The real question that both articles strive to answer, though, is where should I put my money to ensure the best possible outcome for both me and my children? Retirement savings? College savings? Splitting it up?

In my eyes, the issue really comes down to the job every parent is charged with: raising a functional, critically thinking, independent child. If you are truly able to succeed in this regard throughout their childhood, you’re going to raise a child that doesn’t really need your help at all to succeed in the world.

In other words, if you take the time to really focus on parenting your kids in a way that makes them functionally independent and critically thinking adults, you don’t need to save for their education. They’ll be able to make their own way in the world without your financial support. Thus, you can channel almost all of your long-term savings into retirement savings so that you’re not a burden to them in whatever they wind up doing in life.

How do you do that?

Over the last five years, I’ve read a pile of books on the psychological needs of children and young adults, everything from Mindset and Born to Buy to The Read-Aloud Handbook and Raising Financially Fit Kids. I’ve come up with three basic conclusions.

First of all, praise children on their hard work, not their natural gifts. Focus on when they improve their results, not on when they simply succeed because of their talents.

Second, give them room to explore independently. Don’t hover. Don’t be paranoid about kidnapping. Send them out in the yard to explore things on their own, then when they’re done, ask them about it. The more independent exploration they do, the more resourceful they’ll become.

Finally, put them into challenging situations. Don’t protect them from failure. One of the most valuable childhood lessons is learning how to fail. What do you do next? You pick yourself back up and try again. If you go through childhood without knowing how to do this, adulthood becomes much, much harder.

If you are constantly conscious of these three things, you’re going to naturally mold your children to be self-reliant and independent. Those traits will serve them very well in whatever they choose to do in life, and because of that, you don’t need to hand them their education.

They’ll be able to make it themselves.

A final reason to save for retirement: if you do choose to help, retirement savings are usually flexible enough to allow you to help. You can often take out loans to help with education purposes from a 401(k), and you can take back your Roth contributions whenever you’d like to spend as you wish. If you decide that financial help is really needed, you can provide it with retirement savings.

So fund the 401(k) and the Roth IRA and don’t worry as much about the 529. Instead, focus your parental energies on being a parent that raises an independent and curious child.

Good luck.

When I envision my life thirty years from now, one key part of that vision is that my children are financially independent and not relying on me for any of their financial needs. I don’t want to be in a situation where they’re still living at home or they’re relying on regular cash infusions from me when they’re thirty.

One major avenue to this level of success is earning a college degree, which can directly lead to a much higher level of earning than life without a degree. I can help pay for this degree, but it may come at the expense of saving adequately for retirement.

What are the advantages of college savings when you’re young? An adequately funded college savings plan, started when a child is young, can grow into a major resource for paying for significant portions of a child’s college education.

For example, let’s say you start funding a 529 plan with $250 a month when your child is born. The account returns 8% per year. On their eighteenth birthday, you’ll have $116,844 sitting there waiting for their college education. If you don’t worry about it until they’re in junior high, starting at age twelve, they’ll have only $22,888 in savings.

What about your retirement? Many people who make this choice are also making the choice to work later in their lives than the typical “retirement” age. They have no qualms with starting their retirement savings in earnest after the kids are out of the house (say, age forty five or fifty) and planning on a retirement that starts much later (say, seventy or seventy-five).

For some people – especially people who find a great deal of personal value in their work – this makes a great deal of sense. Take myself, for example – I pretty much never want to be idle until I literally am unable to do anything at all. I’m just not wired that way.

What if I change my mind? If you’re using a 529 savings plan to save for college, you can withdraw the money from the account as you wish. You will have to pay taxes on the gains plus a 10% additional penalty for misusing the account.

However, if you wish to use that money for educational purposes for someone else – say, yourself or a child’s sibling – you can change the beneficiary without a penalty as long as the new beneficiary is a close family member.

I don’t want to burden my children in my dotage. If you find yourself needing their assistance in your old age, you will have given them a tremendously strong platform from which to help you if they so choose. The financial advantage you gave to them by ensuring that they were not burdened by student loans puts them in a much stronger financial position in adulthood, one in which they can afford to help you if you need it.

