 20-year guarantee, 12 years of payments would be paid to your beneficiary.   The guarantee period is to assure that the heirs will receive something if the retiree passes away soon after beginning distributions.

• Income Drawdown: This option is a variation on the other choices.  Here, the pension administrator calculates the present value of what your payments will be over your life expectancy and shows this amount as a lump sum. Each time you receive a payment, this lump sum is reduced until it reaches zero. If you were to die before the lump sum is exhausted, the balance would be paid to your beneficiary.

Though there are a range of annuity payment options available, this approach still has flexibility problems. Let’s say, for example, you choose the J&LS option. Your monthly payment is reduced to cover your spouse if you’re the first to die. What happens if your spouse dies before you?  You’ll be paying for a survivor benefit you no longer need for the rest of your life. Even if you were to remarry, you can’t add your new spouse as beneficiary.
 
Inflation creates another problem for most annuity payments.  Retiring at age 65 with a $3,000 per month pension may be a comfortable income today.  But 3 ½% inflation will reduce the purchasing power to only $1,500 in 20 years.  Your standard of living would erode significantly if you don’t have other savings to supplement your income.

Finally, when you submit your retirement paperwork, you’re making a decision that will have to last 20 to 30 years. Rolling over your retirement plan balance to an IRA keeps all of your options open.  You can always buy an income annuity from an IRA that would offer all the options listed above.  You could split the account and take some of the income benefits while keeping an amount in reserve.  Keep your options open.

Social Security Loopholes

The following is a guest post from Marotta Wealth Management.

Had you simply saved and invested, you would probably be retiring as a multimillionaire. But because you were required to pay into Social Security, now you have to figure out how best to get back some of your money. Being aware of some Social Security loopholes will help you choose between options that differ by as much as a quarter of a million dollars.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have been added. A worker's Social Security contributions can total up to $440,000. So you want to make sure you have done your homework when beginning to pull this money out. And to make the best decision, you must consider health, income before retirement, income during retirement and taxes. By learning about three Social Security loopholes, you may be able to recoup thousands of dollars.

Three strategies for maximizing your Social Security dollars are available to married couples. You won't find them by reading the government's printed literature or general web pages. And in a time when many families are stretching to make every dollar count, the extra income can go a long way.

The first loophole comes in the form of an interest-free loan provided by Uncle Sam. Many retirees are not aware that they are eligible to repay their Social Security benefits at any time and for any reason in order to claim a higher deferred benefit and at no interest. This ability to undo your selection will raise your monthly payment by 33% at full retirement age and by 76% at age 70. As you can imagine, this payment can be quite hefty if you've waited years before repaying and refiling your benefits. Some savvy retirees have found a benefit by claiming Social Security early and stashing this money in a CD or other fixed-income account. That way they can earn eight years of interest on the money.

Those unsure of Social Security's viability and solvency can use this method to play both options. If benefits are reduced, you will be happy to have filed early. If not, just repay and refile.

This money may be free, but it's not easy. This "File, Repay and Refile" strategy requires you to amend each year of tax filings to recoup the extra taxes and lost interest applied to those earnings. Interested retirees will need to fill out a Withdrawal of Application to begin the repayment process.

The Senior Citizens' Freedom to Work Act of 2000 provides a second loophole that can boost total benefits payments for retirees by as much as 15%. This option is called "File and Suspend." It works well for couples who have a large disparity in their earnings history.

Consider the dilemma of James and Susan who are fast approaching their retirement. James is coming to the end of a long career as an executive in a carpet factory. Susan's earnings history was cut short when she decided to stay home to raise their children leaving a limited personal Social Security benefit.

A loving husband, James would like to maximize the survivor benefit that he leaves Susan. He can accomplish this by delaying his Social Security filing. But neither are sure they will make ends meet during the ensuing years on Susan's limited monthly payment.

Thanks to loophole number 2, there is a way to increase their current income without compromising longevity insurance. When James, the higher earner, reaches full retirement age (FRA) at 66, he files for Social Security but suspends receiving any benefits. Filing only to immediately suspend may sound like silly gymnastics. But this strategy allows Susan to begin collecting a spousal benefit based on James's higher earnings record. And because James delays to accrue a higher personal payout, Susan is guaranteed to inherit the highest possible payments as a survivor.

With this "File and Suspend" method, stay-at-home moms who would typically have to wait for their spouses to file before realizing any benefits can now access their spousal benefits before their husbands retire. It is particularly beneficial when the primary bread winner is expected to have a limited life expectancy. The surviving spouse will inherit the larger benefit that much sooner.

If, instead, we assume that both James and Susan have strong Social Security earnings records and are in good health, they should consider the final loophole.

This third and potentially most profitable loophole is called "Deemed Filing." In this scenario, James and Susan are both 66. James is due a benefit of $2200 per month. Susan is due a benefit of $2100 per month. Typically, Social Security only gives you the higher of your personal benefit or spousal benefit. But those who file after FRA can deem to only collect spousal benefits. If Susan has already filed for her benefit and James is FRA, he can file for spousal benefits. That would entitle him to half of Susan's $2100 benefit. Then at age 70, when his personal benefit has fully appreciated, he can file for his own larger benefit. When appropriate, this "Deemed Filing" approach can add up to $50,000 to joint lifetime income.

