At the same time, I also get emails from people in their twenties who are already saving diligently for retirement. What they want to know is how much they actually need to save so that they, too, can retire at age 65.

The people in the first group obviously spent a big chunk of their adult life not having to save for retirement. This gave them more flexibility with their money in their twenties and thirties than people who were already saving for retirement.

On the other hand, people who start saving early don’t have to save as much overall as people who start later on.

So, which approach is better? Let’s look at the two cases.

Let’s say you’re 20 years old right now. You want to have $2 million set aside for retirement at age 65 and, magically, there’s an index fund out there that will return 7% a year (I’m using this index fund as a convenience, basing the 7% on what Warren Buffett suggests is a good number to use for average stock market returns going forward).

If you start investing at age 20, you’ll need to put aside about $510 a month to reach this goal.

If you start at age 25, you’ll need to set aside about $725 a month to reach this goal, but you don’t have to save anything from ages 20 to 25.

If you start at age 30, you’ll need to set aside about $1,050 a month to reach this goal, but you don’t have to save anything from ages 20 to 30.

If you start at age 35, you’ll need to set aside about $1,530 a month to reach this goal, but you don’t have to save anything from ages 20 to 35.

If you start at age 40, you’ll need to set aside about $2,270 a month to reach this goal, but you don’t have to save anything from ages 20 to 40.

If you start at age 45, you’ll need to set aside about $3,480 a month to reach this goal, but you don’t have to save anything from ages 20 to 45.

If you start at age 50, you’ll need to set aside about $5,600 a month to reach this goal, but you don’t have to save anything from ages 20 to 50.

As you read through those previous sentences, you probably thought that the amounts early on were quite manageable, but when you got to age 50, you’re likely thinking that it’s bordering on impossible.

That’s the lesson here. You can forego the early retirement savings, but catching up later on can be incredibly punishing and the longer you wait, the more punishing it gets.

Thus, my advice is to start saving for retirement right now, no matter what age you are. Even if you can’t save very much, start by saving something. If you’re not saving, you need to be doing something else that’s financially urgent with your money.

For example, if you just save $100 per month starting at age 20 in the above retirement account, increase it to $200 a month at age 30, $300 a month at age 40, $400 a month at age 50, and $500 a month at age 60, you’ll have $720,000 saved for retirement. Double each of those numbers and you’re getting close to where you need to be.

Start saving now, even if it’s just a little bit. Don’t burden your future self with crippling amounts of retirement savings or employment until the very end of your life.

Roth, IRA, 401(k), 403(b), FERS, TSP – what on earth does it all mean? I know they all have to do with retirement savings, but it’s all just a word salad to me.

This is going to be something of a “dictionary” post where I spell out, as simply as I can, what these terms mean and what it means for you. I’m not going to get into every single detail of each term, but instead I want to give you enough information that you can sensibly navigate other articles you might read about retirement planning.

A 401(k) is a retirement plan, meaning it’s a special way for you to put aside money for when you’re of retirement age. What makes a 401(k) better than a normal retirement account? For one, you can put aside money directly from your pay before taxes are taken out of it. This reduces the income tax you have to pay right now.

For most people, it means that you sign up to have a certain amount of money withdrawn from your paycheck each pay period. This money will come out before taxes, as mentioned above. This means your paycheck will be a bit smaller than it otherwise would, but it won’t go down quite as much as the amount you withdraw (because your taxes will be smaller, too). So, if you sign up to have 10% of your check taken out, your gross income might go from $2,000 to $1,800, but your take-home might only drop from $1,700 to $1,530.

When you’re retired and go to take money from a 401(k) account, that’s when you’ll pay income tax on your withdrawals. In a way, you’ll be able to think of it as a normal paycheck coming out of your 401(k) account, as it’ll have taxes taken out of it.

Sometimes, employers will match what you have withdrawn from your check. If this is available to you, get every dime you can. This is free money. Yes, you don’t have access to it right now, but there’s no easier way to cause your retirement savings to skyrocket than to get every dime of matching you can.

Typically, a 401(k) plan offers a lot of different options for how to invest your money. This can seem overwhelming. Thankfully, there’s a pretty easy solution that works for most people. Just ask your investment advisor for a “target retirement” fund and put all of your money into that fund. Usually, there are several different funds of this type, each of which “target” a specific retirement year. So, let’s say you’re 25 and you want to retire when you’re 64. That’s 39 years from now. Since I’m writing this in 2011, that puts your retirement date at 2050. Thus, you’d want to put your money into a “target retirement 2050″ fund. These funds take care of things like rebalancing for you so you don’t have to worry about it.

A 403(b) is almost identical to a 401(k). Why the different name? Generally, 403(b) plans are offered at non-profit organizations and institutions of public education, whereas 401(k) plans are offered from businesses. A 457 plan is also similar, except it’s typically offered by governments.

An IRA is a retirement account that you can set up on your own, usually with an investment house like Vanguard. You have to make your own contributions to this plan, which is usually done via an automatic deduction from your checking account.

Contributions to an IRA are tax-deductible, which means that when you do your taxes, you can subtract the amount you contribute to your IRA from the total amount of income you’ll be paying income taxes on. For many people, this means a larger rebate check from the IRS.

As with a 401(k), when you make withdrawals from an IRA at retirement age, you have to pay taxes on those withdrawals as though they were normal income.

An IRA involves a lot more effort than a 401(k) for most people. You have to independently sign up for an IRA with an investment house. Once signed up, you’re going to have many more investment options than you would have with a 401(k), which is both good (options are good) and bad (lots of options can be overwhelming). As before, I typically encourage people to use a “target retirement” fund for all of their retirement savings if they’re unsure, which you can read about above in the 401(k) section.

