I’m twenty three years old. I just got a really great job with a 401k that’s matched 100% by my employer up to 10%, which I’ve heard from others is a really great deal that I need to take advantage of. So I started investing 10% of my paycheck so I can get the matching funds.

The only problem I have with this is that I have no idea about retirement. It’s more than forty years away. I just put my money into the investment the person told me to put it into so I have no idea if it’s a good one for my retirement. I don’t even know where to start.

I get emails like this quite often from young professionals who are completely clueless about retirement – and for good reason. When you’re forty years away from retirement age, the thought of retirement seems incredibly distant. It feels more than a lifetime away – that’s because it is more than a lifetime away.

The one piece of knowledge that many young professionals do have, though, is a solid sense of self. They have a good basic understanding of who they are, even if they haven’t pieced through the details yet. And, quite often, this basic understanding is more than enough to make some sound retirement decisions.

Here are three questions I’d encourage any twentysomething to ask themselves.

If money were no object, what would you do with your time?
Some people would choose to be idle with their time, enjoying all of the freedom that comes with it. They’d party. They’d go on trips. They’d goof off. They’d play on their Xbox all day long.

Other people would want to work for something or build something. They’d spend their time with a volunteer project – or maybe even start their own. They need to have a big productive project in their lives in order to feel fulfilled and happy.

Most retirement advice is written for people in the first group. They’re the ones who, when they reach retirement age, will want to travel and spend their later years enjoying themselves with leisure as much as possible.

The other group gets personal enjoyment out of working and being productive. With the many opportunities already available for people to work as late as they’d like in life, such people will probably work at something – whether it’s gainful employment or a big volunteer project or some mix of the two – until they drop dead with a tool in their hand.

If you’re in the first group, you need to be saving as much for retirement as possible. While it’s fine to put money into riskier investments when you’re young, you should start moving into more conservative investments – like bonds or treasuries or cash – pretty early on, even as much as twenty years before retiring.

If you’re in the second group, saving for “retirement” basically means saving for the last year or two of life when you’re unable to work and also saving for some supplemental income for the last few decades of your life. You likely don’t need to kick the savings into high gear and can afford risk a little later than the other group, sliding the money into conservative investments five or ten years before you begin to withdraw it.

Are you frugal?
Do you carefully watch your pennies? Do you spend time seeking out the best deal on an item? Are you find with eating beans and rice a few evenings a week because it’s a dirt-cheap meal that’s still pretty healthy? Do you buy – or at least try – generic versions of products?

If such choices come naturally to you, to put it simply, financial life as an adult is going to be easier for you. After all, if you’re careful with your pennies, the dollars will follow. Because of this, you’re likely to have built up significant assets before you reach retirement age – in which case, pushing your retirement savings to the hilt might stand in the way of your other goals in life.

If such choices seem completely alien to you, you’ll have a more challenging road ahead of you. Almost always, you’re better off financially if you minimize the number of financial mistakes you’ll make along the way. In that case, you’re probably better off pushing your savings up a bit.

Are you interested in having children?
When you picture yourself twenty years in the future, does that vision involve children? For some people, it does – I know it certainly always did for me. For others, it does not – some of my closest friends are wonderful around my kids, but they can’t imagine having children of their own.

Parenting is not for everyone. It can be infinitely rewarding to the right person, but infinitely frustrating to others. On top of that, it’s incredibly costly – little people are unquestionably expensive. They rely on you for everything – their food, their clothes, their space, their education. If you don’t relish in this thought, parenting might not be right for you – and that’s fine.

If you do envision children in your future, kick start that retirement. The more you save now means that later on you’ll be substantially ahead of the savings curve and you can pull back on your contributions in order to devote more resources to raising your children. Even if you end up not having children, you can still pull back later on in order to enjoy travel and other adult endeavors. Also important is the fact that a well-funded retirement means that you’ll never wind up being a financial burden to your kids.

On the other hand, if you are doing everything you can to avoid the remote possibility of children, it makes sense to save for retirement at a slower rate now, allowing you extra money to enjoy the more adult-oriented things you want out of life.

Just worry about the saving for now – don’t sweat the details.
Many people get overly wrought about making sure that their money is in the “perfect” investment. To put it simply, your investment choice is secondary – by a long shot – to simply saving your money as soon as possible and as much as possible.

Start saving now. If you don’t know what to invest in, just ask for suggestions from the representative there. Since it’s a tax-deferred retirement account, you can make investment changes later on without any tax issues.

One good default choice is a “Target Retirement” plan, which basically means that the fund manager will put you in aggressive investments when you’re young, then gradually make the investments more conservative as you grow older. This is a great choice if you’re unsure.

Later on, when you’ve gained some experience in the world and perhaps learned more about investing, you can take a more direct hand in your choices.

For now, though, the best decision you can make is to simply start saving.

Good luck.

Ever since I first gave it a sincere read-through in late 2006, The Bogleheads’ Guide to Investing has been my go-to guide for investment advice, the first place I turn when I have a question about investing. My paperback copy is now well-worn and thoroughly enjoyed.

Recently, a follow-up (of sorts) has appeared on the scene. This time around, however, the book is more of a collaborative effort, containing chapters written by different authors who focus in on specific topics. What they all have in common, however, is that they are all “Bogleheads,” referring to people who believe strongly in the investment philosophy of John Bogle, the chairman of the Vanguard Investment Group.

To put it simply, The Bogleheads’ Guide to Retirement Planning focuses on a fairly conservative investment philosophy, one that doesn’t involve extremely risky investments or exposure to cataclysmic failure in the face of a market downturn. The Bogleheads’ philosophy instead mostly focuses on careful balancing of one’s portfolio (so that a sudden stock market swan dive won’t ruin your future) and investments designed to match the market at a low cost instead of gambling on a chance to beat the market that has a high cost attached to it.

Intrigued? Let’s dig in and see what the book has to say. I’ve broken this down into individual chapters and have labeled each chapter with the chapter’s author.

The Retirement Planning Process
Thomas L. Romens
THe book opens with a chapter that discusses the difference between saving for retirement – something every adult should be doing as soon as they enter the workforce – and planning for retirement. Saving merely means socking away money into something designed for long-term growth. Planning for retirement, on the other hand, involves knowing in great detail what one’s retirement will look like – standard of living, personal goals in retirement, and what assets are needed to get a person to that point. During the saving phase, a person should sock away as much as he or she can, so that the planning phase is much simpler and less prone to risk (since, without adequate savings all the way along, retirement planning will have to involve significant risk or a significant extension of one’s working life).

Understanding Taxes
Norman S. Janoff
Taxes are confusing (and I believe they’re unnecessarily so). Mostly, this chapter just highlights most of the areas of tax law that are really relevant to individual retirement planning. Since the amount one pays in taxes has a direct impact on how much money one needs to have in retirement (the more taxes you’ll have to pay, the more money you’ll need), understanding taxes is vital. This is mostly just a great little reference to the different taxes that most of us are subject to.

Individual Taxable Savings Accounts
Dan Kohn
The first retirement savings option that’s discussed in the book is the individual taxable savings account. These can vary in type from savings accounts at your local bank to investment accounts at a brokerage house. These all work in more or less the same way – you put in money you’ve earned from your career after taxes, pay taxes on any gains that you make with that money, but you have the freedom to withdraw it and do what you want with it without any additional penalty. Such taxable accounts have one very big advantage – flexibility.

Individual Retirement Arrangements
Jim Dahle
Another option for a person wanting to take ahold of their own financial destiny are individual retirement arrangements, like Roth IRAs. These are accounts you can set up with brokerage houses that take advantage of specific tax laws to either defer your tax payments on your earnings to retirement or, in the case of Roth IRAs, eliminate them entirely. Typically, such accounts are set up directly by you with a brokerage house. Usually, you set up an automatic investment schedule and you’re completely responsible for the account, from investment choices to withdrawals. Thus, such options tend to provide much more flexibility than employer-based accounts (like 401(k)s), but tend to require a bit more effort on your part.

Defined Benefit Employer Retirement Account
The Finance Buff
The title of this chapter refers to pension plans – and if you have one, you’re lucky. Your primary concern should be how these plans are insured against the health of your business. What happens to your pension plan if your business fails? Most modern plans have some sort of insurance against this – often, the plan is run by a third party that specializes in such plans. If you have this plan, it’s usually very easy to understand as it clearly outlines the exact benefits you’ll receive in retirement.

Defined Contribution Plans
Dan Kohn
For most of us, this means 401(k) or 403(b) plans. Such plans allow us to put in pre-tax money (meaning money is taken out of our paycheck before taxes and we only pay taxes on the remainder) and then pay taxes on it only when we withdraw it in retirement. Such plans usually also include some matching funds from our employer, which is essentially free money for retirement. If you can get that free money, get it now – start saving immediately if you have access to matching funds from your employer. If not, you may want to consider your 401(k) or 403(b) plan to be a backup and look at individual retirement arrangements, as they will minimize your tax burden in retirement.

Single-Premium Immediate Annuities
Dan Smith
Annuities are actually a form of insurance, in which you pay a premium regularly over a long period of time in order to ensure some specific amount of income in retirement. Annuities can be valuable tools, but they offer some risk in the form of insurer default (the insurance company going out of business). They also leave no legacy to your children. However, they do offer a solid return on investment provided the insurer is a stable company with a long history.

Basic Investing Principles
Bob Davis
You can’t control the stock market, nor can you consistently beat it over a long period of time (as a small-scale investor, anyway). However, there are many strategies you can use to ensure a stable and steady return on the money you save for retirement. One important part of investing is understanding how much risk you can tolerate, which involves how many years you are away from your goal as well as your personal psychology. Rebalancing (and knowing how to rebalance) your portfolio is also vital, especially as you approach retirement age. Costs are also important – if you can keep costs low, you keep more money for retirement in your own pocket.

Investing for Retirement
David Grabiner and Alex Frakt
In order to invest successfully for retirement, you need to have a plan. That involves calculating exactly how much money you’ll need in retirement, determining how much (realistically) you can safely earn each year in your investments, and then using that to figure out how much you need to be saving each year. Just having a plan isn’t enough, though – you need to implement it and then continue to follow through with it. Take the time to actually write out your investment plan in detail – putting it down in writing makes it concrete.

Funding Your Retirement Accounts
David Grabiner and Ian Forsythe
If the first step is to begin saving, where do I begin? Where do I start putting my money if all of these options are available? The first step is to start living within your means – spending less than you earn consistently – and putting your money towards repaying high interest debt. The only retirement savings you should be doing while doing this is in accounts where you receive an employer match. Once that’s done, move some of the money you were using for debt repayment into other plans. Use a Roth IRA if you’re in a low tax bracket – otherwise, use a tax deferred plan like a 401(k). The chapter goes into great detail about additional options as well.

Understanding Social Security
Dick Schreitmueller
Here, Schreitmueller gives a great overview of how Social Security works today in very readable terms – this can be really useful information for people near retirement age now. However, I find this advice is less and less useful the further you are from retirement, simply because I do not believe that Social Security will be a viable option for retirees in thirty years or so. I’m planning for a retirement without Social Security – if it happens to be there, I’ll look at it as icing on the cake.