These three loopholes all require careful analysis, but their payoff can be well worth the effort and planning for the right individuals. The further big government stretches into all areas of civic and economic life, the more savvy U.S. citizens will become in order to "game the system." Complexity creates a breeding ground for inefficiencies and loopholes. Big government will require even bigger calculators.

Three Tips to Make the Most of Your 401k

How's your 401k doing these days? Like most others, mine took a huge hit during the stock market decline, but has raced back at a frantic pace since then.

If you'd like to give your 401k a bit of a nudge on its return to glory, MarketWatch has some ideas for you. They list eight do's and don'ts for your 401k, but these three are the ones that really stood out to me:

2. Avoid risky behavior.

What are those risky behaviors for which you might get dinged? Having an outstanding loan that represents 25% or more of your total 401(k) account balance; not having requested a proposed investment strategy; not using asset-allocation or target-date funds; concentrating in specific asset classes; concentrating in company stock; not taking full advantage of the company match; saving 2% or less; and not saving at all.

6. Don't forfeit free money.

It's hard to believe, but more than one-in-four workers leave free money on the table. They contribute below the company-match threshold, according to Hewitt. Contribute enough to your 401(k) to receive your full employer match. Of note, more companies are restoring their company match. Hewitt research shows that 80% of employers that reduced or suspended their match in 2009 plan to restore it in 2010. Fidelity Investments this week noted a similar trend among 300 firms in its client base.

7. Don't cash out.

If you're changing jobs or leaving your current job, don't cash out your 401(k) savings. About 46% of employees cash out, according to Hewitt. But doing so can have serious consequences. Typically, you'll play a tax on the amount withdrawn and a 10% early withdrawal fee.

It's amazing to me how often people shoot themselves in the feet financially. Just look at some of the number above and you can see "bad financial moves" written all over these decisions. For instance:

• "Having an outstanding loan that represents 25% or more of your total 401(k) account balance; saving 2% or less; and not saving at all." Really? These seem to be obvious "bad moves" to me.
• "More than one-in-four workers leave free money on the table." Why is this? Because they are spending the money on something else?
• "About 46% of employees cash out." Ugh. Bad, bad, bad move -- and almost HALF do it? Again, why is this?

The points above seem to be "common sense" (and probably are for most FMF readers), but obviously many people simply don't understand and/or follow financial "common sense." I guess I never cease to be amazed at the poor decisions so many people make financially.

$1 Million Not Enough for Retirement

Yahoo has come to the realization that $1 million is not enough for retirement. They cite a survey of investment advisors that recommend the amounts people of various ages will need to retire. The results:

Generation Y (ages 18 to 26) needs to save at least $2 million, according to 77% of advisers. Forty percent put the figure at $3 million.

Nearly half of advisers (46%) said Generation X (ages 27 to 42) should at least double the $1 million goal. Twenty-two percent suggested more than $3 million.

For Boomers (ages 43 to 64), 35% recommended $2 million to $3 million. Thirty percent suggested $1.5 million to $2 million.

According to Scottrade's analysis, seniors are the only generation that may come close to needing only $1 million. Forty-four percent of advisers said $500,000 to $1.5 million is sufficient for average families in that age bracket.

It all boils down to the sort of lifestyle you want to lead, doesn't it? If you can live on half of what you do now, you don't need to save enough to replace your current salary. Then again, I don't think most people are on track to save enough to replace their current salary -- not even close.

With that qualification out of the way, it looks like $2 million to $3 million is the "rule-of-thumb" amount, though, as we know, personal finance is personal and everyone's specific needs/requirements will be different.

We're saving to reach a number closer to $3 million. How about you?

Charles Schwab on Emergency Funds for Retirees

After we talked about the appropriate size of an emergency fund I saw some thoughts on the topic in the Spring 2010 issue of Charles Schwab's On Investing magazine. Here are their thoughts on the right level of emergency funds for retirees:

• Set aside enough cash to cover your spending needs for one year -- minus what you expect to get from non-portfolio sources such as Social Security.
• Save an additional two-to-four years' worth of living expenses in longer-term CDs, a deferred fixed annuity or high-quality short-term bonds.

This makes sense to me. The less cash flow you have, and most retirees have less in-flow than they did when they were working, the bigger your emergency fund needs to be. But as we've discussed, most people aren't prepared for retirement in the first place, so I doubt if very many at all have emergency funds even close to what Schwab recommends.

Don't Invest Too Much in Your Company's Stock

The other day we listed all of the worst money moves to avoid (thanks for your suggestions, everyone) and at the top of my list was "investing too much in your company's stock." Charles Schwab's On Investing magazine agrees in their Spring 2010 issue saying:

In 2008, one in four 401k participants held at least 20% of his or her account balance in employer stock. Allowing one security to represent such a large portion of your portfolio is risky, as it could increase your portfolio's volatility and reduce its performance. A large stake in your employer's stock can be particularly risky because it ties your savings to the performance of the company that also pays your salary.

Yep. Having what are at least two of your top three assets (your career is your top financial asset and your investments are probably #3 -- after your home) tied to the success of one business is certainly risky and should be avoided.

Ok, so let's say you agree. What amount should you invest in your company's own stock? Here's Schwab's opinion:

If the value of your company's shares exceeds 10% of your investment portfolio, consider taking steps to trim your stake.