OK, so what does Roth mean? A Roth IRA or a Roth 401(k) work similarly to the plans described above, except that instead of using pre-tax money, you’re using post-tax money for contributions.

How does that work? Your contributions come out of your take-home money in the case of a Roth 401(k), and your contributions aren’t tax deductible in the case of a Roth IRA.

Well, what do you get in exchange for that? All of the money you withdraw from these accounts at retirement is tax free. You won’t pay a dime of tax on any of it.

Naturally, this causes people to start asking questions like “is it better to pay taxes now or pay taxes at retirement time?” This is a debate that’s gone on for years and, frankly, there is no clear answer to it. My usual suggestion to people is to diversify. If you can, put some money into a Roth IRA or a Roth 401(k) and put some money into a regular 401(k) or a regular IRA.

A final note: what about FERS? FERS is essentially a federal pension plan available to federal employees. Many states offer a similar program with similar benefits to their employees. Typically, these plans offer a retirement pension based on years of service and salary and, typically, you don’t have to make any decisions after the initial sign-up.

Hopefully, this article helps you with the basics of various retirement plan options and makes it possible to navigate more in-depth articles about setting up things to cover your retirement.

One common request I get is more discussion on the specifics of retirement plans. For me, whenever someone mentions a topic that they want to hear more about, that means a trip to the library. I try to find books that cover the topic well, particularly from a fact-oriented point of view.

This is exactly the angle of A Commonsense Guide to Your 401(k) by Mary Rowland. Part of the “Bloomberg Personal Bookshelf,” a series of books on personal finance and investing topics, it seeks to discuss from a very fact-based perspective what a person needs to know about 401(k) plans and how to use them for retirement.

The Retirement Landscape
The book opens with a section briefly covering the retirement landscape in general, which is the one place where this book really looks at non-401(k) retirement options, particularly for the self-employed and other groups. The big idea here is that you need to be prepared for what’s going to happen down the road, and it’s going to take a lot of preparation, ideally starting now. The information here really moves almost too fast to really put non-401(k) plans into perspective, though.

401(k) Plans: The Basics
Here, Rowland carefully discusses what a 401(k) plan is, how it works, and why you should invest in it. It’s a retirement vehicle, of course, but it’s one tied to your employer and often restricted by whatever plan or arrangement your employer has set up with the investing house offering the plan. Usually, money is put directly into the account as a deduction from your paycheck before you ever take it home. That money usually comes out before taxes are calculated, meaning that Uncle Sam gets a smaller slice of your pay now but will get a slice of that 401(k) money later on when you’re retired.

How to Get In and Get Out
Rowland moves onto the key processes in opening a 401(k) account, which usually involve signing up through a plan representative in your workplace. On the flip side of that coin is the withdrawal phase, where you sign up to begin taking regular withdrawals from your 401(k) at retirement. The topic of rolling over a 401(k) is also touched on here a bit.

Investing It
The big part of signing up for a 401(k) is the question of investing, and it’s the part that often scares people. How do you know what to invest in? Generally, all you need to do is invest in a wide diversity of things and, as you get closer to retirement, slowly shift that diversity into less aggressive things (less stocks, more bonds, for example). Many plans offer a “target retirement” fund which does this for you automatically and is usually the best choice for people who don’t want to handle the minutae for themselves.

Preparing for Change
What things can you do as retirement nears and you’re about ready to begin collecting that 401(k) money? Rowland offers a ton of ideas here, most of which are simply really sound personal finance ideas. Pay off your debts. Understand what your new lifestyle and income level will be like. Delay collecting Social Security so that you can collect a bigger benefit.

Steps to Take in Retirement
What do you do when you’re actually retired? Many of the tactics here deal with specific situations that people may find themselves in, such as a temptation to take out lots of money and splurge (don’t) or how to utilize “alternative” retirement strategies like pension max (don’t). Instead, learn to maximize every dollar you have without risking the dollars that are yet to come.

403(b)s, 457 Plans, Etc.
This is something of a tie-it-together section that discusses alternatives to 401(k)s that some people may have, such as 403(b) and 457s. Mostly, these plans are really similar to 401(k)s for most purposes, and Rowland mostly just focuses on talking about the minor differences between them here.

Is A Commonsense Guide to Your 401(k) Worth Reading?
If you’re a fact-oriented person and are seeking information about how your 401(k) plan works in your workplace, A Commonsense Guide to Your 401(k) is exactly the book for you. It’s very informative, sticks to the facts, and teaches everything you might need to know about your 401(k) plan.

Having said that, it really doesn’t instruct you too much on broader retirement issues and other places to invest. This is a 401(k) book, through and through. Many people seem to substitute “401(k)” in their head for “retirement savings,” but the terms are not interchangeable. This book provides a great view of 401(k)s, but a narrow view of a total retirement picture.

This is a great read as part of your reading on retirement issues, supplemented by a book that provides a broader picture and other specialized books on retirement. It’s incredibly informative, but on a very narrow topic.

Check out additional reviews and notes of A Commonsense Guide to Your 401(k) on Amazon.com.

On Facebook, Tyler wanted to know, “Should I stop my retirement contributions while i pay back my college loans? I am 23 and my employer will match up to 5% of my contribution. Should i continue? or hold off until my loans are paid?”