What if I reach my retirement age and don’t have adequate savings because of this choice? You’re finally pushed out the door, but you don’t have enough money to make ends meet. What happens then?

To put it bluntly, you’ll have to find a source of additional income. It’s important to recognize, however, that reaching this point without adequate money isn’t necessarily a disaster. Most people in this situation – having chosen to help their children instead of saving for themselves – do have a myriad of options available to them when they reach old age.

This might come from finding another job. It might come from financial support from your children. It might come from goverment support. It might come from something as simple as being the daycare provider for your grandchildren. If you choose this route, there will be options available to you at this point. It does not have to be devoid of options if you’re willing to step up and take action.

Wait a second! You’re probably wondering what my actual conclusion on this topic is. Is it better for the parents of young children to save for retirement first – or save for education first? As you’ve seen, there is a case to be made for both sides of the coin, but I actually do have an answer… which you’ll read about tomorrow afternoon.

When I envision my life thirty years from now, one key part of that vision is that I’m not financially dependent on my children. I’m able to live the life I want to lead without them worrying about me (at least financially) in the least, particularly in my final years.

The best way to ensure that kind of a future is to focus primarily on shoring up retirement savings, even if it comes at the expense of saving adequately for the college experience of one’s children.

What are the advantages of retirement savings when you’re young? The big advantage of retirement savings when you’re young is that it has a huge number of years to grow and grow and grow. The power of compound interest has plenty of time to work in your favor.

The real numbers tell the story better than anything else. If you invest $10,000 when you’re 45 at an 8% rate of return, you’ll have $46,609 when you’re 65. Invest $10,000 when you’re 35 and you’ll have $100,626 when you’re 65. Invest $10,000 when you’re 25 and you’ll have $217,245 when you’re 65. The earlier you sock away money for retirement, the better the deal is.

What about their education? Self-motivated students can always make college work if they choose to do so. There is a myriad of financial aid options available, plus most schools also accept transfer credits from very low-cost institutions, enabling students to fulfill many of their general education requirements at a very low cost from community colleges.

Beyond that, having a student take a large deal of responsiblity for their education forces them to learn some personal responsibility that they might not otherwise learn. It can also show them, first hand, the cost of their education – and the value of it. Those are lessons that aren’t taught by simply writing a check for them.

What if I change my mind? If you start saving for retirement, then change your mind about your choice, you’re not completely without options. Most common retirement savings plans allow you to use some – if not all – of your retirement savings to help with college education.

Most 401(k) plans allow you to borrow against them to pay for educational expenses. However, if you do this, you lose out on the returns during the years that you’ve got the money out on loan. If you’ve used a Roth IRA, you can withdraw the amount you’ve contributed at any time without penalty, but you can’t put that money back.

I’ll feel guilty about saddling my children with lots of student loans. There’s no reason you can’t help them pay off those loans when you’re very secure in retirement. At Christmas, write a check to their student loan holder, knocking off a chunk of their loans for them. This way, you’ll be making the payments from a position of total security rather than from a position where the future is uncertain.

What if this makes my children fail to get an education? From my perspective, that’s more of a commentary on the initiative of your children than anything else. If this roadblock somehow “prevents” them from going to college, they’re showing a lack of self-motivation that will hinder them in more ways than just not getting a degree. Without that kind of drive, they’ll be hard-pressed to succeed in any high-pressure field.

They might also simply not be interested in what college has to provide for them and are intelligent enough to make that decision on their own. In that situation, a trade school or something similar might actually be the best situation for their temperment, for one example. Students who attend trade schools can often earn a very good salary doing a wide variety of skilled labor.

This makes a strong case for saving for retirement instead of saving for your kid’s education. But what about the flip side of the coin? Tune in later today to see that discussion.

The one financial thing I haven’t done for myself yet is start saving for retirement. The problem is that I don’t ever want to retire and if I imagine a situation where I actually am retired, I just don’t want to envision it at all. I just can’t convince myself to take money away from my needs now for a future that isn’t very bright.

Monica is a forty year old single woman with a career she clearly loves. Other than the retirement thing, she has her financial house very nicely in order, with only a mortgage on a townhouse as an outstanding debt, a nice emergency fund, and a great paying job that she never wants to leave.