Withdrawal Strategies
Carol Tomkovich
The amount you withdraw each year from your retirement accounts doesn’t have to be set in stone at all. It can vary greatly depending on your actual needs – they might be more or less than you expect – and whether or not you’ve found a new job or income stream. Many retirees find that, with so much idle time on their hands, they need to find something to do with their time and, for many of them, that means a second career or a new job. Also, some older folks will realize that if they conserve their retirement savings well, they may be able to pass on a legacy to their children and grandchildren – that legacy becomes very important to them.

Early Retirement
Jeff McComas
Everyone follows a different route to retirement. Few people simply walk out the door and into the waiting arms of Social Security on their 65th birthday. Quite a few people retire earlier than that (or at least jump into a second career). There are several tools people can use to handle an earlier-than-usual retirement: penalty-free withdrawals from a Roth IRA (since you can withdraw the balance at any time), self-employed pension programs, sapping your home equity, and so on. Each option has advantages and disadvantages and are worth exploring on their own.

Income Replacement
Lee E. Marshall
What about the unexpected? What if you are injured, acquire a long-term illness, or unexpectedly die? If your current financial state would cause such events to be completely disastrous, you need to look seriously at insurance solutions to protect you and your family against such outcomes. Long-term disability insurance and life insurance are all important to at least consider and evaluate.

Health Insurance
Lee E. Marshall
On the flip side of that coin is care for illnesses from which you may recover (at least partially) after a period, such as cancer. Again, if you can’t afford the costs for such incidences out of pocket (and most of us cannot), you need to evaluate insurance for such situations. Health insurance and long-term care insurance are both worth investigation to keep your family safe and secure.

Essentials of Estate Planning
Robert A. Stermer
Estate planning can be really complicated. Make sure that you, at the very least, know what durable powers of attorney, living wills, wills, and trusts are and which of those you need to have for your financial situation. It is never too early to do this kind of planning – even a simple will can aid the people who survive you in the event of something untimely occurring to you.

Estate and Gift Taxes
Robert A. Stermer
If you leave behind even a moderately-sized amount of money, there’s a good chance that a significant portion of that legacy will be eaten up by transfer taxes and estate taxes. Such taxes are confusing and often unclear to the layperson. If you are planning on leaving behind a significant amount of money to others, it’s well worth your while to study such taxes thoroughly – this chapter really only gives a brief overview of things and helps you identify whether or not you should dig into the topic.

Seeking Help from Professionals
Dale C. Maley and Lauren Vignec
There are many, many finance professionals out there who would love to have your business as you piece through these issues. Of course, muddying the water are individuals who are simply out to line their own pockets by collecting commissions on sub-par investments, as well as others who are quite happy to run up a big pile of fees. The first step is for you to learn as much as you possibly can without a professional so that you know exactly what you do need from a professional. Once you’ve reached that point, you should be able to formulate the exact questions you need answers for, which you can then take to a financial professional of your choosing. The chapter provides an excellent guide for finding one.

Divorce and Other Financial Disasters
David Rankine
Divorce sometimes happens and it can be a real financial burden. One option is to sign a prenuptial agreement to protect both parties and make the divorce process easier (if it happens). Without it, the best route of attack is to simply incorporate the realities of your divorce into your retirement savings – likely, it means that you’ll have to begin saving a larger portion of your income. Another important note from this chapter: most retirement savings are exempt from the claims of creditors, so if creditors are knocking at your door, don’t strip your retirement savings to appease them.

Is The Bogleheads’ Guide to Retirement Planning Worth Reading?
If you’re of any age and a little worried about your retirement (especially in the light of the 2008 financial mess) and are willing to actually invest the time to learn about what retirement investment means and how it works, The Bogleheads’ Guide to Retirement Planning is the book for you. It’s thoroughly well-written, has a consistent set of ideas behind it, does a great job of breaking down concepts into understandable pieces, and leads right into sensible action.

Admittedly, I’m partial to the book due to the philosophy. My own investing ideas are very similar to those of the Bogleheads – I believe in buying low cost index funds for pretty much any long term investment purpose. The Bogleheads’ Guide to Retirement Planning goes far beyond that, though, explaining why one would do that and how it works in terms of planning for a successful retirement.

Be aware, though – this book is fairly heavy. It’s quite readable, but it’s not breezy beach reading. It’ll take you some time to read through it. But if you give this book your time and attention for several evenings and think about what’s being said in terms of your own life – and then turn some of the ideas into action – you’ll find yourself in a much better place for retirement.

This may just be the newest addition to my bookshelf.

The article was filled with lots of stories about individuals close to retirement age who lost a large portion of their retirement savings in the stock market market downturn of 2008, including some who were forced to return to work. The article concluded that the 401(k) system is thus broken, since it’s letting down the people who rely on it.

Here’s the problem, though: 401(k)’s aren’t at fault. Personal responsibility (or a lack thereof) is.

A 401(k) plan is basically just an investment opportunity where employees can put in their money before taxes, then pay income taxes when the money is withdrawn much later in life. While the money is inside the account, account holders have a wide array of investment options. Some of them are very stock heavy and, yes, include a lot of risk; others are more diverse and offer lower risk. The choice of options is left up to the individual investor.

In the end, the investors who suffered a disastrous, life-altering 2008 in their 401(k) accounts were either contributing too little and essentially gambling with it or they didn’t bother to learn or understand how investing works.

A stock fund with a 10% annual return is not a guarantee of a 10% return each year. Minimal reading and investigation into investing reveals this to be true. Thus, if you need that balance to be there for you, you shouldn’t have it in stocks.

Some of the people who are suffering right now were not aware of this fact. They either didn’t bother to investigate their investments further or they simply chose not to think about it at all.

In either case, they chose to invest their future into something that they didn’t fully understand. That’s an incredibly dangerous individual choice.

And, honestly, my sympathy for them is somewhat limited. To build up the large balances that they had in their 401(k)s requires years and years of regular, steady investment – a substantial portion of the financial output of their life’s work. Yet, in many cases, the investors never bothered to truly learn about their investments or make any effort to diversify, using other funds or balancing things out with a conservatively-invested Roth IRA.

There’s a lesson to be learned here. Know where your money is going. Know where your investments are placed. If you can’t afford to take a loss on that money, move the money to something safe, like bonds or treasury notes. If you’re young and have many years until retirement, carefully investigate your options and know that investments in stocks will go up rapidly and down rapidly over and over again with, over the long term, a general upwards trend that will usually beat more conservative choices.

Should special help be given to people who have to re-enter the workforce because their 401(k) didn’t hold up? No. They made the personal choice to expose their investment to a lot of risk when they most needed it. If you argue that they didn’t know, I say that they didn’t bother to educate themselves about the very investment that’s supporting their entire lifestyle – another personal choice.

401(k)s are not the magic answer to retirement problems. They’re a tool, one that requires careful reading of the instruction booklet to use properly. And this time, you need to read the instructions, because if you use this tool wrong, you can cut years of healthy, happy retirement living out of your life.

I’m having a hard time figuring out exactly how much to put away for retirement each week. I’m twenty five years old and most of the advice says to put away 10% of your salary into your 401(k) but I think I should be putting away more. I have three great grandparents that are still alive and over 100 and all of my grandparents are over 70 and still alive. Unless there’s something bad and unexpected I will probably live quite a bit longer than the average person. So should I be putting away more for retirement? How much more?

The best way to answer this question is to roll the clock ahead to age sixty five and ask yourself what you would like to be doing then.

Think about it. When you’re sixty five, do you intend to walk away from your job and settle into a non-employed retirement? Do you want to perhaps seek a different kind of employment, perhaps following a dream of being a writer or a painter or something like that? Do you want to keep doing the job you’re doing until you drop to the floor?

I’ve known the answer to this question all my life. I do not want to be idle in my later years – I’ve always intended to fill them with my writing and that dream is no different now than when I was younger.

Until the final year or two of my life (or when I’m unable), I intend to work and earn some sort of income. What does that mean for my retirement savings? For the later years of my life, my retirement savings will only be a part of my income. I won’t need to withdraw all the money I need to live on from it each year.

Thus, it makes sense for me to not save quite as much purely for retirement and instead invest in long term care and long term disability insurance – these cover the situations in which I’m unable to work.

What does your story look like? Assuming good health, do you intend to keep working productively for as long as you can? If so, then you don’t need to put as much away annually as you might otherwise. On the other hand, you might want to enjoy a long retirement period that doesn’t involve working for an income. If that’s the case, then you should scale up.

Here’s the truth: most retirement planning advice out there assumes that you’ll retire at sixty five and then live without an income for at most another twenty years. In many cases, neither one of those assumptions are true. I certainly don’t want to be completely idle for the last twenty years of my life and I’d love to be able to see my great-grandchildren born – I got to know one of my own great-grandparents very well, in fact.

Instead, I think retirement planning should involve assuming you’ll live as long as possible. I’d take the age of your ancestor that lived the longest and tack on five years. Then, I’d ask myself how many of those years I wanted to spend without earning money – or with earning only some of the money I needed for retirement. Do you want a long “retirement” period or not? Some do, some don’t.

From there, you’ll start getting an idea of how many years you want to cover. Start playing with retirement calculators using these assumptions and see what you come up with. After all, if you think you’ll live to 95 and intend to work until you’re 80, you have fifty five years to save for retirement, thus you don’t need to scale up at all. On the other hand, if you think you’ll live to 95 and intend to retire at 65, you’re almost assuredly going to have to put more away for retirement.

Remember, focus on what makes you happy. If there’s an endeavor that earns a good income that you would be happy spending the rest of your life doing, then spend the rest of your life doing it!

One final caveat: long term care and long term disability insurance are both worth considering. Mostly, they’re hedges against something devastating happening in your life. They ensure that if something does happen that prevents you from working in a productive way, you won’t be a financial burden to those around you. They should at least be considered as part of any long term financial planning.

Financial independence – ahhh, what a dream! Doing as you please, not as you must. Having all the money you need without needing a job. Travel. Adventure. Relaxation. Time to write that book you’ve been thinking about for years.

Well, I’ve been there and done that since I was 25 years old. I’ve had an adventuresome life. I’ve worked for love, not money. I’ve slept late when my body needed it and worked late into the night when the juices were flowing. And I’ve written a book (actually two, one published) which lays out how anyone can have what I have – without risky business ventures or shady deals or being born into the right family. The book, of course, is Your Money or Your Life, which presents a step by step approach to the process of earning, spending, saving, giving and investing with a focus on having enough for life, not “it all” or “more and more.”

We just updated it and, thanks to The Simple Dollar among other frugality sites, we were able to focus on the core strategy and let go of being the go-to people for how to save money on specific purchases.

I’d like to unpack this notion of “financial independence,” though, so we can see it not simply as being filthy rich with a mega portfolio but rather as having a diversity of ways to assure your needs will be met with minimal if any paid employment. It’s a combination of passive income, occasional income, frugality (increasing your unnecessary income) and reciprocity (freely sharing stuff, services and skills with others).

First, you need to understand Financial Independence as having what YOU need to support a life you love. Not what the Wall Street Journal or People Magazine say is rich, not what your financial adviser says you must have, but what you determine is enough by observing and refining your spending patterns until you neither squander nor hoard money. You come up with “your number” – the monthly income needed to have all you want and need but nothing in excess. This is your “enough point”. If FI means having everything the rich people do, you’ll never get there. But if it means having enough income from sources other than work to cover your expenses, we can all achieve through investing time, intention and focus.

