Plan ahead! Legal documents everyone needs at any age! Find out where you stand: About 25% of American workers are very confident they will have enough money to retire; another 44% are somewhat confident, but 60% of the whole group haven't calculated how much they'll need in retirement!  How can they be so confident? About ⅔ of respondents in a recent survey are very- or somewhat-confident that they'll have enough funds to live comfortably in retirement, but they have less that $50,000 saved; half of those 55 and older have saved less than $50,000.  That's not enough! 40% say they have a pension, but 61% expect to receive money from such a plan.  21% are in for a shocking surprise! Half thought they could live on 70% of their pre-retirement income, but the true figure is 85%! 25% of workers between 40 and 60 years old have no retirement savings! About 40% of retirees leave work before they want to because of health reasons, to be a healthcare provider for a family member, or are downsized out of their job. Planning for A Secure Retirement - an on-line course at Purdue Don't Fall Victim to Typical Retirement Planning Blunders Metlife Quiz on Your Retirement Knowledge
	How much will you need to retire? Reasonable estimate is 85-100% of pre-retirement income.  To achieve this, a reasonable estimate is to have 12 times your final year's income saved when you retire (if you do not expect to receive a pension.)  (If your final year's income is $50,000, you should have $600,000 saved when you retire.)  Another source suggests 65% of final income could be enough, but it's better to have too much saved than to little. Expense reductions: No more saving for retirement. Work expenses (commuting costs,  lunches, work clothing, etc.) Social Security taxes.  If you don't have earned income, you don't pay Social Security. Additions: Travel?  Older persons, when asked what the regretted most not doing, answered "travel." Other recreational costs, since you'll have much more leisure time. Health expenses usually increase.  An American couple that retires at age 65 in 2006 will need, on average, $200,000 in retirement to cover out-of-pocket medical costs; an increase of more than 5% over 2005.  This assumes that retirees do not have employer-sponsored retiree healthcare.  It includes: expenses associated with Medicare Part B and D premiums; Medicare cost-sharing provisions such as co-payments, coinsurance, deductibles and excluded benefits; and prescription drug costs.  It does not include expenses such as over-the-counter medications, most dental services and long-term care (estimated to be $65,000 to $150,000 annually.) Kiplinger magazine's Calculators for Real Life Kiplinger magazine's Tools for Investing, Money & Rewards AARP Articles on Retirement Financial Planning Nest Egg Score estimates how well you're set for retirement, and provides a score which compares you to others.  Pensions are not considered, which may throw off the results.  [My score is "good", but I have a pension.]
	Will you be happy in retirement? Are there things you'd rather be doing instead your currently employment? When you're in your declining years, will you be thinking, "Gee, I wish I'd kept going to the office longer?" [Not me!] Are you ready for retirement? Take the quiz.

	1. Old Age, Survivors and Disability Insurance, commonly known as Social Security It's not going broke; just a few adjustments needed. The president's proposal may not be a good deal for workers or anyone else. In 2006 the Social Security trustees report that there's enough funds to pay full benefits until 2040, and 74% of benefits thereafter (under current law.)  However all the assets of Social Security are invested in US government bonds, which will have to be redeemed in order to pay benefits.  This may result in increased taxes for all.   What is Your Full Retirement Age? Year of Birth Full Retirement Age Reduction if Retire @ 62 <1938 65 20% 1938 65 + 2 months 20.83% 1939 65 + 4 months 21.67% 1940 65 + 6 months 22.5% 1941 65 + 8 months 23.33% 1942 65 + 10 months 24.17% 1943-54 66 25% 1955 66 + 2 months 25.84% 1956 66 + 4 months 26.66% 1957 66 + 6 months 27.5% 1958 66 + 8 months 28.33% 1959 66 + 10 months 29.17% >1959 67 30%   Retiring early vs. waiting until full retirement age (or even later) see table Retire early website If you begin to receive benefits from Social Security at 62 you'll be money ahead until you reach 76, then you fall behind (not counting cost-of-living adjustments) Disadvantage: if you die first, your surviving spouse will receive reduced benefits. You can find better estimates, and calculation of your breakeven point at Social Security Administration Calculators (again, not considering cost-of-living adjustments)  Excel worksheet to determine break-even point (including inflation and return on investments, but disregarding any pension)  If this link is invalid, go here, then click on "Free Programs" Things to consider when deciding when to apply for Social Security benefits: Reasons to apply before full retirement age: You need the money now. You don't need the money now, and will invest the benefit payments until needed. You're in poor health, or have engaged in activities in the past which might have shortened your life expectancy (e.g. worked with asbestos, smoked, are HIV-positive.)  