They also advise the following for keeping your percentage at 10% or less:

If you purchase company stock automatically through your 401k, check whether you can redirect the money to other investment options. Next, find out whether you can sell some of your employer's stock and use the proceeds to diversify. The pension Protection Act of 2006 says you can sell any shares received as matching contributions after three years of service. Your plan may limit sales made before that time.

I've only worked for one company that made their 401k match in company stock and that was over 15 years ago (back when most big companies did that.) Since then, all the companies I've worked for have allowed me to invest their portion any way I wanted to (through the options available in the 401k, of course), so this hasn't been an issue for me.

But if you have more than 10% of you 401k in your employer's stock, this is an issue for you and one you should look at very closely. I'm not saying that everyone should have 10% or less invested in their company stock, but if you have more, you need to have a good reason that's backed up with thought and strategy -- simply don't let it happen by accident or momentum. Otherwise, you're probably taking on way too much risk.

Nine Roth IRA Conversion Mistakes

The following is an excerpt from The Gospel of Roth: The Good News About Roth IRA Conversions and How They Can Make You Money, a book that argues everyone should convert a Traditional IRA to a Roth IRA. This is a follow-up from two posts yesterday (here's #1 and here's #2) on the same topic.

MISTAKE 1. NOT TAKING THE ROTH CONVERSION OPTION.

To properly judge whether to commit to a Roth IRA conversion, you must make the Roth conversion(s) first and wait until near the end of the recharacterization deadline to decide. For 2010, the first day to convert is January 4, and the unconversion deadline is 651 days later on October 17, 2011. Any decision not to convert before participation in the RCO is potentially a huge mistake. You can always undo any and all Roth conversions before the deadline, but you cannot backdate the conversion. Account performance and announced future tax rates during the RCO period may make your decision easier.

MISTAKE 2. CONVERTING TO A ROTH IRA TOO QUICKLY.

If you have the benefit of time (as in several years before you are age 70 1/2) and your income tax brackets are not near the top brackets, you may benefit by converting only partial amounts of your regular IRA to a Roth each year. By converting to Roth IRAs over several years, you may better utilize the lower tax brackets and increase the Roth conversion advantage. You still will want to convert the entire regular IRA at first by using the RCO so you can pick and choose the accounts that remain Roth IRAs and preserve all of your future options.

MISTAKE 3. CONVERTING TO A ROTH IRA TOO SLOWLY.

If you are near age 70 1/2, you may want to complete your Roth conver¬sions more quickly based on your specific situation. Also, top tax bracket earners (Type 1s) who have outside non-IRA funds to pay the income tax may want to convert sooner as well. The threat of higher income tax rates in the future and avoiding mandatory regular IRA distributions should be considered. The complete RCO should be utilized as always to preserve future options.

MISTAKE 4. NOT CONVERTING INTO SEVERAL NEW SEPARATE ROTH ACCOUNTS.

Roth IRA conversions may be undone or recharacterized on an account-by-account basis without affecting the status of other conversion accounts. If one of your Roth conversion investments goes way up and another goes down before the deadline to unconvert, you may undo the loser and keep the winner only if you converted the two investments into separate accounts. I suggest you convert into several new separate accounts based on asset class. Be sure to convert into new Roth IRA accounts for the RCO period. After the deadline for recharacterizations, you may consolidate all of your Roth accounts.

MISTAKE 5. NOT USING AN IRA INHERITANCE TRUST.

There are many benefits in using a trust as the beneficiary of your Roth and regular IRAs. Beneficiaries of IRAs often make mistakes with inherited IRAs by removing the money more quickly than the IRS required distributions instead of extending the tax benefits as allowed. By using a specifically designed IRA Inheritance Trust, you can provide maximum protection and flexibility as well. You can financially protect the heirs from divorces, creditor claims, and sometimes even the heirs themselves.

MISTAKE 6. NOT REALLOCATINGINVESTMENT ASSETS AFTER RCO.

After the deadline to unconvert or recharacterize has passed, you should reallocate and rebalance the Roth IRA assets. This is especially true if some accounts were unconverted back to regular IRAs; you definitely want to protect the Roth IRAs from sharp declines if possible by using asset allocation. If you enjoyed a large gain during the RCO period with an investment that has great volatility, care should be taken to not give back the gain in the Roth, if you can shift the more volatile investments to the regular IRAs for the next RCO period. You also will want to al¬locate all of your assets (IRA and non-IRA), for maximum income tax efficiency because some assets are better suited for non-IRA accounts.

MISTAKE 7. IGNORING STATE INCOME TAX.

State income tax is a factor that must be considered with the Roth IRA conversion. Generally, the consideration of state income tax makes the appeal of Roth IRA conversions even greater. Even if you live in a state with no income tax, consider where you may live in the future as well the state(s) were your heirs reside. Also, many states may sharply increase their income tax rates in the future.

MISTAKE 8. NOT BECOMING A TYPE 1.

Before you have completed the RCO period, make sure that you are not at least a partial Type 1. Type 1s are folks who have the money to pay the income tax when converting to a Roth from non-IRA funds. Consider every other possibility and resource before you unconvert or pay the tax from the IRA. Remember, if you are over age 59 1/2, you may remove immediately any amount from the converted Roth with no penalty or additional income tax, up to the total converted. So the Roth IRA conversion funds could be considered your emergency account if you are over age 59 ½.

MISTAKE 9. TAKING ADVICE FROM THE WRONG PEOPLE.