Second, you need to take seriously the old saw of penny saved is a penny earned. Let’s say that through comparative shopping you can get your car or refrigerator for 25-40% off retail price (I have done just that. My car was $16000 rather than $22,000, my fridge $750 rather than $1200). Should such savings generalize to all your spending, then your “enough point” might be $40,000 a year instead of $50,000. That’s phantom income – you still have a $50,000 a year lifestyle, but $10,000 of it comes from sheer frugality.

Third, you need to only buy things that only money can buy. For example, there are several ways to get food on your table. You can buy it. You can grow it. You can forage (like picking blackberries by the roadside). There are also several ways to satisfy a gnawing hunger. One is eating. One is having a glass of water since most of us drink far too little each day. Another is to ask before eating: What am I really hungry for? It may be peanuts or it may be the oil in peanuts or the crunch of peanuts or writing in your journal about how mad you are at so and so. Sometimes we consume something material when the need is emotional or spiritual. There are several ways to read the books we like: buying them new, buying them used, borrowing from friends, borrowing from the library. Likewise, there are several ways to look terrific at a wedding. One is to buy a new dress. One is borrow a dress from a friend. One is to shop your closet and wear last year’s new dress because you still look great in it. Being resourceful is a great income stream because some things you need come into your life without spending dollars. Substituting creativity and awareness for knee jerk spending might save you another $5000 a year!

Fourth, you need to only pay others to do what you really can’t or won’t do for yourself. Every competency is an income stream because you don’t have to pay others to handle it – and plumbers and electricians and mechanics are mighty expensive. You don’t have to do everything yourself, but you can pick one task of daily life to do yourself and this further reduces the amount of income you need to be FI.

Fifth, you need to find ways to share resources with other people. There truly could be one lawnmower or extension ladder per city block if people could work out a trading system. You can rely on pure neighborliness, or you could set up a neighborhood listserve where offers and asks are posted or, if you’re lucky, your community might have a more elaborate alternative currency system. Even without such a system, though, we’re awash in other currencies. Discount coupons can be substituted for dollars so they are a means of exchange. Air-miles are also a currency. IOUs are also currency – that slip of paper could change many hands before it comes back to you for final payment.

Sixth is to turn things you do for love into things you do for money – without stress. Sell birdhouses if you love making birdhouses. Sell flowers if you love growing flowers. Do fundraising part-time if you’ve become a great fundraiser through serving on many boards. Baby-sit if you love kids and one more running around your house is no problem.

Finally, you do need to invest in financial instruments that give you a return on investment – the classic form of financial independence. You might own bonds or stocks or mutual funds or real estate.

My financial independence is based on all these “income streams”. I do have a small but steady fixed income from several sources: bonds, a rental house I own and soon Social Security. I do have a little side income from selling a few hours a month of my expertise (conducting tele-classes, facilitation, coaching, meeting planning, running workshops). I am frugal to a fault and if I were to tally up how much under retail I pay for all my purchases I’d likely find I live on half what others do for the same set of things. Having lived with other people for most of my adult life I know how to share, which means I know how to negotiate, to ask for what I need and take no for an answer, to be direct and not underhanded, to return things in better shape than I found them, to understand where I can be generous and when I just can’t give an inch.

In these tough financial times, which may last far into the future and become the new norm, the smart money is on people who know how to manage these multiple streams of income so that their core well being does not depend on any one of them. This is truly diversifying your “portfolio” for financial security.

A few weeks ago, I took my three year old son to the theater to see Up. It was his first time in the theater and he loved the movie, particularly the friendly dog character, Dug.

I was much more entranced by the central character, Carl Fredricksen. Much like me, he married an adventurous girl he’d know since he was a child – I couldn’t help but see myself in Carl right off the bat.

Watching him progress forward to retirement – and finally realizing that this is his opportunity to do something he had dreamed about with his wife for their whole lives – really hit me with the idea that retirement isn’t just about stopping your work. It’s about continuing your life’s work, except without the constraints of having to beat the pavement each day.

The Total Money Makeover touches on this theme right off the bat.

Retirement Isn’t the End; It’s Security
On page 152, Ramsey makes the point that retirement means security, not just freedom from work:

When I speak of retirement, I think of security. Security means choices. (That’s why I think retirement means that work is an option.)

I agree wholeheartedly with this perspective, to the point that I no longer think of 401(k) savings or Roth IRA savings as retirement savings. In fact, I often have to change things I write about both accounts for simplification.

If I don’t think of them as retirement accounts, what are they? I think of them as “crossover point accounts” with some very nice tax benefits.

Here’s why I think of them this way. I have two young children. Realistically, I know that, unless a major windfall comes my way, I won’t be reaching my own “crossover point” (the point at which I can survive on my own investments) until after they’re out on their own for at least a few years. This puts me at an age that begins to approach the minimum ages for non-penalized withdrawals from my Roth IRA and my 401(k).

Do I intend to “retire” at 59 1/2? Not at all. I have a lot of plans for my life after the point where I am financially self-sufficient that don’t involve golf and fishing. They involve large volunteer projects and activities that simply wouldn’t be feasible without a large financial cushion. The last thing I want to do is waste away.

The Job You Hate
I really like this bit, from page 152:

If you hate your career path, change it. You should do something with your life that lights your fire and lets you use your gifts. Retirement in America has come to mean “save enough money so I can quite the job I hate.” That is a bad life plan.

This idea really hit home for me at a time when I was becoming unhappy with my career in many ways. Over the course of several years, I went from being very passionate and involved and pushing forward a fascinating project to being a system administrator charged with also maintaining a very large code base, something I absolutely didn’t want to do.

To me, the idea of simply switching careers was anathema. I had invested so much effort into my career at this point that I didn’t want to lose it. I was also trapped financially – I needed that income to keep coming in.

I knew what I wanted to do – creative-oriented work that really got people to think about their lives – but that seemed light years from what I was doing. But the investment I had already made and the financial state I was in kept me mentally locked into the idea of keeping on with it.

Don’t let your life be controlled by the need for a few more dollars. It’s not worth it.

15 Percent?
On page 155, Dave encourages people to invest big in their retirement plans:

The rule is simple: Invest 15 percent of before-tax gross income annually toward retirement.

In other words, your 401(k) contributions plus your Roth IRA contributions should add up to 15% of what you earn before taxes in a year, not what you bring home.

I think that 15% number is a bit loaded in a way that Dave doesn’t discuss. I think he makes an enormous assumption in this book, that people reading it are at the very least over the age of 30. The thought process behind this is simple: if you’ve dug yourself into an enormous debt hole, figured out that this is a problem, and dug yourself out, you’ve likely got quite a few years under your belt already.

The catch is that it’s those under the age of thirty that can really make a killing with retirement savings. If you save 15% a year from age 22 to age 30 for retirement in an account that returns 8%, you’ll make more just from those early years than you would if you started at age 30 and saved until age 65. Thus is the power of compound interest.

I think Dave’s absolutely right – if you’re over 30 and have peanuts saved for retirement, 15% is a requirement. If you’re just getting out of college, 15% would be sweet, but you can have a healthy retirement for less if you’re committed to contributions throughout your entire adult life.

What About Employer Matching?
Dave offers up his thoughts on how to consider employer matching on your 401(k) on page 155:

When calculating your 15 percent, don’t include company matches in your plan. Invest 15 percent of your gross income. If your company matches some or part of your contribution, you can consider it gravy. [...] By the same token, do not use your potential Social Security benefits in your calculations.

Why not include these things in your calculations? We all know about the lack of stability in Social Security – I, for one, have little interest betting my long term stability on it. But why not the matching?

Dave really doesn’t give an argument for why he believes you shouldn’t include it beyond “consider it gravy.” I tend to think the reason that ignoring matching is a good rule of thumb is that quite often employee matching money has special investing rules tied to it.

Another good reason – perhaps even more important – is that it’s better to save more than you need than less than you need. If you wind up at age 60 and have more money than you expect, that’s a good thing (provided, of course, that you’re not negatively affecting your life along the way).

Another interesting question: is investing in your own business worth considering for retirement savings? I don’t think it is. For one, a small business is notoriously unstable. For another, I think a small business functions more as a giant emergency fund than as a retirement account, since it can be tapped regardless of where you are in life. I wouldn’t include any sort of business as part of one’s retirement plan.

At Age Sixty Five…
An interesting fact worth thinking about, from page 164:

The investing you do systematically and consistently over time will make you wealthy. If you play with this by jumping in and out, always finding something more important than investing, you are doomed to be one of those fifty four out of one hundred sixty-five-year-olds still working because you have to work.

When I read that quote, I immediately began thinking of all of the people I know that are close to sixty five years of age and whether they still need to work. According to my math, seven still have to work and six do not. From my little bubble, it looks like that 54% figure is pretty spot-on.

One interesting difference between the two groups is that the working group tends to spend money more easily than the non-working group. The people I know in the working group tend to go on a lot of vacations and have shiny new cars, but their days are still filled with their jobs. The people I know that are not working for an income at age sixty-five are not doing as many expensive things, but instead are involved in things like volunteer work and actually working at their own small business that doesn’t turn a big profit but is a lot of fun for them. They don’t have shiny new cars and they don’t fly to Europe regularly, but they’re doing things they value.

I’d like to be able to go on some trips when I’m that age, but overall, I’d rather be in the group that doesn’t work for a living income then.

The Rose
On page 165, there’s a short parable about a rose growing from a plain seed into a beautiful bloom. The comment on this parable is interesting:

The story of the rose is about human potential and about not being defined by what you do, but rather by who you are. [...] Push with gazelle intensity [on your savings] to bloom, but know that as long as you take the progressive steps, you are winning.

For me, this all comes back to the idea of spending less than you earn – it’s the engine that drives everything that I truly value in life. Spending more than I earn means lots of little trifling goodies right now, but it means pain in the future – something I learned the hard way.

Spending less than I earn, though, is much like planting a seed and watching it grow. At first, it seems painfully slow, as a seedling barely peeks through the soil and seems to grow at a snail’s pace. But if I keep fertilizing it and working with it, it grows.

Before I know it, it’s a large blooming bush and the fragrance of freedom is in the air.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the tenth chapter – College Funding.

I am putting 15% of my salary into my 401(k) which gets a 5% match from my employer. I also contribute the max to my Roth IRA.

I followed up with Haruki and found that his salary is $46,000 per year and he’s twenty seven years old, just for calculation’s sake.

So let’s put all of the math together. Haruki contributes $5,000 a year to his Roth IRA. He also contributes $6,900 to his 401(k) and his employer contributes $2,300 to his 401(k), too. Added together, Haruki’s retirement savings each year is $14,200 – 30.9% of his salary.

I think that’s excessive, and I told Haruki why.

First, saving 31% of your income for retirement will give you an abundance in retirement savings. When you finally retire, even if you step away at the minimum possible age that you can access your retirement savings without penalty, you’ll have more than enough for retirement. For some, this seems like a problem they wish they would have, but having excessive income in retirement means excessive taxes in retirement. In short, if you have a mountain of cash in your 401(k), you’ll be paying more taxes upon withdrawal than you ever would if you were more careful about your life’s financial plan.

