Review: The Bogleheads’ Guide to Retirement Planning

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

bogleheads 2Ever 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.

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  1. brad says:

    good article. on an unrelated note, have you ever done a search on the site for “let’s dig in”? i think that might be one of your favorite phrases.

  2. Debbie says:

    Great article. Definitely looks like a book worth owning.
    One small correction regarding annuities – the annuitant (i.e. the one buying the annuity) can select a payout stream that will pay distributions to beneficiaries. This selection will impact (i.e. reduce) the amount the annuitant receives in retirement. The beneficiary will also have to pay taxes at ordinary income tax rates on the income portion of the distribution – i.e. on any earnings over the cash basis.
    Debbie

  3. Trent, you have the most amazing resources for everything having to do with money and finance. I read you every day.

    Thanks, John DeFlumeri Jr.

  4. Kevin M says:

    You might want to revise the wording you have under the “Early Retirement” section as this is incorrect:

    “penalty-free withdrawals from a Roth IRA (since you can withdraw the balance at any time)”

    I think you meant to say – withdraw the principal or original contributions instead of “balance”.

  5. DanT says:

    One minor error to point out. In the Early Retirement section, you state that the balance of a Roth IRA can be withdrawn tax-free at any time. The _contributions_ can be withdrawn at (essentially) any time, but not the balance. Any withdrawn _gains_ would be taxable, unless the circumstances meet the requirements for a tax-free withdrawal.

    Although with the recent market hit, it’s quite possible that the balance is less than the contributions, so in that situation, yeah, the whole balance can be withdrawn. :)

  6. DanT says:

    Stupid work proxy. Kevin M (#4) beat me to it.

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