One of the most common debates I hear about from people such as myself – twenty- and thirtysomethings with young children at home – is whether it makes more sense to save adequately for retirement or save adequately for their child’s college education. Quite often, young career folks (like myself) don’t have the means to do both, so it becomes a choice. Retirement or college? Today, I’ll look at both sides of this coin that’s central in my own life.

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.

Monica writes in:

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.

Every Sunday, The Simple Dollar reviews a personal finance book or related book of interest.

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.

Chris writes in:

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.

This is part of an ongoing series about how to trim the budget of the average American. As this series focuses on such broad-based tips, some will work for you and some will not. You’re invited to mention in the comments the tips that you found to be the most useful for inclusion in a comprehensive budget trimming guide at the conclusion of this series.

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.

Several people in my close inner circle of friends and family have made the active choice to go into careers where they will be earning a low income for life. Their calling is in areas of social work and they’ve made the financially difficult choice to follow their heart. That earns a lot of respect from me.

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!

“Shane” writes in:

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.

Every other Sunday, The Simple Dollar reviews a personal finance book.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This may just be the newest addition to my bookshelf.