Many newspapers and magazines have had articles about Roth IRA conversions. Many have led people to the wrong conclusions or at least been confusing. Most insurance and investment companies have Roth IRA conversion calculators and literature. Most financial advisors have opin ions as well. Warren Buffett said, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. Make sure that you do the Roth Conversion Option and analyze your situation before the deadline to unconvert very carefully. Expert advice on this process may be very helpful, but be sure your advice is coming from a true expert in this subject.

The No-Lose Roth Conversion Situation

The following is an excerpt from The Gospel of Roth: The Good News About Roth IRA Conversions and How They Can Make You Money, a book that argues everyone should convert a Traditional IRA to a Roth IRA. This is a follow-up from a post earlier this morning. In addition, another excerpt will run tomorrow on the same topic.

What if you convert a large IRA on January 4, 2010 (at 9:57 am) that contains one mutual fund? Over the following one year and 10 1/2 months the mutual fund goes up substantially—say 30 percent. Let’s say the account was valued at $1 million on January 4, 2010.By October 15, 2011, it would be worth $1.3 million based on this assumption. You then could leave the account converted realizing a tremendous financial benefit. If you were subject to taxes at a rate of 35 percent, you would owe $350,000 in income tax on this conversion. You would have to pay $175,000 in 2011 and $175,000 in 2012. However, this might appear all the more compelling because at your decision point of October 15, 2011, your account was actu¬ally worth $1.3 million. So you have the option to decide whether to complete this Roth conversion committing to pay the taxes on $1 million with the knowledge that it’s actually worth $1.3 million. This would save 35 percent of the $300,000 gain or $105,000 in taxes. You just profited $105,000 by using the RCO. That might be worth considering. I mean $105,000 here and $105,000 there and pretty soon we’re talking about real money.

If you think that a 30 percent increase over a 22 1/2 month period sounds extreme, please consider recent history. Over the past 30 years, the S&P 500 index has gone up by at least 30 percent nine times. That’s almost one-third of the time. No one can predict the future, and I cer¬tainly don’t know if your accounts will go up or down. However, there is a great likelihood that you will be very happy to have this RCO and to monitor your own account performance.

Maybe your IRAs are worth less now than they were a few years back by locking in a lower value for taxation, and watching the future come to you; this timing of the RCO seems really attractive.

This Roth Conversion Option does not cost you anything other than a little preparation. It is strictly a paperwork transaction handled by the IRA custodian or trustee. It is like a mulligan or a do over in golf. Some corporate executives have been under scrutiny lately for backdating their incentive stock options—an illegal practice where executives picked an advantageous lower price on their company stock that would profit them immensely in the future. The RCO is a legal way for you to backdate your own stock options. The Roth Conversion Option is like betting on a recorded football game that you have already seen.

You will have ample time to analyze and consider the many potential benefits that a Roth IRA conversion may have for you in your specific situation during the ensuing one year and 10 ½ months after you convert. That is 651 days. You will have time to finish reading this book and other books on the subject. You may even recommend The Gospel of Roth to others. You can run Roth calculators until your brain turns into mush. You will be able to employ professional advisors to help you with this decision. You will have time.

RCO THINKING: TO KEEP AS ROTH ORUNCONVERT—THAT IS THE QUESTION

Actually you should not decide on the Roth conversion specifics until you have used the RCO and seen the results. This way you are able to more accurately analyze how much and what accounts to keep converted to a Roth, if any, and you may know more about future pro¬posed tax rate changes and your own situation. You will also be able to select—after the fact—which Roth accounts to keep converted and which ones to unconvert from each of your separate Roth IRAs. You can even choose to keep converted just a portion of a Roth conversion and unconvert the rest.

You have the chance with each converted Roth IRA to use the great line that Gilda Radner coined as the character Emily Litella on Saturday Night Live: “Never Mind!”

Anyone who would like to take advantage of this free one-time op¬portunity that will give you more financial options in the future should make this Roth conversion on January 4, 2010.The special 2010 deferral of tax to 2011 and 2012 makes it possible to take this Roth Conversion Option without even having to increase the amount of estimated tax that you pay to the IRS until after you have gone firm with any Roth conversions on October 17, 2011.When the IRS gives you a mulligan, I suggest you take it.

This RCO opportunity reminds me of the great Will Rogers quote, “Don’t gamble! Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it…” The RCO allows you to do just that with your taxes.

The Roth Conversion Option

The following is an excerpt from The Gospel of Roth: The Good News About Roth IRA Conversions and How They Can Make You Money, a book that argues everyone should convert a Traditional IRA to a Roth IRA. There will be follow-up posts from this book later today and tomorrow to add more details to what is said below. (Update: for more on this topic, see our conversation the other day on whether or not to convert.)

If you follow my advice in the next few pages, you may increase your retirement spendable assets by over 40 percent! Everyone should convert all of his or her IRAs to Roth IRAs on January 4, 2010. (Note: January 4, 2010, is the first date everyone is allowed to convert to a Roth IRA. If you are reading this after that date you should convert as soon as you can following the instructions in this book.) Many articles have been written about the major law change for Roth IRA conversions beginning in 2010. I find most of these articles vague at best, and more often than not, incorrect. Some of these articles are far more confusing than helpful.

Since the inception of Roth IRAs in 1998, you could only convert your traditional or regular IRA to a Roth IRA if your income was $100,000 or less. But, starting in 2010, you can convert your regular IRAs and other retirement plans to Roth IRAs regardless of income. Yes, you read that right—everyone can now convert to a Roth starting in 2010. And everyone should.