The challenge with any question like this is that it relies so much on future events. What will the stock market do over the next thirty or forty years? That’s unknown. What path will Tyler’s life take over the next ten years or so? That’s unknown as well. Both of these factor enormously into answering the question above.

The best thing we can do is follow some reasonable approximations and rules of thumb for future investment growth while also striving to give Tyler as much freedom as possible in the coming years.

The Ghost of Investing Future
In order to get an estimate of how much someone should be investing for retirement, you have to come up with a few basic assumptions.

When will the person retire? This lets us know how many years of investing we’ll be able to account for. I’ll asume that Tyler will retire at 75, giving us 52 (!) years to work with.

How much of an annual raise can we assume? I usually just match this at the same rate as inflation. Speaking of inflation…

How much inflation should we assume? I usually peg this at 3%, which is pretty sound based on the economy of the last twenty five years.

How much of an annual return on stocks can we assume? Warren Buffett projects a 7% annual return over the long haul in the American stock market, so I’ll use that number.

Do you see how tenuous all of these calculations are? When you estimate retirement savings, you’re making a lot of guesses for the future.

What you’re going to shoot for is an amount high enough so that the person’s annual expenses equal 4% of the total savings at the time of retirement.

I ran the numbers, assuming that Tyler is able to live on about 75% of his salary each year. My calculations showed that Tyler should be saving somewhere between 9% and 10% of his annual income for retirement, so we’ll use 10%.

10% is an excellent thumbnail to use. In this case, Tyler has the advantage of a long period until retirement, but I’m also using some pretty conservative returns on his investments for my calculations.

Tyler’s Choice Today
In order to make it to a healthy retirement, Tyler needs to be saving 10% of his annual income starting today. He can choose to delay it a few years, but then he’ll be locking down 11% or 12% or more to make it to his goals. He’s a lot better off locking things down at 10% starting today.

Tyler’s employer will match up to 5% of his contribution, so if Tyler contributes just 5% of his salary today, he’ll be on pace for what he needs for retirement. This is exactly what I would recommend that Tyler does.

Once that’s taken care of, he should throw every dime that he can at his debts. It is far easier to live a little lean now when you’re single and aren’t weighted down with responsibilities than to live lean later on when you’re burdened with career and personal requirements.

Should Debts Ever Delay Retirement Contributions?
This is a tricky one to answer. Quite often, people eschew retirement savings in order to pay off debts because they don’t want to make lifestyle changes. This is a giant mistake. If you find that you’re in a situation where you can’t make your minimum debt payments, a small retirement contribution, and live your current lifestyle all at once, changes need to be made with regards to your lifestyle first and foremost.

If you are in a situation where further lifestyle changes genuinely are not possible – meaning you have no cable or satellite bill, no cell phone, no new or nearly-new car, no living quarters larger than you need, etc. – then you should take care of your high-interest debts before renewing your retirement savings. Of course, this does need to be coupled with an emergency fund and a commitment to avoid debt in the future, because without that, this is all a moot point.

Personal finance almost always comes back to impulse control, and this is no different. If you can’t control your impulses and desires when it comes to spending money, financial success will almost always be elusive in your life. You won’t get ahead if you can’t control yourself.

Yes this is good advice – work for 45 years, squirrel away your income the whole time, and when you are ready to die, you will be rich (*disclaimer – rich in 2011 dollars, maybe not so rich in 2043 dollars)

First of all, I have no interest in being rich. My impression of being rich is that I have enough money saved that my children will have an easy life. I have no interest in that at all.

My goal is financial independence, which means simply that if I choose to engage in activities that don’t earn an income for the rest of my life, I’ll survive financially with a standard of living roughly similar to what I have now (and I don’t live like a rich person). I might choose to earn an income at that point so I can spoil my grandchildren or sponsor a charity or fulfill some other goal, but I don’t need it to survive and I certainly have no interest in supporting my children as adults.

Of course, the core of Donald’s point is that long-term savings goals are pointless because of a perceived short life and low quality of life you would have once you reach a retirement age. Donald mentions working for 45 years and, assuming that you’d start such work at age 25, you would be working until age 70.

Here’s the thing, though. The average person at age 70 can expect to live another fifteen years on average (see Table 6 in the 2007 CDC life expectancy report for the numbers). The simple fact is that people at age 70 aren’t sitting on their deathbeds. This may have been the reality fifty or sixty years ago, but it’s not the reality now. Health care and standards of living have given people much longer healthy and productive lifespans than ever before. The majority of people at age 70 have a decade or more or productive life ahead of them and the percentage will just continue to go up as time marches on.

I don’t know about you, but my plans for when I’m seventy don’t involve me sitting down in a chair and waiting for the end. I plan on being engaged with my family and with charities and other community activities until I’m truly unable to do it any more, and the statistics indicate that, for me in my early thirties, that time is a long way into the future. Estimates on life span increases indicate that I have more than fifty years of productive life yet to live and I’ve already been in the workforce for more than a decade.

Simply put, if you are young today, saving for the future doesn’t mean saving for retirement and life’s end; it means saving for financial independence and a second career.

Now, with regards to the comment of “rich in 2011 dollars, not in 2043 dollars”: you have to go back for two decades to find a year with an inflation rate higher than 4%, and some recent years have seen microscopic inflation rates. 2008 and 2009 had extremely low inflation and, by some estimates, had deflation. This is the inflation metric you’re trying to beat and if you’re investing over the long term (40 years), a well-diversified investment with diverse stocks and other assets will annihilate these returns, giving you much better than inflation. Simply put, saving properly for a second career over the long term will handle the inflation problem.