Second, when you hit your “number,” you’ll likely be many years short of retirement. If you’re saving this much for the dream of retiring early, you might not wind up happy. When you do hit your “number” – the amount you need to have to live sustainably in retirement – and you’re much younger than your retirement age, you’re stuck. You’ll have all the resources you need, but they’re locked up. Of course, you can use your Roth IRA contributions for a few years, since you can withdraw your contributions without penalty, but it won’t cover you for more than two or three years.

The big reason, though, is that excessive retirement savings takes away from your other life goals. Dropping that 401(k) contribution back to 10% gives you another 5% of your salary – $2,300 pre-tax – to save for other life goals without diminishing the quality of your retirement. Instead, start socking that money away for other goals: a big fat emergency fund, a home down payment, a small business you dream of starting, a vacation, or whatever it is that really makes your life worth living.

Haruki is doing tremendously well – this is not a criticism of his saving habits, which are stellar. If you have the capacity to save more than you actually need for retirement, that’s awesome. It’s not a bad thing.

Instead, take some time to step back from your retirement savings Think through your life goals and make some serious, well-informed decisions. Here’s how.

First, calculate your “number.” In other words, figure up how much you’ll need to live on sustainably in retirement. There are tons of different calculators and calculations out there – your best bet is to use several and trust the one that estimates the largest total amount – then add 10%. CNN’s retirement calculator and MSN’s retirement calculator are both useful places to start, but try running your numbers through every one you come across.

Next, calculate how much you need to put away each year to reach that goal at your target age. Assume a 7% annual return on your investments, which is what Warren Buffett suggests is the long-term trend for stocks. One way to get a bead on this is to tinker with the numbers on retirement calculators – set the annual rate of return to 7% and play around with the annual contributions you would need to make to get to your target number. This will give you a good savings number to shoot for each year.

Once you’re sure that you’re saving enough for retirement at the age you want to retire, target the rest of your savings towards other goals. Save for a home, for a car, or for a small business. Give money to a charity. Our goal is a home in the country with a barn in the back which we want to make as green as possible – we want to shoot for near self-sustainability. We also want to do some serious volunteer work in retirement.

What if extra retirement savings makes you feel more secure? If that’s the case – and you don’t have any other goals you’re strongly pushing towards – then feel free to contribute more towards your retirement savings.

In the end, it’s worth your while to make sure that, if you’re focused on saving, that your savings are helping you truly fulfill your dreams. Good luck!

Obviously, the big difference comes when you pay into these accounts. With a Roth IRA, you put your money in after taxes – from your take-home pay. With a 401(k), you invest with money before taxes. Thus, a 401(k) investment reduces your taxes today, while a Roth IRA investment reduces your taxes tomorrow.

Many people want a simple answer to the question of which retirement account type is better – but it’s not that simple at all. To truly know which option is the best one would require a crystal ball.

The best we can do is make the case for a future where a Roth IRA is better – and a future where a 401(k) is better. Let’s look at each one.

A Roth IRA Is Better If…
… income tax rates go up from where they’re at now. Let’s face it – the United States is deep into debt. The revenue to pay for that debt will have to come from somewhere. At the same time, income tax rates are currently about as low as they’ve been in decades. What’s a reasonable conclusion from this? The government will raise individual income tax rates gradually over time to make up for all of the rampant spending since the start of the Reagan years.

… your earnings go way up from your current level. If you have higher earnings later in life, it’s likely that most of your retirement savings will also come later in life so that you can have a standard of living in retirement that’s notably higher than what you have now. If you need a lot of money in retirement, it’ll be very useful to have some of that money arrive on your plate tax-free, especially if the income tax rates are higher. In other words, if you have a big entrepreneurial bone in your body, a Roth IRA is probably a better option.

… you have other avenues of income in retirement besides the Roth IRA. Most likely, if your income goes way up, you’re going to have investments of all kinds that earn income for you in retirement. Almost all of that will be taxable income. Again, having some of your income in a non-taxable form means substantially less taxes for you, particularly, again, if tax rates are higher.

… your employer isn’t offering matching contributions into a 401(k). If you’re self-employed or with an employer that doesn’t offer a 401(k) – or doesn’t offer any sort of 401(k) contribution matching – a Roth IRA definitely looks good in comparison, since the 401(k) doesn’t have this huge advantage.

A 401(k) Is Better If…
… income tax rates stay at the same level – or go down. Many argue that the best way to increase revenue is to actually lower tax rates, spurring on business growth. If future governments apply this philosophy, it’s likely that tax levels will either stay steady or decline.

… your earnings decline, stay the same, or only go up at a slow rate until retirement. If you’re not entrepreneurial in any way, shape, or form and you’re not interested in battling your way up the corporate ladder, your income will likely remain pretty steady throughout your life. This means you won’t bump yourself up to higher tax brackets later on and you’ll likely be in this tax bracket (or a lower one) in retirement. Thus, deferring the taxes until then is advantageous.

… your main income (besides Social Security) will be your 401(k). If your income in retirement will mostly come from your 401(k) and not from outside investments, your total tax bill will be limited significantly. You won’t have additional income pushing up your tax burden (which your 401(k) will contribute to).

… your employer offers matching 401(k) contributions. This is free money that blows away any tax benefits that might come from a Roth IRA. If your employer matches your contributions, the decision becomes pretty easy – take those matches all the way to the bank.

What About a Roth 401(k)?
Some people also have the option of a Roth 401(k), which essentially works like a 401(k) except with after-tax money. A Roth 401(k) often ends up being like a Roth IRA that gets employer matching, which means that most of the arguments in favor of a Roth IRA apply to it.

In the end, though, you need to decide for yourself where you’re headed and where you believe the government is headed. Of course, all of this is moot if you don’t start saving right now. Regardless of what you choose, you’ll lose any advantage of either choice by putting off saving while you decide. If you’re unsure, sign up for one plan or another and start contributing. If you change your mind later, switch your savings plan. But, no matter what, start saving now – don’t put it off.

“Fred” writes in with a question along these lines:

I’m in my mid 20’s and just got my first job, currently make ~$50k. In 3 years I will graduate from medical residency and be making 3-4x that. I’ve had a very fortunate upbringing- no student loans, no credit card debt, and about $100k invested in securities. My question is regarding IRA and 401k contributions. Once I’ve contributed up to my 401k’s match, and max out my Roth IRA what should I do next? The current wisdom is to max out my 401k contribution. I feel quite certain that my taxes (once I make ~$200k annually) will eventually be much higher because of our spiraling debt/ Obama tax plan. Would it still be wise to max out my 401k?

There are several pieces of the puzzle worth discussing here.

First, never, ever count your chickens before they hatch. The most common mistake that I see people making is their assumption that they will be earning more in the future. That may be the plan, but plans can change – they are often derailed by life, health, changing interests, opportunities both missed and otherwise, and so on. Do not make spending decisions now based on what you hope will happen in the future.

When I found myself in a very long-term stable job in 2004, I made the mistake of essentially betting that I would have that income in perpetuity – nothing would keep me from earning that money until retirement. Flash forward to 2009 and what do I see? An opportunity came along and I jumped on board. I’m earning less than I might have otherwise, but every morning I feel absolutely that I made the right choice.

So many things can happen over the next few years. You might become disenchanted with your current work. You might fall in love and have a child. You might fall into ill health. In each of these events, you likely will not be earning three times your current salary in a few years.

Instead, a much more prudent path is to build a firm foundation for whatever may come. As I noted above, many people are at least peripherally aware of this, investing money into retirement. But retirement investing is just the start.

Build a very healthy emergency fund. It’s always useful to have at least six months’ worth of living expenses available in a very liquid place, like a high-interest savings account. Don’t be afraid of the size of the goal – just start an automatic plan to scoop some portion of your paycheck right into that savings account. Hold onto it – use it for big emergencies, then replenish it afterwards.

Invest in yourself. Never be afraid to invest money in making yourself better. Lose weight – if you have difficulty doing it on your own and can afford it, hire a trainer to motivate you. Get your teeth straightened and cleaned. Work on your self-confidence and take opportunities to speak in public. Invest in clothes that are well-made and durable – ones that will last through whatever may come.

Invest in a taxable account. If you’ve got an emergency fund, no debts, and a well-padded emergency fund, start investing in a taxable account. How exactly you do this depends on your risk – my recommendation is to invest in index funds using a buy-and-hold strategy. Hold onto that money for now and wait for opportunities to come to you. That money may eventually become a home. It may become the basis for a business. It may become the backbone of a very early retirement. Whatever it is, having it in a taxable account means you can utilize it for whatever you need, whenever you need it.

What about investing more for retirement? If you’re already maxing out an IRA and picking up all of your employer’s matching in your 401(k), your bases are pretty well covered for retirement. Investing beyond that can be helpful over the long run, but if you’re doing it at the expense of an emergency fund, your own personal health, or other personal goals, you should spend some time asking yourself what your true goals are.

My argument is simply this: money invested in a taxable account is likely a good option in this situation. While you do have to pay capital gains tax on the dividends (as well as on the gains if you sell the investments), that money can be used for any purpose without penalty: retirement, a home, startup money for a business, a wedding, education for a new career, or anything else that might come your way. Your future is not set in stone – don’t set all of your savings and investments in stone, either.

Good luck!

Clark’s main reason was pretty simple: people can’t receive scholarships or student loans for retirement. Obviously, that’s true: my children will be able to get all kinds of assistance for their college education, while I won’t be able to get any sort of aid for retirement. Not only that, if your child does have to get into debt for college, they’ll have many, many years to earn their way out of it, whereas when the children go off to college, you won’t have too many years to keep saving for retirement.

On paper, the argument does make a lot of sense. On paper.

This equation leaves out an enormous human element. For many people – myself included – retirement isn’t the big ultimate goal. I might like to think about retiring a bit early, but my big motivation in life isn’t related to retirement at all.

My big plans right now involve guiding my children into adulthood with enough life skills and opportunities that they can basically choose to do anything they want – and run with it. In most ways, my financial choices revolve around that motivation. I started 529 accounts for my children before they were even born (starting them with myself as beneficiary, then changing it). I’m already investing in educational opportunities for them.

Yes, I’m saving for retirement. However, I could be saving substantially more for retirement if I were not directing significant money to my children’s future – and I don’t just mean college savings, either. Other opportunities, such as camps that revolve around their interests, international trips, equipment and instruments they might need, and so on are also important – and by planning for them and saving for them now, I reduce the chance that changes in my career will affect the opportunities that my children have.

Clark’s advice is correct on paper, but it leaves out one of the biggest aspects of personal finance: setting your own goals. Most of my goals revolve around my children – thus, my savings and investment choices revolve around what paints the best future for them.

The lesson here is not every “rule” of personal finance applies to every situation. Instead, you should figure out what your own goals are and then seek out advice on how to make those goals actually happen.

Good luck!

Even before I began my financial turnaround, I dreamed of being able to settle into some form of “semi-retirement” around age fifty or so (when the children are out on their own). I dreamed of spending mornings working on my writing, spending my afternoons volunteering, and spending a lot of long, wonderful days with my wife as we grow into our golden years together, chasing grandchildren and enjoying each other.