FOLLOW THE YOGI BERRA PRINCIPLE

This change in the law has all of the CPAs, financial planners, and engineers scrambling for their calculators and spreadsheet programs debating the virtue of potential Roth conversion for each situation depending on a dizzying array of assumptions about future income tax rates and the maximum number of angels that can dance on the eraser of a number 2 pencil. It is human nature to want to figure out the best answer before taking action; but this intuition is incorrect when it comes to Roth conversions. What you should do is take action, then figure out the best answer. Or to quote the great intellectual Yogi Berra, “When you come to a fork in the road ...take it.” Convert first and calculate later.

The general repeating theme of almost every article about Roth conversions instructs and cautions people to calculate their Roth conversion “suitability” before they make the conversion, implying that a good decision can be made in this order (calculate before you convert). This premise is wrong. Dead wrong. Backwards.

Figuring out if you should convert to a Roth IRA before making the conversion is putting the cart before the horse. Convert first and ask questions later using the method outlined next. Do it exactly this way and I will explain all of the reasons later. The time line for the Roth Conversion Option is as follows:

• STEP ONE: (January 4, 2010, 9:57 am CST.) Convert all IRAs and available retirement plans into new Roth IRAs divided by asset class or investment type. Do not combine or mix with older Roth IRA accounts for now. Keep separate Roth IRAs for assets that were in retirement plans. No single Roth IRA account should exceed 20 percent of the total. If one asset class or investment type exceeds 20 percent of the total divide it into two IRAs or more as needed.

• STEP TWO: (December 3, 2010 at lunchtime.) Recharacterize or unconvert any Roth accounts that lost substantial value from the conversion date of 1/4/2010. These accounts should be converted again to Roth IRAs on January 3, 2011 at 9:57 am CST.

• STEP THREE: (September–October 15, 2011.) Analyze and run your conversion numbers based on all known factors including increases in Roth accounts since the conversions.

• STEP FOUR: (October 17, 2011, 8:30 am CST.) Unconvert or recharacterize any accounts not selected to remain Roth IRA conversions back to regular IRAs.

CINDERELLA STORY

As you can see, you should convert to a Roth IRA first, then run the numbers later. This is because the IRS gives you until mid-October of the year following the year of a Roth conversion to undo the conversion. This “do over” is technically called a recharacterization. Your Roth IRA conversion is not final or complete until you pass this deadline for unconverting or re¬characterizing. To advise a client properly on whether to convert to a Roth IRA is impossible in advance of learning this vital information. You must know about any increase in the Roth account after the conversion date but before the deadline for unconverting to be able to “run the numbers.”

Even folks who otherwise would not ordinarily benefit from the Roth conversion may benefit greatly by converting if the value of the newly converted Roth goes up substantially during this option period. Like Cinderella and her pumpkin carriage, the Roth can be turned back into a regular IRA just as if nothing happened if you choose to do so before the deadline. The only way to have all the options and proper knowledge to make an informed Roth conversion choice is to convert first and ask questions later.

THE DETAILS

2010 is a special year.There is good news on the horizon for anyone with retirement accounts beginning in 2010.The title of this book is The Gospel of Roth. Gospel means good news. This good news or gospel is due to a tax law change that was enacted in 2006 called the Tax Increase Prevention and Reconciliation Act (TIPRA). What a catchy title from a clever Congress. I love it when taxes go on sale, no matter what they call it.

TIPRA changed Roth IRA conversions in two major ways for the year 2010. First this new law allows taxpayers at any income level to convert to a Roth IRA in 2010. In the past, Roth IRA conversions have been limited to folks with an income level of $100,000 or less. Beginning in 2010 and beyond, everyone can convert to a Roth IRA, regardless of income. Notice that this lifting of any income restriction for Roth conversions is not limited to 2010 but applies in the years afterward as well.

Second, for 2010 only, the conversion tax will not have to be paid in 2010, but can be postponed until 2011 and 2012. This law change will produce a remarkable opportunity that is unprecedented. TIPRA rocks.

Roth IRA Conversion Thoughts

I'm in the process of deciding whether or not to convert all or part of a traditional IRA into a Roth IRA this year. I've talked about the issues surrounding a conversion (including six mistakes to avoid when converting) as part of this process. I've also read a good deal on it and almost every article has been pro-conversion in some manner, either completely or at least slightly.

Then I had lunch with my CPA a couple weeks ago and she said it's not a no-brainer decision. She pointed me to this article which says that Roth conversions are the gamble of a lifetime. The summary:

I believe that the reason many financial professionals are recommending this conversion is salesdriven, rather than what's in the client's best long-term interests.

As a fiduciary, I cannot recommend that my clients take this gamble, as there are just too many unknown variables. In my view, there are only a few cases where this gamble may be worth it. For the vast majority of clients, it's not.

He takes a bashing in the comments -- what you might expect from a group of financial planners just accused of recommending bad advice just to generate fees.

But of everything I've seen, this piece from Kiplinger helped me the most to sort through many of my questions/thoughts. They list five key questions to answer before anyone moves money to a Roth IRA as follows:

1. Can you afford to pay the tax on the conversion with money from outside your IRA?
2. Do you expect to be in a higher tax bracket in the future?
3. Will you need your IRA money in retirement, or do you think you’ll be able pass most of it on to your heirs?
4. How long do you plan to keep the money in the account?
5. Do you plan to pay college bills soon?