But what about the economic bogeyman? You know, the fear of a financial apocalypse that political opportunists and media members who know how to sell fear love to trot out all the time? The only thing we have to fear is fear itself. Most of the people preaching fear have been preaching fear for several years now. All I see is a prolonged recession and a national debt that was worse in the 1940s than it is now.

The things that have worked for the long term throughout human history work now. Spend less than you earn. Invest the rest in a diversity of things because you don’t know exactly what the future holds. Invest in yourself, too, and make sure you have skills and education to handle both the needs of your life and the needs of the marketplace.

One final thing: think and plan for the long term, because the long term is longer now than it ever has been – and it’s full of more opportunity than ever as well.

There’s an important fact to consider, though, that’s been left out of this story. In 1935, the average American lifespan was 61.7 years. You had to exceed the average American lifespan by more than three years to begin receiving Social Security benefits.

Let’s roll forward to today. The “retirement age” set by Social Security is still 65. However, today the average American lifespan is 78 years and continuing to rise.

In other words, the national “retirement age” of 65 has remained unchanged for 75 years, but the lifespan of the average American has gone up by 16 years.

Yes, this is an easy explanation for why Social Security is seeing financial problems, but there’s a more vital issue at work here, one that we’re seeing at work all over the place in America.

40 is the new 20. 60 is the new 40. Simply put, people are living far longer and enjoying excellent health much later in life than ever before.

In 1935, a person aged 65 was often quite elderly and in poor health. In 2011, a person aged 65 is often full of vitality and has two more decades of lively activity ahead of them (at least).

There are two key points to pull out of this.

First, if you’re under 50 or so, you’re probably not going to be able to retire when you’re 65. In the past, Social Security could sustain you by providing enough income between the age of 65 and the end of your life that you could survive. Unfortunately, as lives grow longer and future generations grow smaller in size, one of two things will eventually have to happen: either the Social Security age will move back or the amount of benefits will fall.

That means that either you’re going to be going on full Social Security benefits at a later age than 65 or Social Security benefits are not going to be enough to sustain you in retirement at all. In either case, retirement at 65 simply because Social Security is now available is quickly becoming a myth – and will completely become a myth in a decade or two.

At the same time, however, 65 is the new 45. Over the last 75 years, the quality of life for people over the age of 65 has increased drastically. Rather than beginning to lose control of their faculties, most people between the ages of 65 and, say, 80 are quite valuable and have a ton to offer in the workplace and in the marketplace.

Simply put, at the same time that retiring at age 65 is becoming less feasible because of longer lifespans and demographic shifts, it’s becoming much more worthwhile to continue being productive at 65.

What does this mean for retirement planning?

At this point, I don’t view retirement planning as saving for true retirement. Most retirement savings plans allow you to begin taking money out at age 60, which means you likely have a quarter of a century of good health ahead of you at that point.

Instead, I look at retirement planning as building a backbone for a second career. At age 65, I won’t have enough retirement savings or Social Security income to fully sustain me for the rest of my life, but I will have enough retirement income to make it possible to take some significant career risks. I can take a low-paying position with a charity or even do volunteer positions with some perks. I could retreat for a year and write the novel I’ve always wanted to write. I can take a very low-stress job as a greeter or a position on a community board that gives a stipend.

These are all things that are difficult to do right now in my life, yet sound appealing to me and have a firm place on my to-do list.

Simply put, my retirement savings aren’t just for retirement; instead, they create possibilities for a second career or other opportunities later on during my healthy adult life.

Don’t fear the changes coming in retirement savings. Embrace them for the opportunity that they are.

I asked my mother a few days ago about what she considered to be the “long term.” She basically pointed to a point about ten or fifteen years down the road when my children are graduating high school.

I asked my oldest son what he thought about the future and what he thought of as the biggest thing that would happen in his life. He thought about it and he said it would be when he was a parent, roughly when he was my age. Let’s call it twenty years.

I asked my father-in-law what he thought of when I said the words “long term” and he pointed to a point about eight years down the road when he hoped to retire.

Seven years. Twelve years. Twenty years. Thirty years.

One of us is looking at that long term with (relatively) shorter-term retirement savings in mind as a tool to get there. Another sees the route to the long term coming through health maintenance. Yet another sees it as a natural outcome of growing up. For me, it’s all about the long-term retirement planning.

We all have very different definitions of the long term. We all have very different actions we need to take to get there.

Whatever your definition of the long term is, though, you don’t just get there by wandering in the wilderness. It takes work, and it takes a plan.

I’m saving steadily for retirement and putting that money into investments that are fairly high-risk. As time marches on, I’ll be pulling the throttle back and moving into less risky investments.

My son is so excited about school starting in August that he’s already wondering about school supplies.

My mother rather carefully watches the food she eats.

My father-in-law is saving for retirement hand over fist.

We each have our own visions of the long term. We each have our own path to get there.

The key word in personal finance is personal. We all have different goals and dreams. Those goals could be as close as a year into the future or it could be several decades down the road. Depending on where we’re at right now, the things we need to do to get to that point might be drastically different, even if the goals are similar.

What’s the point? You’ll find the most success with personal finance – and with life – if you don’t just copy someone else’s plan. Instead, learn the principles and figure out your own plan that takes you to wherever (and whenever) your long term happens to be. Along the way, don’t be afraid to grab great ideas from others and add them to your own plan, just as long as it keeps taking you to wherever it is you want to go.

I’m reading about retirement and I see terms like Traditional IRA and Roth IRA and 401(k) thrown around without really explaining what they are or what the differences between them are. Do you have a summary of these plans and how they work?