Obviously, before I began my turnaround, this really was a pipe dream. If I had continued down my road of rampant spending, I would have been working until I fell over. Now, with a few years of good financial management under my belt, the dream is starting to become a little more realistic – but I know I’ve still got a lot of years of work ahead of me to make it happen.

Work Less, Live More by Bob Clyatt is basically a “how-to” guide for building such a state of semi-retirement later in life. I tend to think that this book speaks to a lot of people. I think many people dream of an active retirement of some sort where their time is filled with regular activity, and for many, that will include a part time career of some sort.

But how do you get from here to there? That’s what Work Less, Live More is all about. Let’s dig in.

Figure Out Why You Want To Do This
Clyatt opens the book by arguing that there needs to actually be a compelling reason to choose a path to retirement or semi-retirement. If you’re actually content with your job, why quit? It fills your time with something that fulfills you and earns you money, after all. If you’re going to consider a path to semi-retirement, it should be pushed not only by a discontent with where you’re at right now, but also a desire to accomplish something different with your time. Clyatt offers a lot of exercises here to help you walk through this, because in truth, there’s a lot of introspection and self-discovery here.

Live Below Your Means
Once you’ve figured out what you want, the first big step on the journey is to, well, spend less than you earn. That means both striving to earn more as well as focusing on frugality in your life, with the goal of maximizing the difference between your income and your spending. Clyatt focuses mostly on the “spend less” part of the equation, discussing things like creating a spending plan and seeking out chunks of regular spending that you can cut out.

Put Your Investing on Autopilot
Most people put far too much stress into investing. Clyatt proposes that it’s actually quite easy for most people if you just follow a few basic principles: invest in a lot of different things, avoid fees, and don’t micromanage it. His suggestion is to stick with index funds in your retirement accounts, either by using a “target retirement” fund or by buying small amounts of a very diverse selection of index funds. Then, once you’ve set up this investing plan, just let it sit and don’t worry about it – it’ll go mostly up and sometimes down no matter how much you stress or don’t stress about it.

Take 4% Forever
How much do you need to save for retirement? Clyatt says that you need to have enough so that you can just withdraw 4% of the starting balance each year and be just fine. So, let’s say you’ve decided you need $40,000 a year from your account – you’ll need one million dollars to be ready. Obviously, you should only withdraw as much as you need – the 4% is just a maximum. If you’re calculating into the future, you should keep inflation in mind – you might be able to get by on $40,000 a year now, but $40,000 today will be worth quite a bit more than $40,000 will be in ten years.

Stop Worrying About Taxes
Many people who move into semi-retirement situations often get very worried about the tax bill at the end of the year. Clyatt’s solution? Don’t worry about it – just save plenty and you’ll be fine. He offers a few basic tips for minimizing your tax impact in semi-retirement. For instance, if you’re strongly thinking about semi-retirement, you should definitely be utilizing a Roth IRA for at least some of your retirement savings so that you’re not required to pay taxes on that money in your later years, when you’ll still be earning some income.

Do Anything You Want, But Do Something
Many people, once they’ve ushered their children out into adulthood and find their careers winding down, discover that suddenly they have many more hours than they know what to do with. Clyatt argues that the key to a successful semi-retirement is to fill those hours with some sort of activity to keep your mind and body engaged. Retirement does not mean idleness.

Don’t Blow It
Guilt. Boredom. Panic. Financial worries. Bruised ego. These are all psychological traps that people can fall into upon retiring – and they’re all real and worth consideration. Clyatt offers great, specific advice for these concerns and many others, but most of them revolve around the fact that you’ve worked your entire life to earn the freedom to choose what you want to do, so get out there and do whatever it is you want to do.

Make Your Life Matter
Keep a healthy body and a healthy mind. Build healthy relationships. Be involved in activities that are meaningful to you. Don’t worry about the past – instead, look forward to the things that are happening now and will be happening soon. In other words, you have all the time in the world to build the best quality life you can, so take advantage of it.

Is Work Less, Live More Worth Reading?
In many ways, I expected Work Less, Live More to be a book heavy on the personal finance specifics, dealing with questions about how to invest for semi-retirement, how to transition to a part time career, how exactly to manage your money during those years, and so on.

While that material is covered, Work Less, Live More takes a much broader view of what it would mean to be semi-retired – and Clyatt actually seems to focus on other issues, such as thinking ahead about what you want out of your life, maintaining psychological health during the transition, and living a full life in retirement.

For some, this won’t be the book they need. It’s not going to provide the tools you need to exactly calculate the optimal financial plan for moving into a state of semi-retirement. Instead, Work Less, Live More does a fantastic job at something else: getting your mind in the right place to create a great, successful semi-retirement. From where I stand, Work Less, Live More can be incredibly helpful for people who are thinking about the possibilities and challenges of being semi-retired in the future, but if you need strong help with the exact financial planning, you may want to seek additional help beyond this book. Nevertheless, I found it an excellent and thought-provoking read.

Recently, I received a long email from a very distraught woman (that I’ll call Mary) who has finally come to the realization that she will not be able to retire in seven years as has been her plan all along.

For the past twenty five years, she’s been contributing a regular small amount to her company’s optional retirement plan – about 7% of her salary. Her company has also chipped in about 3% on that savings, bringing her to about 10% of her salary each year in total savings.

She invested that money pretty conservatively – but it’s an investment plan that seems reasonable to me. Half of the money went into bonds – mostly treasury notes. The other one went into the S&P 500 as an index fund.

On average, over the past twenty five years, her plan has returned 7.5% – and that’s a number she’s become quite comfortable with. As her retirement age approached, she began to use that number to calculate forward from her current state – and this enabled her to plan for retirement in 2015.

Then 2008 came along, and at the end of the year, she received her statement. Her stocks had dropped 39% on the year, wiping out about 16% of her overall retirement savings. This one single year had dropped her annual returns from a 7.5% average to almost a 7% average.

The end result of that swing? Unless the stock market has a gigantic rebound over the next few years, Mary won’t be retiring on time.

For most of you, Mary’s story is pretty ho-hum. Almost every baby boomer is going through some version of what Mary is dealing with right now – I can certainly say that the boomers I know are working through what to do.

What intrigued me was that Mary didn’t want help for herself. She wanted to know what exactly she should have done in the past to not put herself in this situation. In her words:

My daughter just started a great job. We’ve talked a lot about this and she doesn’t have any idea what to do with her own money now. She’s worried about being stuck in my situation later on. What should she do differently than what I did?

Here are seven tactics I recommend for Mary’s daughter (aside from get started now).

Contribute a little more. If you’ve decided to contribute 7% to your retirement account, make it 8%. If you’re at 8%, consider bumping it up to 10%. You’ll likely not notice the difference in terms of your day to day spending, but bumping your retirement savings up from 8% to 10% gives you 25% more money to work with in your retirement account – money that might help you retire early, but might also simply help you survive another down year.

Don’t repeat the same formula when you’re 60. If you’re just starting out, going aggressive with your retirement savings is fine – you have plenty of years to recover from any early down years. However, don’t just keep riding with that same strategy because it’s comfortable and it’s worked in the past. Over time, you should gradually move your money into something more conservative – that usually means out of stocks and into something more stable, like bonds.

An easy way to do that is with a target retirement fund. Most retirement plans offer an option called a “target retirement fund.” The way it works is pretty simple – they do the gradual shift to more conservative investments for you over time, so you’re not caught holding the bag when it comes to another 2008.

Assume some bad years – and don’t be despondent when they happen. Over the course of a career, there will be some bad economic years. Know this up front – you can’t expect every single year to reward you with a big return. When the bad years happen, remember the good years – and if you’re getting close to retirement and realize you can’t afford a really bad year, make your retirement allocations more conservative.

Don’t be afraid to ask for help. Many people feel as though retirement planning is a burden they must carry themselves – and they often put it off or make bad choices simply because they’re unsure what they’re doing. Don’t fall into this trap – ask for help. Ask the person in your workplace who manages such plans. If you’re really unsure, ask a fee-only investment advisor for help. Don’t put it off simply because of ignorance – get educated and get going.

Don’t invest in something you don’t understand or seems risky to you. This is a great rule to follow. If you’re looking at your investment options and you don’t understand some of the options, learn more about them on your own. If you’re still confused – or if it seems overly risky – don’t invest. Everyone has a different level of risk tolerance, and you’ll only regret it if you exceed your risk tolerance, particularly in your retirement account.

Don’t plan for a “full” retirement. Assume that your retirement will contain some degree of activity that can earn an income. Many people after retiring seek out some sort of activity to fill their time and a part-time job or a seasonal job can be just the ticket. Instead of trying to figure out how you can possibly replace your whole income in retirement, focus on just replacing most of your income under the assumption that you’ll want to remain active in retirement.

Retirement planning is one of those painful things that we all know we should be doing, but for those of us who started our careers with a routine of not saving for retirement, it can be a painful subject to consider. Yet another drain on my current paycheck? It doesn’t sound like something that many of us would look forward to.

Because of this tug-of-war between a recognition that we need to save for retirement as opposed to a desire to maintain as much take-home pay as possible, people often resolve to make the coming year one where they finally take charge of their retirement planning, but often it’s a resolution that falls short. They find little things standing in their way and use that as a reason to not take control of the situation.

No more. If 2009 is going to be the year when you take control of your retirement, you need a plan. Here are some simple steps you can take to get a retirement plan in place for yourself, no matter what your situation is.

First, find out if your place of employment offers a retirement plan. Likely, you already know this – if you don’t, contact your supervisor and find out who you can contact to find out more. Many workplaces offer some form of a 401(k) or 403(b) retirement plan which is very easy to participate in.

If you do find that your place of employment offers such a plan, get signed up as soon as possible, even if you’re unsure how much you will be contributing to the plan. You’re better off getting the plan in place now, since you can change your contributions later on. Actually signing up for the plan should also be straightforward – if you need help, ask for help from the person who gave you the forms.

How much should you contribute? This is the stumbling block that catches many people and keeps them from actually pulling the trigger. They consider contributing 5% to a 401(k) plan, but when they envision their paycheck dropping by that much, they don’t even want to think about having to deal with that kind of pay cut.

First of all, your paycheck won’t actually drop that much. For example, if you contribute 5% of your paycheck to a 401(k) or a 403(b) plan, your take-home pay will only go down 3 to 4%. Why? The 5% is taken out before taxes. Let’s say you earn $10 an hour, earning $400 a week, and 25% of that is eaten up by taxes of various kinds. That leaves you with a $300 paycheck at the end of the week, right? Well, let’s say you elect to contribute 5% of your pay to a 401(k) plan. You earn $400, then 5% of that is taken for the plan, leaving you with $380 in pay and $20 contributed to the plan. Then, 25% of that is taken in taxes, leaving you with a take-home of $285. You were able to contribute $20 to your retirement, but your take-home only went down $15. (In fact, it might even be better than that, because likely you’re going to have slightly less of your check taken out in taxes, but that’s a much more complicated story.)

Second, the reduction in your paycheck will be easier to handle than you think. Whenever a person’s earnings fluctuate a bit, their spending almost always automatically fluctuates to keep pace with it, and it’s often not noticed at all. In the example above, the $15 difference in paychecks would likely quickly evaporate in the form of different food purchases, for example.