Do you do things which may shorten your life before or after retirement (e.g. travel in an auto without using a seat belt, sky-dive, drive while using a cell phone?) The reduction in survivor payments to your spouse (should you die early) is not important. Reasons to apply at or after full retirement age: You want to continue working  If you take benefits before your full retirement age, for every $2 you earn above an annual limit (which is $12,960 in 2007) will reduce your Social Security payment by $1.  Also, if you work, your benefit will increase when you finally take benefits. You are in good health, and expect to remain so.  Your life expectancy heritage is great (Did your ancestors live to great ages, or did they die earlier than their expected lifetimes because of an congenital disease or condition?) You don't want to pay taxes on the Social Security income (which may be spiting yourself.) The reduction in survivor payments to your spouse (should you die early) is important. Forty percent of early retirees do so because of health reasons (their own or becoming a caregiver for someone else.)  A recent study of all retirees of Shell Oil Co. from 1973-2003 showed that their risk of dying between 55 and 65 was double for those who retired at 55 as compared to those who continued to work, but those who retired at 60 had similar survival rates to those who retired at 65 or older.  No explanation was offered by researchers, but my guess would be that those who retired at 55 might have had serious health issues, so they retired as early as possible.   A complicated method of perhaps having the best of both worlds: Retire at 62 and start collecting payments withdraw your application 60 days before your full retirement age pay back all the money you received refile for full benefits Advantages it's a free loan from Social Security (money you can use during that time) provides time to reconsider other factors (see below) Possible problems giving back all that money if you die before completing this process, your surviving spouse will receive reduced benefits this procedure can impact Medicare benefits and taxes
	2.  Your employer's money  Defined-benefit or defined-contribution plan? Defined-benefit means you get a specified pension for life (or longer, if you can choose to continue payments to a beneficiary).  (This is a vanishing program, because of the money required of the employers increases with the number of retired employees.  The USPS postal rate increase of 2006 was necessitated by pension costs ― not all companies can raise their incomes as easily.) Risk rests with employer, who must provide your promised pension regardless of expense.  Employers utilize financial experts in order to invest the money appropriately so that they can provide the funds needed for their retirees. Good for long-time employees (benefit usually depends on final years' paychecks) Law requires employees must fully vest (become yours, even if you leave that employer) in seven years Private company pensions protected by federal government (up to $45,614/year in 2004) if you retired at 65 (less if you retired earlier.) Some plans allow person retiring to withdraw in a lump sum; if so, some things to consider If the company goes under, any pension over $45,614 (in 2004) would be reduced to that amount (or less if you retired earlier than 65) A lump sum payment cannot be rescinded; it's yours to keep. But don't spend it too fast.  More than half of those who took lump sum pension in 2003 had spent it all within three years.  How are they going to live after? Government pensions totally exempt from NYS & NYC income tax. Employer may change from defined-benefit to defined-contribution plan (or no plan at all; it's not required.) Via cash-balance method (which penalizes long-term employees more than newer employees) May "freeze" current defined-benefit plan, which stops contributions into plan (and lowers future costs, but reduces pension for current workers when they retire) and perhaps begin 401(k) plan. Verizon did this in 2006. Defined-contribution means your employer puts in a specified amount each paycheck, invested among available choices from plan as you direct, final amount varies as your investment choices perform. Risk and financial planning requirement shifts to employee, who must decide not only how much money they'll need when they retire, but also how much to invest,  what to invest in to achieve their retirement goal, and when they can afford to retire Good for employees who change jobs often, because they can move money with them When leaving employer, move to Rollover IRA to allow you more investment choices
	3.  Your money Invest early no matter what you invest in. Save for your retirement, even before your children's education: There are many kinds of scholarships, education loans and grants which may be obtained when needed for your children, but there are no "retirement loans"; when you retire you're on your own. For every 10 years you delay before starting to save for retirement, you will need to save three times as much each month to catch up.   