There’s no better time than the present to offer up some great fundamental personal finance information like this. I’m going to ask a series of basic questions about retirement plans and provide the answers for each type of plan so that you can clearly see how they differ in each area.

I myself have had a 403(b) in the past and I currently have a Roth IRA.

One important point to make: this is a summary of the differences between the plans. Plans often change over time as the government alters the tax code and many plans have loopholes that appear and disappear as the years go by. The goal here is to not provide a be-all-end-all reference, but to make clear the big differences between the plans.

Right off the bat, let’s clarify a key point. A 401(k) and a 403(b) are essentially the same thing. The difference between the two is whether or not your employer is a for-profit entity (a business) or a certain type of non-profit entity (such as an educational institution). In terms of the employee, they’re virtually identical in their usage. Some types of non-profit entities also offer a 457 plan, which is very similar to a 401(k)/403(b) except with a few less restrictions on withdrawals.

Who Offers the Plan?
How can you get involved in each type of plan?

A Traditional IRA is offered directly from investment houses. In order to open a Traditional IRA for yourself, you have to open an account with an investment house. Some well-known investment houses that I use (or at least somewhat recommend) include Fidelity and Vanguard.

A Roth IRA is offered in the same way as a Traditional IRA. You have to set up your account yourself with an investment house (like Fidelity or Vanguard).

A 401(k)/403(b) is offered through your employer. Your employer sets up an arrangement with an investment house to provide individual 401(k)/403(b) accounts to their employees. Rather than having a choice of investment houses, you are stuck with using whatever investment house your employer provides.

Which has the advantage? The IRAs have the advantage here. Because you have the freedom to choose which investing house to use and can move from investing house to investing house, these companies have good reason to offer you strong investment options. With a 401(k)/403(b), you’re locked into whatever investment house your employer negotiates with, which may or may not provide you with the best investment options. This doesn’t mean that the investment choices in a 401(k)/403(b) are terrible; usually, it just means that the fees are a bit higher than they would be with your own IRA.

Who Is Eligible?
Which people are eligible for each type of plan?

You are eligible for a Traditional IRA if you are under the age of 70 1/2. You must also earn some sort of income from work or be married to someone who earns income from work.

You are eligible for a Roth IRA if you are eligible for a Traditional IRA. The requirements are the same.

You are eligible for a 401(k)/403(b) if you are employed by an organization that offers such a plan to its employees.

How Much Can You Invest?
How much money can you invest in each plan each year?

In a Traditional IRA, you can invest $5,000 per year if you are under 50, or $6,000 per year if you are over 50. These numbers are accurate for 2011 and may go up in future years (they’ve gone up in the past).

In a Roth IRA, you can invest the same amount as in a Traditional IRA. However, there are income caps for investing in a Roth IRA. If you are single and earning between $107,000 and $122,000 or if you’re married and earning between $169,000 and $179,000 per year, your upper limit is less than $5,000 or $6,000 per year. If you’re over the top end of that range, you can’t invest money at all into a Roth IRA this year.

In a 401(k)/403(b), you can invest up to $16,500 per year as of 2011.

Obviously, in this regard, 401(k)/403(b) plans are the big winner as you can invest more in them.

What Tax Advantages Are Included?
The purpose of a retirement plan is to take advantage of tax breaks. What tax breaks do you get with each of these plans.

A Traditional IRA offers the ability to make contributions that are fully tax-deductible. In other words, if you contribute $5,000 to a Traditional IRA in 2011, you will be able to subtract $5,000 from your taxable income when you file your taxes early next year. This results in a smaller tax bill right now.

A Roth IRA contribution does not offer the tax deductibility of a Traditional IRA contribution. Instead, once you contribute to a Roth IRA and have the account for at least five years, you can withdraw any money in the account tax-free (gains or otherwise) once you’re 59 1/2 years old. This results in a smaller tax bill later on, as Traditional IRAs require you to pay taxes with all withdrawals from the account.

A 401(k)/403(b) operates much like a Traditional IRA in this regard. You make contributions today that are fully tax-deductible with regards to your taxes for the coming year. However, there are no tax benefits when you withdraw.

Which is better? It depends strongly on what you think tax rates will do in the future. If you expect them to stay the same or go down, then the Traditional IRA and the 401(k)/403(b) route is better. If you expect them to go up, then the Roth IRA is better. I expect them to go up, so I give the Roth IRA the nod here.

When Can I Withdraw?
I have this money in the account. When can I take it out without a stiff tax penalty?

You can withdraw from a Traditional IRA at age 59 1/2 or any time after that. Withdrawals made from a Traditional IRA will be viewed as income and taxed as such. You must start taking withdrawals at age 70 if you haven’t already started.

You can withdraw from a Roth IRA at any time (once you’ve had the account for five years) as long as you merely withdraw your contributions. You can begin to withdraw your investment gains at age 59 1/2. You do not have to start withdrawing at age 70.

You can withdraw from a 401(k)/403(b) in almost exactly the same way as a Traditional IRA. You may start withdrawing at age 59 1/2. The withdraws you make are taxed. You must start withdrawing at age 70.

The Roth IRA is clearly the most flexible account here. There are no tax penalties for withdrawing contributions early. There’s also no requirement to begin withdrawing at age 70.

How Can I Withdraw Early?
What if I desperately need the cash early? This is usually a bad idea, but it’s worth knowing.