So, how much should you contribute? For most people, 10% is a good number to target when you’re first starting out. Some employers actually match your contributions, so you can include their matching in that 10% – if you contribute 5% and they match 5%, there’s your 10%. If you’re over 30 and you haven’t started yet, you should look at a bit higher number – 12% or 15% might be better for you.

Even if the percentage seems painfully high, give it a try and see how it works. You might find that it’s easier to deal with than you think – and if it’s not, you can always request to lower your contribution percentage.

What if I don’t have a 401(k) or 403(b) option? Your best option is to start a Roth IRA, which is an independent retirement plan you can easily set up yourself. I recommend using Vanguard to manage it – that’s the group I use. You’ll have to make contributions to this plan directly from your checking account – I have a small amount withdrawn each week for my Roth IRA. They do all of this automatically for you – you only have to set it up once, then you can forget about it.

How should you invest the money? For most people, the easiest solution is to simply put all of one’s contributions into a “target retirement” fund. Most retirement plans offer several of these target retirement plans, which are intended to automatically manage your money over time, helping you get big growth early on, but slow down and become more stable as you near retirement. Pick the one with the year that’s closest to when you turn 65 – for example, if you’re 25 in 2008, you’ll be 65 in 2048, so you should choose a Target Retirement 2045 or 2050 plan. If you don’t have a “target retirement” plan, go conservative. Put 50% of your contributions into one of the stock options (preferably whichever one is the broadest one) and 50% into one of the bond options (again, whichever one is the broadest). This is a pretty conservative choice, but it will keep your money fairly safe no matter what the future holds.

The bottom line is to just take that first step. Even if you’re not contributing much at first, at least you’re setting up the plan and making a start at things.

I completely agree with your assessment on the economy, particularly if you’re young. There is no crisis that is well served by panic and I don’t think that the current economic situation is anywhere near as bad as the Great Depression.

That doesn’t change the fact that many people (myself included) are looking at their 401(k) statements for the year and are seeing 20-30% drops for the year. I looked at my 401(k) and I saw that it’s down about 19% for the year.

I’m about six years from retirement, or at least that was my plan until this year. Now that I’ve lost so much money, I don’t know if I can retire then. I will probably have to work several more years beyond that, because even if the stock market goes up 20% the next two years, I’ll still only be back to about where I started.

Got any suggestions?

Maggie tells a story that’s been repeated in the media quite often over the last week or so. My mother-in-law and father-in-law are also likely in the same group as Maggie – they’re in their mid 50s and are building a solid nest egg in their 401(k)s, but have watched some sizable chunk of that savings vanish this year.

If you’ve already lost that money, it’s gone. There’s no magic way to get back what you’ve lost. For some people who are getting close to retirement age, that means you will have to work a few years more. Your retirement date probably went from 2014 to 2020 or so. That’s unfortunate.

But the blame doesn’t go to the flailing of the stock market. The blame actually goes towards poor asset allocation in your retirement account.

Stocks are inherently a risky investment. If you look at the long term history of the stock market, there are a lot of years where the stock market goes up 15 to 20% in a year. There are also a lot of years where the stock market drops 20% in a year. Over the very long haul, these average out – that’s why holding a broad range of stocks (like in an index fund) is a good idea if you’re investing for the far future.

The problem comes in when that future isn’t quite so far any more. If you’re getting close to retirement, your investment in stocks becomes less of an investment and more of a gamble.

Think of the stock market as being kind of like a coin flip. Think of each year as being like a single coin flip, where a heads flip will get you a 15% gain and a tails flip will get you a 10% loss. The more times you flip a coin, the more likely you are to get a roughly equal mix of heads and tails results.

Since I’m thirty years away from retirement, I have a lot of coin flips ahead of me. I’ll likely see some runs of heads and some runs of tails, but over that long period, it’ll approach an even split in flips. That even split will mean a pretty good return on my investment.

But let’s say you’re now five years from retirement. That means you have only five coin flips. There’s now a measurable chance (a little over 3%) that all of your remaining flips will be bad, losing you a significant amount of money. Instead of being a volatile investment, it moves more towards being a gamble.

So what’s the solution? Most money managers recommend that as you get closer to retirement, you should slowly start taking your money out of stocks and putting it into something safer, like bonds or money markets. These investments won’t return as well over the long haul as stocks, but they’re as steady as can be – a 2% to 6% return that comes in like clockwork.

You’ll hear a lot of different methods for how to do this. My suggestion for most people is to do it automatically – simply put all of your retirement money into a Target Retirement fund that’s close to your retirement date. For example, I use a Target Retirement 2045 fund for my Roth IRA (which matches when I turn 67).

A Target Retirement fund automatically does this transition for you. Right now, my Target 2045 fund (since I’m so far from retirement) is almost entirely in stocks (and it’s been painful to watch it drop). But I have many, many years for it to rebound. When I start to get closer to retirement – in 2020 or so – the fund will automatically begin to adjust, reducing the amount of my retirement money that’s invested in stocks and increasing the amount that’s invested in other things. When I get very close to retirement, most of the money is not in stocks.

Unless you know the ins and outs of risk management and asset allocation, there’s no reason to not use a Target Retirement fund in your 401(k). Call up your plan manager and see if there’s anything like it available to you. If you want to push the risk a little bit (but, of course, remember what 2008 has been like), then use a fund that’s a little bit past when you want to retire. If you’re conservative, use an earlier fund. Then just dump all your contributions into that fund, sit back, and relax.

The next time the stock market flops, you might worry about it a bit, but it won’t be cataclysmic. You’ll be appropriately diversified without having to even skip a beat.

Right then, he asked a key question, one that has left me thinking carefully and deeply over the last few days.

If you’re planning on working until you literally can’t work any more, why are you saving so much for retirement?

This is a question that a lot of self-motivated individuals should be asking themselves as they put together their retirement portfolios. I know I certainly don’t plan on sitting around all day twiddling my thumbs when I reach some mythical retirement age, and I don’t plan on spending all my time traveling around, either. I want to be out there, contributing what I can to society.

So what does that mean for retirement savings? Here are my thoughts regarding my own situation.

First, right now is the time to save for the future, no matter what the situation. At this point in my life, with two young children at home, I need to be at least somewhat careful with my work. That means I have to be very careful with my career choices, selecting paths that pay well and give me some degree of security. Also, my life naturally trends towards frugality – most evenings are spent at home with the family, making a homemade supper and enjoying simple fun together. Relatively low spending coupled with a focus on steady, strong wages equals a surplus (or at least it should), and that personal surplus should be invested.

Second, once the kids are old enough to no longer rely on us, I’ll be more willing to take risks and bold steps. When my children reach the point of independence and we have our home paid off, I’ll be far less worried about the day-to-day bills and will be much more willing to take risks. That includes taking on community jobs I’d never otherwise consider (like running for the county board of supervisors, etc.) or even looking at volunteer leadership positions within the community.

Third, by the time they move out, I’ll be reaching the eligibility age to start withdrawing some of the money in retirement accounts without penalty. Given our plan for having more children, I will be 57 by the time the last one likely moves out. I can begin withdrawing from my Roth IRA without any taxation or penalty at age 59 1/2. It’s pretty nice how those two ages line up, isn’t it?

Another factor to consider is that health care is steadily improving. I’m thirty. What medical advances will be made available by the time I’m sixty? A cure for cancer? Genetic revitalization? Nanobots to repair damaged tissues and clear arteries? Whatever it is, I plan to take full advantage of it and live as long and active of a life as I can. That may mean I’m productive into my nineties – or even older – and saving now gives me plenty of resources to do interesting things with that stage of my life.

In short, for me, Roth IRAs and 401(k)s are not retirement vehicles – they’re merely tax-advantaged investments to help pay for my activities in the second half of my life. Right now, when things are financially stable, I can save up for periods later on in my life where, by my own choice, things aren’t quite as stable.

What about financial security during the end of your days? Many people mistake retirement savings for a long-term care and long-term disability policies, ones that will pay for their health care costs when they reach those final years.

My approach to this is to get such policies early and lock them into low premiums. This way, whenever I reach a point where I’m unable to keep going, whether at age fifty or age ninety, my care is paid for. This is my end of life planning, and I’m currently shopping around for such policies.

This doesn’t really change the amount I’m putting away for retirement. The more I put away now – while I can – the more options I have further down the road. It’s also a big carrot for me to focus on my personal health so that I can enjoy those golden years when they come around.

I don’t want to spend my golden years on a golf course. I want to spend it doing something that matters.

If you’re an active and self-motivated person, don’t just think of a Roth IRA or a 401(k) as a retirement account. Think of it as a long-term investment that will pay off when you’re sixty, perfectly timed to help you do spectacular things with that period in your life.

I asked if, by calculating our monthly expenses, we could multiply that by 200, and if that would be enough to retire. So, if one’s expenses were about $24,000 a year, if having $480,000 would be enough. And you said – rightly so – that this figure doesn’t include inflation, and that a safer amount would be close to 2 million! That’s a lot of money, and I must agree with one of the readers who said very, very few people can afford to save that amount during a lifetime.

I strongly disagree with the statement that very, very few people can afford to save that amount during a lifetime. The combined powers of compound interest and inflation will easily push a person’s investment level higher and higher. Many young people today, if they get started, will have millions in the bank when they retire, even if they don’t have a top-paying job.

I’ll use Jeff as my example. Let’s say Jeff is 25 years old and currently makes $35,000 a year. He wants to retire at age 65. He decides to put 10% of his income away into a 401(k), earning a 5% match from his employer. If you assume he gets a 9% annual return on his investment over the long haul, that inflation is at 4.5% annually over that period, and that the only raises he gets are cost of living raises to match inflation, he’ll have $2.018 million in his account on his 65th birthday. There’s nothing unrealistic about any of the assumptions here.

The problem is that from today’s perspective, $2 million seems like an enormous amount of money. And it is, in today’s dollars.

Comparing 1968 to 2008
But let’s roll back the clock forty years and see how things have changed. I’ll use the CPI-A for my historical inflation numbers.

The CPI-A is a number you can use to compare prices from one year to another. It takes into account the changing prices of goods and services and comes up with a number that expresses that difference. For example, on January 1, 2006, the CPI-A was at 199.4, while on January 1, 2008, the CPI-A was at 212.516. This means that the goods you could buy for $199.40 on January 1, 2006 would cost you $212.52 on January 1, 2008.

Now, let’s say Jeff started saving in June 1968, when the CPI-A was 34.9. Then, he retired in June 2008, when the CPI-A was 219.181. This means that every $34.90 Jeff earned in 1968 was worth $219.18 in 2008.

Now, let’s translate those numbers a bit. Let’s say Jeff had $2 million in 2008 dollars. In 1968 dollars, it’s only $318,459.

On the flip side, let’s look at investments. On January 2, 1968, the Dow Jones Industrial Average was at 906.84. On December 31, 2007, forty years later, it stood at 13,264.82.

That means, in order to have $2 million in 2008, you would have had to only put $136,728.58 into the Dow Jones blue chips in 1968.

Comparing 2008 to 2048
Now, let’s say you’ve decided that you need $24,000 in today’s money as living expenses when you retire in 40 years. Let’s also assume the stock market and the CPI-A change remain the same over the next forty years as they were over the last forty (they won’t be, but we can use them as a yardstick).