My answers:

1. Yes, I can afford it. (I may not want to pay it, but I can afford it.)

2. I expect that I'll be in a lower tax bracket during retirement but that rates may increase, so who knows if I'll be paying more or less in the future? This is the million-dollar question.

3. I'm not sure whether or not I'll need it.

4. The money will be in the account at least for 20 years unless something unforeseen happens.

5. No, not soon, though I will have some in five years or so.

Where this is netting out for is that I'm thinking of only converting a portion of my traditional IRA to a Roth or perhaps none at all. I just can not be sure that I'll make back the money that I'll need to pay upfront. Then again, the "tax diversification" that a Roth offers may make it worth my while to convert at least some.

Anyone else out there wrestling with the same issues? Have you come to any conclusion?

Five Things You Need to Know about Social Security

Kiplinger lists five things you need to know about Social Security as follows:

1. Patience pays off. The longer you wait, the bigger the check.

2. Marriage has its perks. Couples have the most flexibility.

3. But you can collect if you decouple. You may be able to collect on your former spouse's benefits, as long as you were married for at least ten years and are 62 or older. (If you remarry, however, you can't collect based on your first spouse's record -- unless your second trip to the altar ends in divorce, annulment or death.)

4. Bide your time. Get a bonus. If you wait until age 70 you can collect even more, thanks to the delayed-retirement credit, which is worth 8% a year.

5. Ask for a do-over. If you started collecting Social Security and wish you had waited in order to get a higher benefit, you can press the reset button. You'll need to pay back what you've received -- which could be $100,000 or more -- but the government won't charge you interest.

Personally, I'm not counting on Social Security being around when I retire -- and I'm saving accordingly. Then if it does pay me anything, I'll consider that a bonus.

So, as you might imagine, I'm planning on waiting as long as possible to withdraw funds (I shouldn't need them, so I'll wait for a bigger payday.) Then again, if the whole thing appears to be collapsing, I might jump in and get as much as I can before it topples.

Oh the joys of dealing with a government-run retirement program. ;-)

Update: Sometimes I post articles in advance without looking at what was just before and after them. This one is a case in point. Didn't we just discuss SS yesterday? :-)

Earn $200k More by Waiting to Take Social Security Benefits

CBS MoneyWatch weighs in on when to take Social Security benefits. Here's a summary of their thoughts:

Today, most people who qualify for Social Security are eager to get their hands on a check as soon as possible. A full 70 percent of recipients sign up for Social Security between age 62 and the normal full retirement age, which is between 65 and 67, depending on the year you were born.

Some, undoubtedly, have been forced into early retirement for health or economic reasons. But anyone who can avoid taking Social Security checks early will do themselves a big financial favor by delaying, since taking benefits early slashes what the government provides. As a married couple, however, you can employ more sophisticated strategies to collect Social Security early and still maximize your benefits over time.

Then they share this example:

To see the long-term benefits of waiting, consider this example from T. Rowe Price senior financial planner Christine Fahlund. A man born on January 2, 1948, who earns $80,200, he can expect a $2,157 a month from Social Security at his normal full retirement age of 66. But if he retires this year, at 62, he’ll receive just $1,458 a month, about a third less. Using Social Security’s assumptions, by waiting until 70, his checks will start at $3,303 — more than double what he’d get at 62.

True, he must pass up eight years’ worth of checks — in this example, that’s a total of $149,517 in inflation-adjusted benefits from age 62 through 69. But if he starts taking benefits at age 70, the bigger checks will let him make up that $149,517 in a little over six years, or by the time he’s 77. From then on, he’ll be ahead of the game. Through age 85, he’ll have collected $786,450, or $219,462 more than if he had started benefits at 62. Postponing meant eight years of tax-free, government guaranteed growth.

It's a long time before I will be taking Social Security -- and honestly I'm wondering if it will be around when I get to 62, 66, or anything close. As such, I'm saving like I'll get nothing from it and if I do get anything, I'll be pleasantly surprised. As such, I think I'll be in a position  to wait as long as I need to to start collecting Social Security, a move that could earn me an extra $200k. Cool!

By the way, the piece linked above goes on and on above various withdrawal options and a couple special ones for married couples. I have one word for those scenarios: complicated! I'm surprised that there isn't an industry set up to help people weed through their Social Security options in order to maximize their payouts. Then again, maybe there is. Do financial planners do this sort of stuff?

15 Ways to Slash Retirement Spending

MSNBC lists 15 ways to slash retirement spending as follows:

1. Adjust your health insurance
2. Flexible travel
3. Cut the purse strings
4. Curb your cars
5. Use cash
6. Watch those investment fees
7. Put food spending on a diet
8. Seek out freebies and discounts
9. Adjust your insurance
10. Downsize your home
11. Move to a cheaper locale
12. Refinance your mortgage
13. Don't wait to sell your house
14. Do a dry run on your new spending plan
15. Get a handle on monthly expenses

I'm not so sure what makes this list only for retirement. Many of these seem like good ideas we all should be following.