You can withdraw early from a Traditional IRA if you pay a 10% additional tax penalty on your withdraws. This is beyond the normal income tax you’d have to pay on it. So, if you withdraw $10,000 from a Traditional IRA early and are in the 25% tax bracket, you’ll pay $2,500 in taxes on it plus an additional $1,000 penalty. There are some exceptions to these rules for special situations.

You can withdraw early from a Roth IRA if you’ve had the account more than five years. At that point, you can withdraw contributions with no penalty and no tax. If you’ve not had the account for that long, you’ll have to pay a 10% tax penalty on your early withdrawal. If you withdraw above and beyond your contributions before you’re 59 1/2, you’ll have to both pay taxes and a 10% penalty on those additional withdrawals. There are some exceptions to these rules for special situations.

You can withdraw early from a 401(k)/403(b) much like a Traditional IRA. You pay a 10% additional tax penalty on your withdraws beyond the normal income tax you’d have to pay on it. As always, there are some exceptions to these rules for special situations.

Again, the Roth IRA is the best deal here. It offers more flexibility with early withdrawals than the other plans.

A Final Factor
At this point, a 401(k)/403(b) plan looks like the worst option, but there is one huge factor in that plan’s favor. With many employers, the employer will offer matching contributions. For example, one employer that I know of offers one-to-one matching of every dollar an employee contributes to their 401(k)/403(b) up to 6% of the employee’s pay. So, if the employee makes $50,000 per year and contributes 6% of that – which would be $3,000 per year – the employer would match that, giving that employee a total of $6,000 invested each year.

This blows away the benefits offered by other plans. The strength of this kind of multiplying of retirement funds is the best tool you have available to you – if your employer offers it.

What Should I Do?
Here’s my take on the plans as a whole and how I invest for my own retirement.

If my employer offers matching funds on my 401(k)/403(b) plan, I take advantage of those matching funds first. I would contribute as much as possible to retirement to get every drop of matching funds. This is free money that you should never turn down.

After that, I would fully fund a Roth IRA if I were eligible for it. If you make less than $100,000 a year, you’re eligible for it. Find a trustworthy investment house – I use Vanguard, but do your own research – and open a Roth IRA with them. They’ll make it easy for you to open the account and set up an automatic investment plan that pulls money from your checking account.

If I wasn’t eligible for a Roth IRA, I would fully fund a Traditional IRA.

If I was still not saving 10% of my income for retirement, I would invest enough in my 401(k)/403(b) to add up to 10% of my salary. So, for example, if I were making $100,000 a year and I contributed $4,000 to my 401(k) to get matching and $5,000 to my Roth IRA to fully fund it, I’d still only be saving 9% per year. I’d contribute another $1,000 to my 401(k) to get to that 10% threshold.

I would then pay off any and all debts I have. Before contributing more than 10%, I would get myself to complete debt freedom. I would also take care of buying whatever house I wanted to live in for the long term and make sure that I was saving for major purchases like automobiles. Riding a merry-go-round of debt eats away at your retirement like anything else.

If I were completely and securely debt free, I would increase my personal retirement savings to 15% of my income. This might mean fully funding a Roth IRA, contributing more to a 401(k), or even just saving money in a savings account or non-retirement investment account.

That is the plan I would follow at my age (32, as I write this). My only exception to that is that if I were over 35 and hadn’t saved for retirement yet, I’d put the 15% total savings at a higher priority than total debt freedom, as you have some retirement ground to make up for the years you weren’t saving.

Good luck!

Don’t rely on Social Security for any part of your retirement. When you’re thinking about retirement, assume that you’re going to be paying your own way.

That’s not a statement that a lot of people like to think about, but the data pretty much points to this as an inevitability. Let me explain why.

Take a look at the birth rate by year in the United States. During the years when the “baby boomers” were arriving on the scene (the early 1950s, for example), you saw a birth rate of 25 babies per 1,000 people in the population. By the 1970s, this birth rate had dropped to 15 babies per 1,000 people in the population and never really recovered. In fact, the current birth rate is the lowest it’s ever been – 13.5 babies per 1,000 people.

To put it another way, the age of the average American is rising. According to this data, the average American is about 0.2 years older each year and is currently 36.7 years old.

With the population getting older and with fewer babies being born, you have more people reaching retirement age with less people entering the workforce. That means more people are moving to the point of taking money out of Social Security and fewer people are joining the workforce to pay into Social Security.

What happens to any pool of money if you suddenly start paying out more than you’re paying in? It dries up. The sheer numbers say that’s what’s going to happen to Social Security.

Well, why can’t something change? The problem with touching Social Security in its current form is that it’s a political nightmare. Politicians are afraid to touch the issue because people who are retired and receiving Social Security benefits are also the people who often have the most time to vote and to get involved in political causes.

There aren’t very many ways that this problem can be solved. The most likely solution will be to simply raise the benefits age for Social Security – and raise it again – and raise it again. What that would mean is that by the time we retire, we’ll have to be very, very old before we see Social Security money.

What that means is that unless we want to work until we’re in our eighties, we’d better start planning for our own retirement now, not later.

Even if this doesn’t come to pass and a great new solution somehow solves the Social Security problem, saving for your own retirement is still incredibly beneficial, because it allows you to have financial means in retirement that go far beyond the small Social Security benefits.

What can you do? It’s simple. Start saving for retirement now, whether you’re 22 or 35. The earlier you start, the better off you are.

If you have a 401(k) plan at work, that’s usually a good place to start. If your employer matches your contributions, that’s even better. Don’t worry about not knowing anything about investing – it’s far more important to start contributing than to find the “perfect” investment. Head over to your benefits office and get this set up today.