Just One Year Can Make a Big Difference! (from Fidelity Investments) If you start at this age You'll accumulate this much at age 70 The One Year Delay Difference 20 $2,010,977 -$151,962 21 $1,859,015 30 $909,731 -$70,388 31 $839,343 40 $399,641 -$32,603 41 $367,038 assuming $3,000 annual contribution to an IRA and 8% rate of return 401k (403b) or Roth IRA? 401k (companies) or 403b (non-profit organizations) 401k contribution may be partially or fully matched by employer (Great! Immediate growth! Invest at least enough to get employer match) Money is invested before taxes (reduces current taxes) Taxes paid when withdrawn (at then-current ordinary-income rate,  not reduced-rate of dividends or capital-gains) Cannot be withdrawn before age 59½ without penalty except specific under certain conditions Must begin withdrawing at age 70½ in calculated minimums, and cannot invest any more When leaving employer, best to move to your own rollover IRA, and have trustee-to-trustee transfer to avoid 20% withholding When asset-allocating, hold all bonds in this account because gains are taxable at ordinary-income rate, and bonds have more modest gains than stocks. Roth IRA Money invested after paying taxes Withdrawals (principal and gains) tax-free Never has to be withdrawn, and can be left to others tax-free Always better than traditional IRA because withdrawals are never taxed, and gains are completely tax-free.   An article in February 2005 AAII Journal (subscription required) shows that investing before or after taxes has no effect on final amounts (assuming same tax rates during contribution and withdrawal years.)  If your tax rate is lower after retirement, it's better to defer paying taxes, but how can you know what the tax rate will be when you retire?   Bankrate.com's explanation of the features of the kinds of IRAs Motley Fool's explanation of IRAs Kiplinger's take on IRAs If I were starting now, I would invest in a Roth IRA because (although I'd be paying taxes as I earned the money) all withdrawals are tax-free.  If I worked where there was a 401k match I'd invest enough there to get the match, then the rest in a Roth IRA.   Windfalls are wonderful, but don't count on them An inheritance is money left to you in a will.  Don't count on them before the fact, because you may never receive the money.  Changes of finances or heart may change the will, or the money may be used to pay for health care. Lotteries may provide some cushion, but unless it's substantial, it won't make a difference.  "Investing" in lottery tickets is a bad idea, since the odds of winning are so long. A recent giveaway uses the tag line, "how will you quit your job?"  With the top prize being only $1 million, a better question would be, "why would you quit your job?", since a safe 4% withdrawal rate would only provide a $40,000 annual income, and it's hard to retire on that. Investment choices are many, however held Buy your residence Advantages It appreciates while you live there, and you do have to live somewhere Mortgage payments and real estate taxes are income tax-deductible (making it cheaper to own) You build up equity for yourself, rather than paying rent to someone else When you sell it, profit of up to $500,000 (jointly owned with spouse, otherwise $250,000) is tax-free if you've resided there for two of the last five years When you die, your beneficiaries' basis is the value on your death, thus the appreciation during your lifetime is tax-free Fact:  in 2001 the net worth of homeowners averaged $174,980; non-homeowners averaged $6,720 ― a difference of 2600%. Disadvantages You must sell it in order to realize the gain, and changing residences is neither cheap, easy or fast You still have to live somewhere, whether rental or a purchase of another home Not readily convertible to cash, but a reverse-mortgage can provide money to stay in your present home Stocks (you own a share of a company, with vote on management and directors) Bought and sold at exchanges throughout business days Price set by supply-and-demand A bull market means prices are moving up; a bear market is moving down An index (plural: indices) is average price of a specific list of stocks Dow Jones Industrial Average (the Dow or DJIA or "the market") is 30 large companies which trade on the NY Stock Exchange, and is considered a barometer of how large companies are trading Russell 5000 Standard & Poors 500 is 500 stocks which provide a broader range of companies You can't invest in any index directly, because it's just an average of stock prices Don't invest in your employer's stock (too many eggs in one basket -- if company goes down, you lose your job and your investment - Enron, the prime example) Pay attention to your investments (you may lose by inattention) Timing your investing is not critical (market-high vs. market-low), but the earlier you invest the more you'll accumulate.  An 2/06 article in AAII Journal showed that there was no dramatic difference between investing at the year's market maximums vs. minimums over the years 1984-2004, but the investor could achieve near-maximum gains by investing on the first trading day of each year (investing $1,200 on Jan. 2 rather than $100 each month.) If the company you've invested in goes bankrupt, you may lose all your investment Bonds (you loan your money to them) Commercial Municipal (most tax-exempt in the issuing state) Federal (savings, bills, bonds, notes, TIPs) Mutual funds are shares in many investments, and are often in many sectors An open-ended fund continuously issues and redeems shares of the fund, but may close (stop selling shares) to new (or even current) investors to avoid having too much money to invest.  This is the type listed in the newspapers as "mutual funds", and trades at the closing price for the day.  Price is the net asset value of the properties owned by the fund divided by the number of shares (plus any front-end load.) A closed-end fund has a fixed number of shares, and trades like a stock all day (in order to buy shares, someone else has to sell them); and is listed among the "stocks" listing A growth fund invests in companies with above-average revenue and earnings and is expected to continue do well, a value fund invests in stocks considered to be bargains and  expected to do well in the future.  