That said, this list depresses me. It makes it appear that you're pinching pennies and living close to the financial edge in retirement. That's certainly not where I want to be. Hey, I have an idea, how about saving for retirement so you'll have more than enough money when you need it? That's a GREAT idea!!!! :-)

I want to comment on a few of the items above before I end this post. Here goes:

3. If you're close to retirement and still giving any sort of meaningful economic aid to your kids, it's likely that both you and they are in deep financial trouble. Cut them off (and for those of you who are younger, don't start supporting them once they are out of the house.) The longer you give them money, the worse it will be for them (for more info, read The Millionaire Next Door -- kids who get economic aid from parents are LESS likely to accumulate wealth.)

11. Ha! Told you so (see #9 and #1 in the link.) ;-)

12. Why do you still have a mortgage at retirement? Am I missing something?

My two cents: set your retirement number now and work to save for it so you're not seeking out freebies and discounts and limiting your food budget to survive through retirement.

More on Retiring Inexpensively Abroad

I've said that I think retiring in a foreign country is a viable alternative for those people who really need to stretch their retirement funds (I also admit that the suggestion isn't the most popular with many people.) Now Consumer Reports is discussing the idea with an author who talks about retiring abroad. Here's a summary of his thoughts on living abroad for a modest amount of money:

Yes, especially Latin America, where the cost of living can be half the U.S. level or under. You can rent a small house in Chapala, near Guadalajara, for $500, and gardener and maid service is very affordable. Even in Europe, where the dollar is weak, avoid the expensive places where everybody else goes. So instead of Provence or the Riviera, try Languedoc-Roussillon. Instead of Tuscany, try Umbria. You can find places that are even cheaper than the United States. In fact, right now is a really interesting time to consider going to Europe. The price of real estate has fallen perhaps even more than here. In Spain, for instance, house prices have dropped between 50 and 60 percent.

And he offers this suggestion for people in their 40's and 50's who may want to take advantage of this idea one day:

I’d say instead of vacationing in the same place every year, use that time to visit different places. Check your fantasy file, and if you’ve always dreamt about Italy, for example, go there for a couple of weeks. While you’re there, don’t just see the sights, but talk to other expats and get a feeling for what it was like for them to move. The main advice is, do your checking beforehand. Don’t rush headlong into it, don’t leave your brains at the border. You really need to know what you’re doing and where you’re going.

I'm not sure I could ever do this. Moving to another part of the world, learning a new language (in many cases), learning the culture, etc. -- seems like too much "adventure" for a guy like me who likes things to stay the same. Then again, I'm saving fully for retirement so I don't have to consider moving if I want to retire before I'm 85. For those who can't/won't save, this is still a viable option and one that many will prefer to working an extra five or ten years.

Last Chance for a Segregated Roth Conversion

The following is a guest post from Marotta Wealth Management. For more thoughts on this topic see 2010 Roth Conversion: Factors to Consider Before Making a Decision.

A tax tsunami is coming at the end of this year. The higher your adjusted gross income (AGI), the closer you live to the coast where the tsunami will hit. This is the last chance you will have to put your assets in a lifeboat and avoid getting swamped with taxes.

At the end of 2010, the Bush tax cuts will expire. The Obama administration is not expected to alter the rates significantly before then. They don't want to be held accountable for raising taxes before the midterm elections. And they would rather blame the previous administration for a crazy expiring tax law.

Right now, tax rates are at a historic low. But after 2010, counting all the tax changes, top marginal tax rates may rise from 44.6% to 62.4%. Thus you will only have to pay a maximum of 44.6% on income you can take before 2011, but after that you may have to pay 17.8% more in tax.

If you have an income over $100,000, this is the first year you can take money from your traditional IRA, pay tax as though that money is ordinary income and convert it to a Roth IRA. This procedure is called a "Roth conversion."

Roth IRA accounts are to your advantage if your tax rate will be higher in retirement when you withdraw the money than it was when you contributed. With a Roth IRA, you pay tax on the acorn. With a traditional IRA, you get a bigger acorn to start with, but you pay tax on the oak. Many families have actually lost money by investing in their traditional IRA when they were young and in a lower tax bracket, only to find themselves in a much higher bracket during their retirement. A year from now, we will all be in a higher tax bracket.

If you execute a Roth conversion this month, January 2010, you do not have to pay the tax on that conversion until April 15, 2011. You also may change your mind. If you decide the conversion wasn't worth it, you can move the money from the Roth account back to a traditional IRA account. This is called a "Roth recharacterization."

Recharacterizing a Roth conversion can be done any time before you file your taxes, including the filing extension. So if you file an extension you can change your mind any time before October 15, 2011. And you can decide to recharacterize part or all of what you converted.

The upside is that you can use all these laws and changes to maximize your after-tax investments. During the next few years, tax planning and management will be a significant part of wealth management. But it needs to be put together as part of a larger plan.

Here's the timeline of how to use a Roth conversion to maximize your investments. Now is the time to do five Roth conversions of equal amounts into five separate accounts. You aren't going to keep them all, so you can convert five times as much as you want to end up keeping and actually paying tax on. Invest each Roth account in a different asset class (e.g., large-cap U.S. stock, small-cap U.S. stock, foreign stock, emerging markets and hard asset stocks).

The five accounts will appreciate differently, but the entire portfolio will be fairly well balanced. Before April 15, 2011, decide if you will be keeping only one account or more than one. If more than one has appreciated significantly, you may want to keep more than one account's conversion. Compute your tax liability for the year and pay the tax, but instead of filing your return, file an extension.