If you don’t have a 401(k) (or a 403(b) or something similar) at work, you can do it yourself by setting up a Roth IRA. It’s really easy to do – just open an account at an investment house (I use Vanguard) and set up an automatic contribution out of your checking account.

Think of it as a little thing you can do right now to help your future self a lot when he or she is in their sixties. Giving up a magazine subscription or something else small now can give you the freedom to control your own destiny when you’re older. That’s a great trade if you ask me.

Daniel Solin’s series of The Smartest X Book You’ll Ever Read have turned me off for their title alone, and thus, to this point, I’ve not read them. The title set off a big “questionable investment planning” warning light inside my mind and, with a lot of other options to choose from, I just kept passing on books in this series.

As is often the case, though, a long-time reader emailed me and strongly encouraged me to give this specific book a shot, mostly because he felt it addressed retirement savings from new angles that he hadn’t considered before.

I do enjoy reading personal finance books, particularly ones that add new ideas to familiar topics, so I headed out to my local library and picked this one up. I do have to say that it did include some ideas and angles on retirement savings that were certainly intriguing and provided food for thought.

Let’s dig in.

One | Rethink Retirement Investing
Right off the bat, Solin makes the vital point that if you don’t protect your portfolio against inflation, you’re going to run out of money much sooner than you would like. Inflation is a force that constantly pushes against your retirement savings, making every dollar you save today worth less when you retire. This is a particular problem for conservative investors who would like to keep their money low risk and “safe” – they won’t lose money, but they’ll often earn at a rate lower than inflation, which means the real value of their money is actually decreasing over time. The best solution, then, is to balance the two – keep a healthy portion of your money in stable things (like cash or CDs or savings accounts or treasury notes), but put some of it into other things with more growth potential that can keep your overall portfolio ahead of inflation.

Two | Stocks Made Simple
Individual investors shouldn’t invest in individual stocks (unless it’s just for fun) because the risk is just too great. You don’t want to bet your retirement on one company lest it turn out to be the next Enron. Instead, you want to mix it up: invest in broad-based index funds, some of them with lower risk and some of them with higher risk. So, for example, your overall portfolio might be 1/3 in cash or treasury notes, 1/3 in a total stock index, and 1/3 in an international total stock index. The key is to buy index funds for your investments – they spread out your risk while also keeping the fees very low. (I do this myself – I have my money with Vanguard.) Obviously, as you move closer to retirement, you’re going to want less of your money at risk, so over time you’ll migrate more and more to cash and treasury notes and less and less in stocks. One easy way to do that is to just buy “target retirement funds” which automatically handle that transition for you (again, making sure that these “target retirement funds” are made up of low cost index funds).

Three | Bonds Made Simple
Bonds are a great way to get solid returns in your portfolio with relatively low risk. Solin recommends that most investors should have at least some of their retirement money in a broadly diversified, low-cost bond index fund. It’s important to remember, though, that bonds aren’t riskless. They have less risk than stocks, but they’re not entirely free of risk. Solin also suggests that investors worried about inflation should not buy TIPS (Treasury Inflation-Protected Securities) because they’re very volatile and they earn very poorly in times of low inflation (like right now, for example).

Four | Cash Made Simple
You should never keep cash in a bank that doesn’t have FDIC insurance, and you should make sure that your cash savings never exceeds the FDIC insurance cap (currently $250,000). Solin encourages searching around for banks if you’re just looking for a place to sock away your cash savings (I suggest using BankRate).

Five | Annuities Made Simple
Solin is a big fan of immediate annuities – annuities in which you give a cash sum to an investment house and receive payments for the rest of your life from them. He argues that they greatly reduce the risk of outliving your money, even if the returns aren’t stellar. Another option is a charitable annuity, where you give a lump sum to a charity and they issue you payments for the rest of your life – this ensures that your annuity lump sum winds up in the hands of a charity you care about instead of a business. If you do get an annuity, though, Solin recommends a fixed rate annuity, not a variable rate one – they carry too much risk. Your annuity should have a fixed rate, period.

Six | Mining Your Money
Do not trust historical returns when you’re trying to figure out how much you can safely withdraw from your retirement each year. Instead, you should simply focus on withdrawing as little as you can get away with each year. Solin suggests aiming to withdraw between 2% and 4% of the total each year – I think that’s a great target (he offers some more math-intensive guidelines as well). He also offers a few exceptions to that “2-4%” rule that involve market timing, a subject that I don’t agree with him on (I don’t think market timing is usually a good move).

Seven | Simple Steps to Stretch Your Money
When you start taking withdrawals, withdraw from your taxed accounts first (like any ordinary savings or investment accounts), then deferred retirement savings accounts (like a 401(k)), then Roth IRAs last. Why? The longer money stays in a tax-deferred account, the longer it has to grow in value without Uncle Sam feeding off of it. If you have a 401(k), Solin recommends rolling it over into an IRA if you can because this gives you more control and the ability to utilize lower-cost investments. He also thinks converting your IRA to a Roth IRA (and everyone with an IRA can do this in 2010) is a good move for almost everyone, but particularly high income earners.

Eight | Social Security and Pensions: Critical Choices
If there is any possible way to delay taking Social Security, do it. If you can wait until you’re older, you’ll get higher payments for life. It can also adversely affect the quality of life of a spouse that survives you. Also, don’t bank everything on a pension because, as we’ve seen recently, companies sometimes aren’t 100% reliable in paying out the pensions they’ve promised. If you do have a pension, avoid taking the lump sum option (if you have it) and take monthly payments instead.