So why should she be saving for retirement?

I think that “retirement” is the wrong word for Monica to be using when she thinks about saving in this way.

Let’s look at what a Roth IRA actually is. A Roth IRA is an investment account to which you can contribute money each year (in whatever way you want – weekly, monthly, one lump sum). Once the money is in the account, you can withdraw your contributions whenever you’d like with no penalty – but you can’t put them back.

The big catch is with the gains on that money. If you withdraw them before age 59 1/2, you pay a stiff penalty – you have to pay all taxes on those gains, plus an additional 10% tax penalty. On the other hand, if you wait until you’re 59 1/2, you can withdraw it completely tax free.

The Roth IRA is often viewed as a retirement vehicle because people who are of that age are often planning to use it for retirement.

But it doesn’t have to be a retirement vehicle at all.

I look at my Roth IRA as my “second life” vehicle. When I turn sixty, my worries about choosing a job or career path that provide me a stable income go away because I now have access to my Roth IRA money. In effect, that Roth IRA money becomes a huge emergency fund – a big enough one to last for years and years of living expenses.

What would you do if you suddenly had an emergency fund that would cover years and years of living expenses? I plan to spend my time doing volunteer work and trying to make a second career out of writing fiction (something I deeply enjoy on a personal level).

That’s not retirement. That, to me, means a lot of options that wouldn’t have existed before.

Instead of thinking of retirement savings as truly retirement savings, instead look at it as an opportunity to save for a big dream you have down the line. For Monica, that means twenty years from now. Whatever that dream is, whether it’s retirement or something entirely different, a retirement savings account will be there for you.

Good luck.

For a long time, I avoided reading this book. The title seemed unnecessarily fear-mongering and apocalyptic to me and that’s a subgenre of personal finance books that I really have no interest in. Personal finance has such a profound power to improve people’s lives and give them hope that selling the ideas with a big spoonful of fear and paranoia is something I have no interest in.

However, the author, Ed Slott, has a point. Rather than focusing on a fear of the unknown, which is what many personal finance books do, this one focuses on a known concern. If you have a bunch of money stored away in your 401(k), it’s simply a fact that the government is going to take some of that in taxes. If you haven’t thought about that and planned for that, then, yes, retiring can be something of a time bomb.

Once I got past the overly dramatic title and actually read the book, I realized that there were a lot of good points in it. The entire focus of The Retirement Savings Time Bomb… And How to Defuse It is minimizing the tax impact on your retirement savings without giving up returns along the way. This way, you don’t have to worry about tax guesswork in your retirement planning, especially when taxes are very easy to miscalculate.

What does Slott suggest? The book boils down to a five point plan that focuses on the biggest objectives that people mention with their retirement money: protecting it from taxation, using it for emergencies without tax penalties, and passing on as much as possible to descendents. Let’s dig in.

The Crime of the Century
There are lots of horror stories of people attempting to make major moves and withdrawals, only to see them backfire in their face. Slott relates several of them here. The rule of thumb I learned from them is simple: if you’re going to make a move involving a large sum of cash, consult a tax attorney first. Most of these stories seemed to revolve around people simply making moves with a lot of money on their own because they seemed straightforward, then realized they hadn’t thought about the tax consequences of them.

What’s Your Risk IQ?
Here, Slott runs through some of the “mis-steps” that people make in their retirement planning that often creates a tax burden: putting most of their money into a 401(k), for instance, or not specifying an appropriate plan as to who actually is the beneficiary of the money once you pass on.

Roll Over, Stay Put, or Withdraw?
Whenever people leave a job where they have a retirement savings plan in place, they often have three choices: roll it over into an IRA, stay put in that plan, or withdraw it now. Each choice has benefits and drawbacks, but those benefits and drawbacks often shift based on changing tax rules. The best solution if you have a significant amount of money, from my perspective, is to consult a fee-based financial planner to make sure you’re not making a big tax mistake. Remember, all you’re trying to do is to maximize the amount of money you retain in your pocket from your savings.

Step #1: Time It Smartly
The focus here is the required beginning date (the date by which you must start taking money out of your retirement savings accounts) and the required minimum distribution (the minimum amount you must withdraw each year). Usually, the best method for minimizing your taxes on that money is to start withdrawing as close to the required beginning date as you can without going over and withdrawing just the minimum amount.