Before the October 15, 2011, extension deadline, decide which of the five accounts you are going to keep. By now, nearly a year and three quarters has elapsed. You can easily determine which account has appreciated the most. Keep that one, and recharacterize the other four. Because you only have to pay taxes on the amount you originally converted, it's like betting on the horse race after the winner has already been determined. After recharacterizing the accounts, file your tax return before October 15.

If all of the accounts decrease in value, recharacterize them all and pay no tax. Financially, you are none the worse for having filled out a stack of paperwork. If only one account appreciates significantly, you only keep one conversion. But you have increased the odds of your Roth account appreciating by five times.

The average return of the S&P 500 is about 11%, but the standard deviation is about 19%. All of the other asset classes have an even higher standard deviation. It is likely, for example, that emerging markets will be either the best or the worst performing asset class over any two-year period. Using this technique you can guarantee that the Roth conversion you keep will have been invested in the best asset class during that year and three quarters.

Segregating each of the five conversions into a separate account allows you to decide to recharacterize or let each account stand separately. The difference in returns between the average and the best account is liable to be 20% or more over the year and a half before you have to choose which accounts to keep. Coupling the 17.8% tax savings and this Roth segregation technique could boost your returns by 30% or more.

In the quite likely event that all five accounts have appreciated significantly, you may decide to keep them all. Once you have reached the maximum tax rate, the top marginal rate does not increase from there. Those most fearful of expectations of higher tax rates soaking the rich after 2010 would be those most likely to benefit from converting everything.

You are a good candidate for a Roth conversion in 2010 if you have the following characteristics. You have an AGI more than $100,000 and so have not been able to convert previously. You have a large IRA that could be converted. You expect your tax bill to be higher in the future. You have sufficient taxable assets to pay the tax. You would like to reduce the value of your gross estate and leave a tax-free asset to your heirs. You are willing to pay estimated taxes and increased tax preparation fees.

Even thought this technique could boost your after-tax returns, be careful. Executing a Roth segregation account requires professional assistance. Such a technique should be just one small part of a larger comprehensive financial plan. And you should seek the guidance of a personal fee-only financial planner and certified public accountant (CPA) who have a legal obligation to act in your best interests. The laws are changing annually, and as a result so is the optimum path.

Maybe You Only Need So Much to Be Happy in Retirement

Here's an interesting bit of information I found in Consumer Reports' recent review of great retirement principles:

Retired subscribers' satisfaction with their retirement reached a plateau when their net worth was between $500,000 and $1 million. Having more didn't make much of a difference. But notably, even among those who reported having less than $250,000 in net worth, more than half were highly satisfied with their retirement. In addition, 38 percent of retirees said they depended on a defined-benefit pension for a significant portion of their income.

I'm not sure what to make of this. A few possibilities:

1. Once you get to a certain net worth, having more doesn't make you happier. This is similar to what we've already discussed regarding income -- once people have a certain level of needs and wants covered, making more money doesn't seem to make them happier.

2. People are generally happy in retirement no matter how much they have. 

3. Is it "worth" saving more than $1 million? It doesn't seem to impact "happiness" if you do.

Personally, I'm still socking it away and think I need waaaaaaaaaay more than $1 million to retire. How about you? Anyone else out there have a take on this information?

Six Steps to a Great Retirement

Consumer Reports lists six steps to a great retirement as follows:

• Live modestly. This was the top "best step" listed by retirees who said they were highly satisfied with their lives.
• Maximize your savings. Even if you don't have a defined-benefit plan, regularly contributing to a 401(k), 403(b), IRA, or other investment vehicle pays off, our satisfied retirees told us.
• Reduce debt. 74 percent of retired respondents who were free of major debt reported being highly satisfied with their retirement.
• Don't invest too conservatively. Taking on even a moderate amount of risk pays off.
• Study your options. When you design your dream retirement, also devise a Plan B in case you're forced to retire early or can't sell your home (a predicament of 8 percent of surveyed retirees).
• Take the intangibles seriously. Stress affected overall satisfaction in retirement even more directly than net worth, our survey found. A quarter of retirees cited nonmonetary stresses such as family relations, poor health, a loss of identity, and boredom.

They don't say...what an interesting list of to-dos. I wish I'd thought of those. ;-)

As a review for those who can't get the sarcasm through words on a screen, I'll highlight my take on each of these issues:

1. Spend less than you earn is my best piece of financial advice.

2. Save early, save often. I contribute the maximum amount to my 401k, my HSA, our Education Savings Accounts, our 529s (the amount to get the maximum tax break) and my SEP IRA. Good thing I've been doing this for awhile since time is the #1 factor that impacts the performance of savings/investments.

3. No debt here for over a decade -- ever since we paid off our mortgage.

4. I have most of my investments in index funds in Vanguard Admiral shares.

5. I know about how long it will be before I retire and as such have my retirement planned somewhat. My "plan B" would be to work longer versus retiring early (which is my current plan.) Plan C would be to count on getting something from Social Security (I'm planning on nothing at this point.)

6. Not sure how anyone can plan for the intangibles completely. I do swim four times a week and try to eat a fairly healthy diet (my wife makes sure of that). I also have a healthy and happy family life. But could life still throw me a curve ball? Sure. But I have faith that I can make it through almost anything.

I go through all of these not to show how "great" I am doing, but rather illustrate that these are basics to retirement planning and that we cover stuff like this all the time here. That said, it is nice to have the information reaffirmed by the study Consumer Reports highlighted.