Nine | Is Sixty-Five the New Fifty?
People are living longer lives and staying healthy much longer. What this means, to put it simply, is that if you retire at the traditional retirement age, you’re going to have to cover many more years than the generations before you had to cover for themselves. The solution, of course, is a simple one: work longer. Turn your early “retirement” years into a continuation of your career or the crest of a second one. Don’t rely on age discrimination laws to help you, either – everyone is responsible for keeping their skills up and building their own paths.

Ten | Financial Lifelines for Desperate Times
What if you’re running out of money? A reverse mortgage (meaning you give your home’s deed to someone else and in exchange you receive regular payments) is an option, but it should be your absolute last one. Why? They’re expensive – they’re loaded down with tons of fees and you’ll get nothing close to what your home is actually worth out of it. Instead, seek other options. The AARP is a spectacular resource for the elderly, as are local churches and civic organizations.

Eleven | Care Costs
One of the major costs a person often has in retirement is medical care. Before you even consider retirement, you’ve got to know what your medical care options are when you retire. Is there any continuing coverage from your current job? Can you make ends meet with Medicare? Do you need long term care insurance? Solin spends quite a few pages on long term care insurance and basically argues that the lower your net worth is at retirement, the better an idea long term care insurance is (because if you have more money, you can pay for more care out of pocket).

Twelve | The State of Your Estate
Everyone needs a will, but a will has severe limitations that can hurt you if you’ve spent a lifetime building wealth. A better option for people with a high net worth that wish to pass on their money is to set up a living trust, assign their assets to that trust, and receive payments from that trust until they pass away, at which point their instructions for further management of the trust (i.e., who gets the money) is followed. Also, older couples are very well served by having prenupital agreements that specify that some assets get left to children when one member of the marriage dies.

Thirteen | Wolves in Sheep’s Clothing
If you need financial advice, be careful – there are a lot of sharks in the water. Avoid people who are offering you free things (like lunch) to listen to their pitch. Instead, seek out assistance on your own terms. Look for financial advisors who are fee-based, can explain things clearly, and aren’t seeking to constantly beat the market (such people often wind up way over their heads and you’re left holding the bag).

The book closes with a large handful of appendices and additional documentation for many of the points made in the book.

Is The Smartest Retirement Book You’ll Ever Read Worth Reading?
I think The Smartest Retirement Book You’ll Ever Read is a very strong retirement book for high income earners – the people who aren’t having to make hard decisions about whether to save for retirement or accomplish other life goals. It pretty much assumes you’re going to be socking away plenty and that your questions revolve around where to put it.

If you’re in that group, The Smartest Retirement Book You’ll Ever Read is a very worthwhile read. Solin keeps an eye on the real world (inflation, business failure, etc.) and explains the logic behind every move he recommends in a very clear and straightforward fashion.

If you’re really hitting your income stride and are looking for some sound advice on what investments to put your retirement money in, The Smartest Retirement Book You’ll Ever Read is a pretty strong choice for a good read, in my opinion.

Obviously, this represents a major change from where we’re at now.

At age 65, people will have 40% of their life yet to lead. In other words, 65 will become the new 40.

Social Security cannot support everyone having forty years of retirement. It will have to drastically change or go bankrupt. There is no other option. The only way to prepare for this is to assume that Social Security simply won’t be there when you reach retirement age.

Few people will want to “retire” at age sixty five. If 65 is the new 40, people aren’t going to want to retire then. They’re going to want to keep having active, productive lives for many, many years to come after 65.

Thus, the age range for retirement savings will become much longer. People will start targeting their retirement savings to age 80 or 85. Money put into such savings at age 25 will have 55 to 60 years to grow.

When I look at my children, I recognize that these are the facts that their lives are going to hold. How exactly will they plan for the future? What will their lifelong financial trajectory look like? Here are a few elements I see coming down the pike – and they’re certainly going be a part of the advice I give to my children.

First of all, their first career probably won’t be their only career. The idea of the “second career” is slowly becoming more and more mainstream as people reach “retirement” and realize they don’t want to retire. As people’s life spans continue to extend, the idea of a second career will become pretty normal. I expect that many people will work hard at a lucrative “first career” and then move on to a pesonal passion for a “second career” once their major life expenses (a home, children) are taken care of.

What does that mean? Don’t give up on your dreams just because you can’t do them right now. Master living on less than you make so that down the road you can do absolutely whatever you want with your time. Spend your time picking up lots of transferable skills – public speaking, communication skills, time management skills – that will help you in whatever direction your road goes.

Second, retirement planning will move to an even longer scale. Right now, many people calculate their retirement starting at 25 or 30 and ending at 65. The numbers become quite a bit different if you start at 25 or 30 and end at 80. The advantage of starting early becomes even more profound and people won’t have to put away as much each month to hit their numbers.

For example, let’s say you need to have $8 million to retire. You start saving at age 25 for that and you’re putting it in an investment that earns 8% a year.

If you’re retiring at age 65, you need to put away $2,400 a month.

If you’re retiring at age 80, you need to put away only $725 a month.

A longer life span means that you can get away with saving a lot less per month for retirement. The power of compound interest is amazing.

Finally, don’t bank on the government to save you. I offer this advice to everyone out there still in the workforce. Social Security in its current form is unmaintainable. The numbers do not add up. At some point, it is going to have to be radically changed or it is going to have to disappear.

Account for your retirement without Social Security in the equation at all and you’ll find yourself much more secure and happy at retirement time.

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.