A blend fund invests in both growth and value companies. Large-cap, medium-cap, small-cap, micro-cap (variously sized companies) International (everywhere except the U.S.), global (all over the world), tech, healthcare, energy, etc. Bond (municipal, federal, commercial) Index funds attempt to emulate performance of specific indices, like the DJIA, S&P 500,  etc.  (e.g. a fund which emulates the DJIA should go up 5.3% if the DJIA goes up 5.3%) Very low expenses because they emulate specific indices and don't require expensive research or managers Not subject to illegal market-timing losses of recent news Brokerage houses often have their own index funds, or they can be invested in directly from mutual fund companies such as Vanguard and Fidelity Mutual fund expenses cost money; minimize whenever possible All funds have management fees (less is better, but you can decide to invest in a fund with higher expenses if it pays better returns) Load funds charge money to invest with them front-end load (class A) charge before investing, so purchaser gets less investment Class B front-end loads are lower than class A, but levy higher annual expenses back-end loads charge to sell your investment 12b-1 fees pay for advertising (avoid if possible) No-load funds don't charge to invest or sell; returns are just as good Booklet on mutual fund fees Exchange-Traded Funds (EFTs) are almost-always open-end mutual funds.  Most track indices; a variety are available (about 150 at this writing) Trade on exchanges throughout business days (like a stock) Bought and sold through any broker Advantage: low costs and taxes because they track indices; thus good for long-term investment Disadvantage: you pay your broker a commission on each purchase or sale; thus unsuitable for small or periodic investments Kiplinger magazine's listing of EFTs Investment Trusts are a collection of specific properties or bonds put together by sponsor, and sold in units (usually $1,000 each) No control of management Not widely traded, thus hard to sell Periodically receive interest and some principal (no control over how much or when) Examples: Real Estate Investment Trusts (REITs) invest in real estate, bond trusts invest in bonds Immediate Annuities -- a pension you can buy  AARP article Explanation of annuities by a company that sells them Another explanation SEC article on variable annuities General rules about investing. Understand the investment product, and ask questions about risks before putting in any money Know your risk tolerance, and don't invest beyond that point (for peace-of-mind) Find out all fees which may pertain, including minimum purchases and surrender fees which may "lock you in" to an investment Monitor the investments, so you're aware of changes (declines, changes of management, etc.) Make sure you can get your money out in an emergency.  Top Myths About Retirement Plans - Nolo   Asset allocation Diversify ― don't put all your money in one sector, because if that sector goes down, your investment will too. Examples: Large-cap stocks and international stocks may not move in the same direction at the same time Stocks and bonds often move in opposite directions.  Late 2003, when interest rates are at historic lows and can only move up, is not the time to invest in long-term bonds. Your house can be considered an illiquid investment in real estate: real estate taxes are income-tax deductible as is mortgage interest, but you have to live somewhere and selling real estate is a costly and slow process if you need to convert to cash. Cash (and its equivalents of money market funds and savings accounts) is a choice. They won't go down, but will lose value to inflation. This works for companies too.  Geico used to sell homeowners insurance, but exited that market (possibly because of possible numerous claims for large-scale calamities; they now only cover autos.)  If they had remained in house coverage they would be facing huge payouts because of hurricane Katrina and the 2007 California fires.  They limited their losses by diversifying, since it's highly unlikely that a large number of autos will be involved in crashes at the same time. Dollar-cost average (keep on investing, regardless of the current price). When the prices decline your result is more shares each investment. When prices increase you get fewer shares, but your total investment increases.   One Method of Allocating Your Investments Term (when you expect to need the money) Investment Your Risk Tolerance Low Medium High Short (<2 yrs) Cash 100% 100% 100% Short-Medium (3-5 yrs) Stocks 25% 40% 60% Bonds 40% 40% 30% Cash 35% 20% 10% Medium (6-10 years) Stocks 40% 60% 80% Bonds 40% 30% 20% Cash 20% 10% 0% Long (10+ years) Stocks 60% 80% 100% Bonds 30% 20% 0% Cash 10% 0% 0%

 

Your biggest problem could be inflation! Inflation examples Remember gasoline at 35¢ (or $1.35, or now even $2.35)/gallon, or letter postage at 3¢? My salary in 1967 was $5,900, now same step is $50,000 (not counting promotions.) My house value increased 1,000% in 29 years   Life expectancy means that 50% of people die before that time, 50% after.  It's not a determination of how long one actually will live, merely a mathematical tool to aid planning. Life expectancy increases with age (the older you get, the more likely you'll live longer), so always invest for the long-term