First of all, your annual $24,000 today would have to be $150,276.19 in 2048. That would actually be $12,560.52 a month in that timeframe. Using Lois’s “monthly amount times 200″ equation, she’d actually have to have $2.5 million in the bank then.

If Lois set her retirement goal at $480,000, she would be starving in 2048.

But she’s forgetting that compound interest works more strongly in her favor overall. A person today, filing singly, who has $24,000 in income that they can spend actually has a salary of about $30,000 before income taxes.

So, let’s say Lois is actually just trying to keep her current standard of living. She’s 25, earns about $30,000 a year, and never has any interest in climbing the corporate ladder and earning more – she’ll just earn cost-of-living raises for the rest of her career (ideally, this isn’t true, but we’ll make a “worst case” scenario for Lois). Her employer matches 1% for every 2% Lois contributes to her retirement account.

All Lois has to contribute to her 401(k) to reach her goal (using the assumptions above) is 15% of her salary. That’s assuming no performance-based raises ever, no promotions ever, and no job changes ever. If Lois commits herself to building a career and gets a few promotions along the way, her contributions can easily be lower than that.

$2.5 million is a completely realistic retirement goal for a young person only earning $30,000 a year. They’re helped along by the power of compound interest.

Is Lois’s “200 Times Monthly” A Good Thumbnail?
It’s only a good thumbnail if you’re starting off with your estimated monthly costs in retirement. Even then, it’s a bit on the risky side, as it will require solid returns on the investments to keep up with the spending.

There are two big problems with using such easy thumbnails, though.

The first one is math based. If you figure everything in today’s dollars, you won’t make ends meet later on. You’ll have to estimate what you expect to spend then. Doing that in Excel is easy, actually. If you believe that inflation will be at 4.5% from here until retirement, enter something like =2400*1.045^25 where 25 is the number of years you think you’re away from retirement and $2,400 is the amount you expect you’ll need in today’s dollars each month (for those curious, it’s $7,213.04).

If you then take that number and multiply it by 200, then you’re starting to get a reasonable retirement figure. I think, actually, that 200 is a bit low, as it assumes a 6% annual return in retirement just to break even. Try using 240 (which assumes a 5% annual return) or 300 (which assumes a 4% annual return) for more safe and realistic thumbnail estimates.

The second one is psychological. The numbers you’ll come up with doing this math seem frighteningly large. Most people then react by ignoring the numbers, arguing that they’re false, or using some other form of psychological crutch to make the number seem more reasonable. But it already is reasonable. It’s important to remember that a 1968 dollar is worth $6.28 in today’s dollars. If your old man was earning $10 an hour at the factory in 1968, that’s like earning $62.80 today. In reverse, a dollar today can only buy what $0.16 bought in 1968. These trends will be (roughly) the same into the future. A dollar today will likely be worth somewhere between $5 and $10 in 2048.

It’s for those two reasons that I don’t find a “target” for retirement to be too useful, especially early on. It can play psychological tricks on you and it can trip you up if you’re not strong on the math.

Instead, just stick to a strong savings plan from your first day at work. Don’t even think about it – just start putting away 10% of your salary either into a 401(k) or a Roth IRA (or some combination thereof). If you do that and work hard at your career, your retirement will be in fine shape.

Once a day or so, I’ll get a long email from someone pouring out the details of their personal finance situation. Quite often, they’ve reached an age where they’re starting to seriously worry about retirement and have realized that they’re way behind where they need to be. Usually, this revelation is coupled with an astounding debt load – quite often, they list their debts, and they add up to quite a pretty penny.

Then comes the big question: what do I do? Most of the time, the situation is salvageable, but it usually points to a path of a lot of frugality and hard work – and quietly I wonder whether they’re up to it or if they’re going to keep working until the very end of their days.

Their question usually boils down to what personal finance need do I tackle first? Should I start hacking away at all this debt, or should I start socking my cash away for retirement? It’s not an easy question, actually.

What Are The Options?
Usually, you’re asking yourself what to do with roughly 10 to 15% of your income. Should you use it to repay debt, save for retirement, or a combination?

A debt repayment plan essentially means you’ve determined an orderly plan for repaying your debts and have committed a certain amount of money each month to eliminating them. Let’s say you’ve committed $500 a month and your minimum payments are $400 – that leaves $100 as an extra payment on one of the debts after all minimum payments are handled. When you pay that one off, you still use $500 a month but your minimum payments are less, meaning you can put a larger extra payment towards the first debt.

Saving for retirement, on the other hand, means you’re committing a certain amount each week or month towards an investment account for your retirement, as discussed earlier this week.

So What Should I Do?
I don’t think the choice is necessarily one or the other. I think the best solution for someone facing debt issues and the need for retirement is a hybrid of the two.

The most important thing is to make sure you’re not throwing any money away. This means making sure you’re hitting the minimum payments on all of your debts. It also means, if you have a 401(k) plan, that you’re contributing up to your employer’s match. If you’re not doing these two things, you’re throwing money away on late fees or lost contributions – and now is not the time to be throwing money away.

The first big step is to get a grip on your spending. If you’re in a situation where you have strong retirement needs and strong debt elimination needs, you need to trim back the spending hard. Stop eating out. Cut back on or eliminate your travel. Stop shopping for entertainment’s sake. Look at your hobbies carefully. Trim any fat you can from your monthly bills. You got into this situation by overspending and the only way out is by underspending.

The next big step is to compress your debts as much as you can. Call your credit card companies and ask for some rate reductions. Do some zero percent balance transfer offers. Look for other opportunities to get those rates down, such as home equity loans or personal loans. Here are some strong tactics to use.

Next, figure out how much you need to be saving for retirement. Figure out when you want to retire and how much extra money you have each month at this point, then go to your retirement specialist at work and see what you can do. They’ll probably move you to more aggressive investments and suggest you use most of the cash for retirement. You should consider seriously working while retired.

If there’s anything left, use it to hammer on your debt repayment plan, but if there’s any real key to solving this debt versus retirement conundrum, it’s learning to live cheaper. If you don’t do that – and do it with all your heart – you’ll be working for the rest of your years.

One of the most common questions I get asked about retirement plans is whether or not a person should be putting their money into a 401(k) or a Roth IRA for retirement. The answer isn’t as straightforward as it might seem.

What Are The Options?
A 401(k) is a employer-sponsored deferred contribution retirement plan, so named because it’s defined under section 401(k) of the IRS code. In a nutshell, it works like this. You sign up for a 401(k) plan in your workplace and choose investment options within the plan. Your workplace takes money out of your paycheck before income taxes are taken out and deposits this in your plan. In some workplaces, your contributions are matched by the employer. Then, when you reach retirement age, you can take money out of the 401(k), but those withdrawals are subject to income tax – since you didn’t pay it earlier, you have to pay it later on. Currently, there is no upper income limit on who can contribute, but an individual can contribute at most $15,500 to his or her 401(k) in 2008 and the maximum amount that can be contributed total between employer and employee is $46,000 in 2008. You can find a lot more detail in the Wikipedia entry on 401(k)s.

A Roth IRA is an independent individual retirement account that you set up directly with an investment firm; it’s name comes from its chief legislative sponsor, Senator William Roth. With a Roth IRA, you set up an account with an investment house yourself (mine is with Vanguard), choose investment options with them, and then directly deposit after-tax money (from your checking account, for example) into the Roth IRA. Then, after meeting a few basic requirements (you’re 59 1/2 years old or older and have had the plan for five years or more), you can withdraw both your deposits and gains completely tax free. In 2008, the maximum contribution you can make is $5,000 a year (unless you’re over 50). There is one big caveat: there are income limits on who can contribute – if you make more than $99,000 individually or $156,000 jointly, you can’t contribute the full amount (and may not be able to contribute at all). You can find out a lot more detail in the Wikipedia entry on Roth IRAs.

What Are The Big Differences?
The big differences between the two are employer contributions, investment options/management, and taxes. Let’s look at each aspect.

Employer contributions With a 401(k) retirement plan, an employer may match contributions made by an employee up to a certain percentage. For example, one 401(k) program I know of offers a 2:1 match for every dollar contributed to a 401(k) up to 5% of the salary. So, if you contribute 5% of your salary to your 401(k), the employer also puts in an extra 10% of your salary, effectively tripling your contribution. In short, if your employer offers matching contributions to your 401(k), that likely trumps any other concern and you should use a 401(k). It’s free money, after all – don’t turn it down.

Investment options/management With a 401(k), you’re tied into whatever management and investment options are made available to you by the plan your company offers. That often means the investment choices are relatively weak. Things to look out for in your investment plans are expense ratios (if they’re high, that’s bad) and investment options (the more choices, the better). With a Roth IRA, you are allowed to choose your management and thus also your investment options – you pick the investing house you want to use. I chose Vanguard because the expenses they charge me are very low and they offer a huge number of index funds, my investment of choice. Roth IRAs offer an advantage in that they allow you to choose your plan’s manager, though if your 401(k) offers good options, this may not be a big advantage.

Taxes This is really the sticky wicket out of the three because it involves some prediction of what the future holds for you. Here’s the deal: if you think your income tax rate will be higher at withdrawal time than it is now, a Roth IRA is a better choice and will save you money in the long run. If you think your income tax rate will be lower at withdrawal time than it is now, a 401(k) is a better choice and will save you money in the long run.

How can you know which rate will be higher? Here are a few things to ask yourself.

Will my income grow vastly between now and retirement? If the answer is yes, you’ll likely be in a higher tax bracket when you retire, which favors the Roth. If you’re near your peak, you’ll probably be in the same bracket or lower, which favors the 401(k).

Will I be working in my retirement years? If the answer is yes, you have a much higher chance of at least being in the same tax bracket you are now. If the answer is now, likely your income will be lower.

Will the political landscape shift towards higher tax rates? This one, honestly, is complete guesswork. If I had to guess, I would speculate that tax rates will go up in the future, and that favors the Roth IRA. If you think they’ll go down, that favors the 401(k).

Seem confusing, even overwhelming? That’s because it is. It’s really hard to tell what will happen with the future and balancing different factors like that is hard. My personal opinion is that the Roth IRA has a slight edge in the tax department, but that’s mostly because I believe taxes are going to eventually go up.

So What Should I Do?
The first step, to me, is pretty easy. If your employer’s 401(k) plan has matching funds, always contribute up to the maximum amount that receives matching. This is free money, and enough of it that it trumps the other concerns. Get it while you can.

The question really revolves around what to do with additional retirement money. Given all the factors above, and also assuming you’re young and have many years of income growth ahead of you, I believe the best option is a Roth IRA – but they take a bit more work. You have to find your own investment plan with a Roth IRA and set it up yourself (it’s not that hard, but it does take a bit of time up front), but that gives you the freedom to find an investment house that matches your philosophy and saves you money (for me, that’s Vanguard).

If you’re older, near the peak of your income potential, and expect to have a smaller income in retirement, then more contributions to your 401(k) is probably your better choice.

No matter which path you decide to follow, simply by the act of putting money away you’re putting yourself ahead of the game. Don’t let this debate keep you from starting to save – if all else fails, simply start making contributions to one or the other now and then make up your mind later on – you can always change your contributions around later.