Step #2: Insure It
You should always back up your retirement plan with a healthy term life insurance policy. This way, if you pass away before you’ve spent your money, your family isn’t required to make a sudden decision to withdraw your retirement money in order to survive – a withdrawal that would cause a big, panful tax penalty.

Step #3: Stretch It
You should take the minimum distribution you can along the way, leaving as much as possible in the account. This way, the remaining amount has much more of a chance to grow and benefit from the power of compound interest, meaning it could last throughout your life and the life of your children, too.

Step #4: Roth It
A Roth IRA is a very strong place to put your money each year as the normal (appropriately timed) withdrawals from it have no tax penalty whatsoever for you. If you are eligible (if you earn under $100K a year, you likely are), a Roth IRA should be part of your retirement planning, according to Slott. I can say that I have one that’s fully funded and it makes me feel a lot more secure about retirement.

Step #5: Avoid the Death Tax Trap
In the end, though, it’s about your plans. Do you want to leave something long-lasting for your children and other descendents (or maybe for charities and causes that you leave your money to)? Or do you only care about covering for your spouse if you pass away? In each case, you should set up beneficiaries quite differently, and Slott walks through each of those options. For us, the biggest concern is to ensure that our partner is fine if one of us passes on later in life, so we’re planning for that outcome. Of course, a lot of these rules only apply if you have a reasonably large estate – for small estates, it’s much more straightforward.

What to Do When S[tuff] Happens
This chapter mostly covers a lot of the current loopholes for using your retirement money in certain situations (disability and so on) and how to handle mistakes you’ve made in your past with converting IRAs and the like. Most of this material is fairly complex – the average person would be well-served by consulting a fee-based financial planner if they’re in such a situation.

Is The Retirement Savings Time Bomb… And How to Defuse It Worth Reading?
If you focus on the core principles talked about in the book – save plenty, get life insurance, use a Roth IRA – you’re going to have a leg up in retirement. Those ideas are valuable parts of protecting your retirement savings from the taxman, regardless of whether you want that money for you or for your descendents.

The trickier part is the specifics. Right on the cover, it says “Revised and updated for the new tax rules” – and that’s the problem. You should never, ever bet on a specific minor rule or loophole to get you through your retirement, because such individual loopholes open up and close all of the time. Much of the content of this book is based on those individual loopholes.

Thus, the specifics of this book are bound to become dated quickly, and the more general advice is stuff that can be found in other very solid investment books that focus on more timeless advice.

That’s not to say there isn’t a role for this book. If you are thinking about retirement concerns in the short term, such as making withdrawals and the like, this can be a valuable read. It’s also a great primer on the things you’re going to need to think about as retirement nears.

I just wouldn’t bank a whole lot of money on the specific rules cited here, simply because such small tax law issues change so often. I’d read this book and know the scoop, but I’d talk to a fee-based financial planner who can assess your situation before making a move.

We are friends with another couple that is around our same age, income level, status, and number and age of children. When I was mentioning to them that we were planning to pay off our car this year (leaving us with our mortgage and a small student loan) and the starting to put $50 to $100 per into 529s for each of our kids (currently aged 1 and 3), she mentioned that they were not starting 529s, but rather had a different philosophy….. They were going to contribute up to the company match in the 401K, max out a roth IRA (every year) and then pay off their house in 15 years, which would be just when their oldest is about to start college. Then they would use any excess from their income (that was now free because they no longer had a mortgage) in order to help with their child’s education. She also mentioned that she did not believe that her children would qualify for much (if any) financial aid. This would be the case for us as well. We are currently putting approximately 10% into our 401K and we plan to put approximately $3,000 per ear into a Roth IRA starting this year. Can you comment on what might be the pros and cons of either financial philosophy? I suppose that I should also mention that I do not forsee us having any issues with having enough $ for retirement and my philosophy is that I would like to contribute to 25-33% of my children’s college costs.

First things first: with all things being equal, you’re better off putting your money into retirement savings than into college savings. There are several reasons for this.