What’s often not asked is whether or not estate planning really even applies to you at all. Does it? Let’s take a look.

The first question you need to ask yourself is if you passed away tomorrow, would you leave anyone else behind in a financial pinch? Do you have dependents on your income tax? Are you helping out your parents as they get older? Look through your life and ask yourself if anyone would be in a significant bind if you suddenly vanished (and the people you work with professionally don’t count here).

If you can identify people who would need help (or may need your help in the near future, like a future spouse), then you should have some sort of life insurance. There are many tools online for estimating how much you’ll need – this MSN Money tool is particularly good.

If you can’t identify anyone, you probably don’t need life insurance at all. A tiny policy – just to cover your funeral expenses so you don’t burden your parents with the cost – might be appropriate, but if no one is left hanging by your passing, life insurance isn’t really a necessary expense for you.

Another worthwhile question to ask is do you have any specific sentimental property or small assets you want given to specific people when you pass? If you do, then a proper will is in order, so you can specify your wishes. If you don’t care what happens to your stuff for the most part, then you can either not have a will at all (and allow the court system to distribute your assets) or have a very will that assigns everything to one person.

What if you have a lot of assets you want to pass on to people? In that case, you’ll probably want to set up a living trust of some sort – consult a lawyer. You’ll probably also want to prepare a financial preparedness document for your survivors, so they know where everything is and can easily access it.

To put it simply, if you’re a young and unmarried professional without any kids or other challenges, you likely don’t need to worry about estate planning at all. Instead, focus your energy and your money on building a strong career and preparing yourself for the other challenges and goals in life, and revisit this question if you decide later to get married and/or have children.

If you’re young and are married (and/or have young children), but haven’t accumulated significant assets yet, you should have life insurance and a basic will. Life insurance will ensure that your surviving spouse and children are taken care of, and a will may specify any other specifics you may want to label, particularly in the event of the death of both you and your spouse with surviving children.

If you’re later on in life and have accumulated significant assets, that’s when a living will comes into play. Consult a lawyer and get one set up properly so that your wishes are clearly carried out after your passing.

Estate planning is a perfect example of how the same old financial advice doesn’t apply to everyone. People at different stages in life have different needs.

Lately, as my parents and my wife’s parents begin to inch towards retirement, I’ve become quite interested in looking at the financial issues they face at this point in their lives. Their situations are very different – the one thing they have in common is their age, and the title of this book makes it appropriate for all of them.

Along these lines, I’ve read The Number (long on entertainment, short on solid advice) and Start Late, Finish Rich (solid, but repetitive if you’ve read other David Bach books), and thus I’m still searching for a truly strong book on retirement-related issues to recommend to readers who ask.

Since I highly enjoyed It Pays to Talk (Schwab’s excellent book about talking to your loved ones about money issues), I had high hopes for this book. Does it really offer thought-provoking and strong advice on retirement issues, or does it fail to stand out from the pack? Let’s dig in and find out!

Inside You’re Fifty, Now What?

1. Investing Strategies for the Second Half
Schwab’s basic approach is pretty simple. If you’re under 50, you should invest aggressively for retirement – mostly in stocks (and even pretty aggressively within that). When you get over that age, every five years, you should inch it back, moving your investments from stocks into bonds bit by bit.

Even more important, Schwab recommends managing it all yourself. It’s not that hard, the amount that you learn getting your hands dirty in the process, and it’s also cost-effective – if you’re not paying someone to manage your funds for you, you’re putting it in your pocket. I’m hugely in favor of doing it yourself – the ten hours you might spend learning about what’s going on is quickly repaid over a lifetime of superior investments – even a 0.1% improvement annually in your retirement can add up to tens of thousands of dollars over your life, and basic knowledge and good choices are worth a lot more than that.

2. Adding Up What You Have
Calculate your net worth. That’s basically the point of this section of the book, offering up a ton of compelling reasons for doing so and providing a solid guide for walking you through the process. Schwab focuses pretty heavily on the assets part of the balance sheet, for better or worse. I know many people who have a lot of assets coupled with a lot of debt and thus if they focus solely on their assets, they seem rich. Debt is an important part of the picture and I think Schwab doesn’t focus on it enough here, though it is mentioned.

For me, net worth is an essential part of the personal finance picture. I use my (and my wife’s) net worth as the primary gauge of where we’re at financially – not how much money we have in our accounts. Assets minus debts – that reveals the real picture and it’s the only fair way to compare today to the past.

3. Estimating How Much You’ll Need for the Second Half
Schwab uses a rather … interesting calculation to determine how much money you’ll need in retirement. In a nutshell, he says to take your annual expected living expenses, divide them by 12, and then multiply that number by 230 in order to get the amount you need to save. For example, if you want $80,000 a year in retirement, you should divide that by 12 and then multiply by 230 to get you $1.541 million.

The 230 number is pretty arbitrary (Schwab admits it) and is even more arbitrary the farther you are from retirement (inflation has much more time to be a big factor), but it is a pretty compelling calculation. Later in the chapter, Schwab (smartly) suggests adding in an inflation multiplier based on the number of years you have until retirement. For me, that’s about thirty years – a multiplier of 2.8. If I wanted that $80,000 threshold above, I should then be targeting somewhere in the ballpark of $4.2 million as a total the day I retire – a pretty hefty number, indeed, but it’s based on significantly more spending than I do right now. A more realistic number for me is half that – $2.1 million.

4. Choosing Investments for the Second Half
For the most part, Schwab recommends staying at least somewhat aggressive until you’re at least 80. Seriously – he recommends keeping at least 60% of your retirement fund in stocks until you’re 80. That’s pretty aggressive – definitely on the aggressive side of investment advice that I’ve seen.

On the other hand, Schwab is pretty optimistic about retirement itself. He implicitly states that he believes most retirees will live into their eighties, exceeding current life span estimates by quite a bit. In other words, he’s betting on continual improvement in medicine and diet, which will lead to extended lifespans for retirees.

I agree with Schwab’s optimism, actually. I tend to believe that “retirements” will get longer and longer and longer as the years pass and that it’s good to assume that you’re going to live to a ripe old age.

5. Cash Flow in the Second Half: Creating a Paycheck for Yourself
Schwab recommends taking 4-5% per year out of your accounts as a retirement “paycheck,” but no more than 5% each year. With the relatively aggressive portfolios that Schwab recommends in the previous chapter, this effectively ensures that you’ll be able to live forever on your retirement nest egg, which is a good thing.

On the other hand, if you determine that a 5% annual withdrawal across all of your retirement accounts isn’t enough to live on, you need to keep working and socking money hard into retirement. Retiring before you’re ready tacks extra years onto your retirement and also depletes your retirement much more quickly, leaving you much more likely to be without funds in your final years when you need the money most.

What did I learn? Save now, when I’m young.

6. Monitoring and Rebalancing Your Portfolio
This chapter serves as a good primer on portfolio rebalancing whether you’re focused on retirement or not. Once you’ve figured out your target portfolio, the principles of rebalancing are pretty much the same. If one piece of your portfolio is low and another is high (compared to your “ideal” portfolio allocation), buy more of what’s low instead of selling what’s high. If you can, do most of your rebalancing within a retirement account that’s tax-deferred. In other words, pretty typical rebalancing advice.

The most interesting part (to me) is Schwab’s subtle indication that index funds are the way to go. He encourages readers to use comparable index funds as the benchmark to compare their current investments. For example, if you have a large cap fund in your portfolio, use the S&P 500 as your benchmark to make sure the investment is up to snuff. The logical conclusion (to me) is why not just invest in the benchmark and buy something like the Vanguard 500?

7. Getting Help If and When You Need It
Here, Schwab discusses how to find a financial advisor – in other words, how to “talk to Chuck.” Ignoring the expected bias, Chuck actually does a good job here of describing how one should select a financial advisor, including a pretty frank discussion of fee-only, fee-based, and commission-based financial advisors (and not too subtly making a strong case for the fee-only ones unless you need someone to completely manage everything for you).

I confess to expecting this chapter to have a lot of bias towards financial advisors, especially commission-based ones, because that’s how his company makes the most money, but his advice really is pretty solid. Do the research and make the choice that’s right for you. For me, I doubt I ever turn to a financial planner – I get much more value from figuring things out for myself.

8. The Assurance Called Insurance
Health insurance, long-term care insurance, disability insurance, and life insurance – these are the four things that you need to have covered in retirement, according to Schwab. These four insurances together create a safety net, protecting your family against anything that might happen to you.

This advice really applies to anyone of any age, particularly if you have a family that could be severely impacted by a lengthy illness, a disability, or a sudden death, something I mused about recently. Anyone who has a family should at least strongly consider all of these types of insurance.

9. The Fine Art of Estate Planning
The penultimate chapter focuses on estate planning: wills, living trusts, and so forth. Schwab often assumes that the reader has a rather large estate to worry about, something that doesn’t really apply to a young professional. In other words, Schwab’s estate planning advice really does apply to the titular fifty year olds.

The key thing that Schwab mentions here (and it overlaps well with his other book, It Pays to Talk) is that this is a family moment and should be adequately discussed with everyone involved. Secretive decisions do nothing but foster resentment and hard feelings, which are perhaps an unwanted part of your legacy. If you’re making a difficult choice in your planning, have the courage to talk about your reasoning openly with the people involved.

10. Giving Something Back: Some Thoughts on Charitable Giving
You’re Fifty, Now What? closes with a brief look at charitable giving. Schwab’s key advice is straightforward: know what you’re donating to in detail (meaning do the research, don’t just hand cash to anyone that asks and seems to have a decent cause) and also take advantage of any tax benefits that the donation gives you (remember, if your donation is tax-deductible, that effectively means you can donate more).

Schwab doesn’t give any specific charity recommendations, but does advise that if you’re giving a significant amount, you should work with the charity and with a lawyer to maximize the benefit to the charity. It may be that giving money in multiple sums has tax benefits for you or for the charity and thus may allow your donation dollars to stretch further – don’t overlook it.

Appendices
One aspect of this book that I really like is the inclusion of some very fact-heavy appendices on specific subjects. Doing this enables some specific areas to receive the detailed, fact-based coverage that they need without completely bogging down the main part of the book – things like discussions on durable power of attorney for health care and how to read a mutual fund prospectus. The print’s a little smaller and the writing is dense, but that’s perfect for this type of material – it’s fact-heavy and the specific bits don’t apply to everyone. This is an approach I’ll look at if I write a book in the future that could use such support.

Is You’re Fifty, Now What? Worth Reading?

If the title of the book fits you – you’re between ten and twenty years away from retirement – then this is the best book on retirement planning I’ve seen. It really addresses the needs of people who are in that particular demographic range, like my wife’s parents, for example.

On the other hand, if you’re outside of that demographic area, it’s not all that helpful. From my perspective, much of the material was either not applicable at all or applicable only in a theoretical sense. I’m more interested in longer-term retirement advice, as I have thirty years (at least) until I retire.

This is a book that I think is great for my father-in-law and my mother-in-law to read. I can see very clearly how the advice would apply wonderfully to their life. As for me, I think it’ll go back on the bookshelf and wait for another twenty years or so. In other words, the title is very appropriate and accurate – if it interests you, the book will interest you, too.