First, your children can make college happen even if you don’t have a dime saved for them. Between student loans, scholarships, and other aid, most students who are accepted to a school will be able to find some way to go there. They may end up with a lot of student loans in the process, but it won’t prevent them from getting an education.

On the other hand, you can’t make up for missed retirement savings. Nothing can undo missing the early years of your retirement plan, because those are the years when compound interest is at its most powerful. The money you put away right now will be much more valuable than any money you put away in your 50s or 60s.

Another factor to consider is that many retirement plans allow you to “borrow” against them for educational expenses. You can withdraw some amount, agree to a repayment schedule, and use that withdrawn money to help pay for your children’s college education.

A final note: if you haven’t saved adequately for college, you may end up being a financial burden for your children late in life. You might not ever ask them for money, but they’ll see that you don’t have much money and will stretch their wallets to help you when they can. I have seen this many, many times.

In short, if you’re unsure, I recommend saving for your retirement over saving for your child’s education.

The next question, then, is why should one ever save for their children’s educational expenses?

We’re saving for that purpose. That’s because we have plenty of money to save at this point – our retirement savings are fully covered, plus we have extra money beyond that to push towards long term goals. One of those long term goals (for us) is to pay for some significant portion of our children’s college education. After doing the math, we decided that saving $100 per month for each child from the day they were born to the day they leave for college is the best bet.

In other words, if you can save for college without short-changing your retirement, go for it.

What about that third factor, though? Where does paying off your house rank?

When it comes to using your home as an asset for college savings, you’re betting on two things. First, you’re betting that the payments you make on your home mortgage are more financially efficient than money socked away in your 529. If your mortgage interest rate is 6%, then your money channeled into that is effectively earning a 6% return. If you put that amount in a 529 instead, you could earn more or less than 6%, depending on your investment choices and the risk you’re willing to take on.

The second (and more challenging) bet comes later, when you want to tap your home equity. You’re betting on the interest rates at that future date, because your loan will charge you some interest rate. Will you need the money at a time like today, where the Federal Reserve is keeping rates low? Or will you need it at a more challenging time, when interest rates are higher?

If saving for college is important to you and your family, I would probably do things in this order: retirement savings, then college savings, then mortgage.

One final note: I would never rely on future earnings to pay for college education. Our lives are far, far too uncertain to bank on your professional income in fifteen years as a source for college savings – or savings of any type. People radically change careers. People are downsized. People are disabled. People stumble into great opportunities. These things happen all the time. To bet on stability there would be the biggest gamble of all.

Good luck.

Pensions, Social Security – $5,027

For the most part, there’s not much the average American can do to alter the amount of money they pay for Social Security and for pensions. For most of us, this is merely a paycheck deduction, something we never see in our take-home pay.

Yet there are several things we can do to increase the value of that money or to secure it. Here are some options that you might want to consider.

Insure your pension. Many corporations have played games with the pensions long-promised to their employees. If this is a concern to you, you can insure your pension so that you’re not at risk of losing it. The Pension Benefit Guaranty Corporation (http://www.pbgc.gov/) can help you get started in this regard.

Know what Social Security benefits you’re entitled to. The Social Security Administration mails this information to most citizens annually. Study this information and know what you’re due to receive so you can plan accordingly. If you don’t have access to this information, check www.socialsecurity.gov.

Know how much money you’ll actually need in retirement. Spend some time utilizing retirement planning tools (I like this tool at MSN Money) so that you know exactly how much money you’ll need in retirement. Use this number to see if you’ll be meeting your needs or not. If not, now’s the time to start socking away more (which we’ll address in another section of this series).

Minimize your requirements. If you’re finding that you’re far short of what you need, you may want to consider minimizing your financial requirements for the future. A big move in another area – like downsizing your home, particularly if it’s overly big now that the kids have moved out – can often create the breathing space you need.

At the same time, improve your self-sustainability. If you have money for it now, invest in things that will make your retirement years much more self-sustaining. Instead of buying a new car, invest in geothermal heating. Instead of redoing the kitchen, look into a small wind turbine. Learn how to garden and to cook. Such assets and skills can drastically reduce your spending.

Develop a “second career.” If you’re still intending to take advantage of your pension as early as you can, consider developing a “second career” that will provide some income while allowing you to engage in something you’re passionate about. There are many jobs and entrepreneurial activities – from tour guide to caterer – that can match exactly what you enjoy while still bringing in some extra income.

Share resources and ideas. Don’t be afraid to talk about your money with people in the same boat as you are. Share ideas with your friends and other people nearing retirement age. Don’t take on your concerns and worries about retirement in isolation – quite often, the people you care about most are facing similar concerns of their own, even if you don’t see it from the outside.

I want your help! In the comments, please let me know which of the tips you find most useful for trimming these costs. I’ll include the top choices in a comprehensive budget trimming guide at the conclusion of the series.

Of course, when you step back from that decision and look at the course of one’s life, many normal financial choices become much more difficult. Many low-paying careers do not offer the same benefits as other careers – there simply isn’t the money available.

So how does a person in a low income career path save for retirement?

First of all, most low income people will have to plan for their own retirement beyond Social Security. Although some non-profits do offer 403(b) and other such retirement plans, many offer nothing of the kind and expect the employees to figure out their own path.

The best option for most people in such a situation is a Roth IRA, which is paid for with after-tax money. Since you’re already earning a pretty low wage, the tax advantages of 401(k)s and 403(b)s are less important.

Roth IRAs are pretty simple to understand. A Roth IRA is an investment account in which you can contribute as you wish throughout the year up to an annual limit (currently $5,000 if you’re below age 49). Once the money is in the account, you can choose to invest that money in whatever options the company managing the IRA has available to you – you can keep it in cash, buy bonds or stocks, or put it in index funds that allow you to own a little bit of everything. Any income you earn from these investments stays in the account and, when you reach age 59 1/2, you can withdraw that income without any taxes or any penalty at all. You can also withdraw the money you contributed at any time, but you can’t put it back into the account to replace it – once it’s gone, it’s gone.

A Roth IRA is pretty simple to open. Most investment firms offer Roth IRA plans of some sort. I use Vanguard for my own Roth IRA and I’ve been very happy with them and the investment choices they offer, but your mileage may vary.

I encourage anyone in a low-income career without a retirement plan to open a Roth IRA for themselves and contribute what they can on a regular basis. The easiest way to do that is to set up an automatic investment plan that withdraws a small amount from your checking account every week. Even $20 a week adds up to $1,040 over the course of a year, which is a good step in the right direction.

A second factor to note is that by choosing a low-income career, you’ll learn how to live on a low income. This means that your retirement needs will be much lower than people who earn a much higher income than you. You don’t need to stress about having millions in retirement when you retire.

Of course, there’s an important catch here – financial independence. If you’ve embarked on such a career but haven’t become fully financially dependent yet, you’re currently living above your means. Move towards financial independence. Start today. If you’re still being supported by someone, direct that support into something distinct, like your student loan bills, and learn how to live off of what you actually make yourself.

Yes, it’s hard. Yes, it often means passing on things you’d like to have. However, there are many valuable lessons to be learned from that process. You’ll learn what’s truly important to you – and what really doesn’t matter too much. You’ll learn how to live frugally and understand quite well how to maximize a dollar. Those are lessons that will help you throughout your life, in more ways than just saving a dollar.

My last suggestion is one that’s good for everyone to follow: don’t let pride stand in your way. When people offer to help you, it’s because they want to help you, and you bring value into their life by accepting a helping hand sometimes. Don’t turn down a free meal from someone who appreciates the work you’re doing. Don’t turn away a friendly gentleman who is impressed with the work you’re doing and gives you $50 to help you out. Just don’t rely on these things – accept them as they come.

Pride is our natural enemy. It constantly causes us to make choices that put us in a worse place than before. It often causes more social negativity than social positivity. Never be too proud to accept someone’s genuine offer of help.

Here’s an example. In my early years, I knew several people who did missionary work for the Latter Day Saints. Even though I’m not a member of that church, I know that such work is long, hard, lonely, and often without reward. Today, I’ll often give a bag of cookies or a few dollars to such missionaries. Quite often, they’ll say no out of pride. Yet, I wouldn’t be offering if I did not genuinely want them to have what I gave them.

Good luck!

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.