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Retirement

Do You Need to Be a Millionaire to Retire Comfortably?

how much money to retire

I had a lot of fun yesterday being on the panel for the #retireeNextDoor Tweetcast. Jeff Rose from Good Financial Cents and Money Tips did a fantastic job hosting it and some wonderful advice was shared.

Like I mentioned the other week, we tend to put off preparing for retirement for a few reasons. I think one huge factor is the unknown. We hear all these huge numbers about what we need that it can be discouraging. I don’t think we have to be afraid of it.

Planning for retirement is a bit like saving up for a baby – you will never be able to prepare for every event, but you’re better off having something saved up rather than nothing.You can get an idea of where to start if the two of you can sit down and find what works for you.

Define Your Retirement

Make it a dinner date and talk about what you’d like to do when you’re retired.  Ignore the numbers for just a moment and just focus on what you want. Retirement is a kind of a catch all phrase that doesn’t really help you plan as everyone has different ideas on how they’d spend it.

Joe Saul-Sehy from Stacking Benjamins had a wonderful remark about retirement yesterday. He said retirement isn’t an event, it’s a 40+ year span of life for many. It may be easier to think of it in phases. What do you want to do when you’re in your 30s, 40s, 50s, 60s, and beyond?

After talking about it, you two may want to do a hybrid or stepping stone retirement. Perhaps you set a goal to build an income stream that will allow one or both of you to explore a new business or to start investing in real estate. You’re not officially retiring, but rather you’re now able to quit your day job and give full time attention to building the income stream and boosting net worth for when you do stop working for money.

Every couple will come up with their own plan, but you can make progress until it’s discussed.

Finding Your Retirement Number

Now that you have a picture of what you want, the two of you can work backwards and see about much money you need to retire. You may discover that your retirement doesn’t have to require a million dollars in the bank to achieve. Or you may see that it will take a boatload of money.

If you’re in the latter category and you are freaking out about not having enough when it’s time, take a few days and break your goals down further to extract the absolute essentials. What do you truly want? What are the non-negotiable? Start with those and get a baseline number and build from there.

No matter what your goal is, the best thing you can do as a couple is to start now. If you haven’t already, start this week. Pick some amount you can afford, automate your contributions, and increase it with every raise/bump in pay. Time is one of your biggest allies, so use it.

Should You Include Social Security?

Personally we don’t include Social Security in our retirement plans. I have no idea how exactly it play out, but I’m pretty sure that it will be stripped down by the time we qualify to take it. I’d rather be pleasantly surprised at the extra income than be disappointed because it wasn’t what I had planned for.

Unless you will be retiring soon, I think you’re better off not making it a pillar of your retirement plan. (Completely my personal opinion)

Thoughts on Retirement and What It Means to You

I hope the two of you have a chance this week to discuss your retirement plan. I’d love to hear what you come up with and what your overall strategy is to get there.

Photo Credit: epSos.de

What are the Most Common Mistakes People Make When Planning for Retirement?

how to invest for your retirement and future

Even though most of us know that retirement planning is something we should be doing, real life tends to get in the way of us actually getting it done. Retirement is so far away in your timeline, it’s tempting to put it off for a bit.

What’s worse, we can be our worst enemies and make some huge mistakes when it comes to planning for retirement. I’m going to share some of the biggest mistakes and how you can begin to fix them.

Waiting Until You Have More Money

One of the biggest mistakes couples and really individuals make is waiting for the next raise to happen before they invest. They feel like their small contributions now will have little or no effect so why not just give a year (or two….or more) and when they get enough then they’ll invest.

I have some great news – you don’t need a lot of money to start investing and time is one of your biggest allies when it comes to your portfolio’s growth.

I actually wrote about how you can start investing with $1,000 or less because when I graduated for college, I knew I wanted to set aside money for retirement, but I didn’t have much money.

Investing Without a Goal

I think the big question people have when trying to figure out their retirement number is how much they will need as a couple to retire. Of course that completely depends on your own family’s circumstances.

So just how do you come up with the right amount?

While the traditional rule of the says that you should plan for around 75% of your current income, Todd Tresidder, author of several financial books including How Much Do I Need to Retire? and early retiree himself, shows that it’s more practical to look at your expenses and make a reasonable ballpark figure as to what you will need. He cites from various studies that most of your budget categories see significant decrease with the exception of health insurance.

If you want to get an approximate idea of what your family would need, pick up Todd”s book or use resources like Vanguard to help you out. If you’re thinking about retiring early, find out how much you need to save.

Not Automating Your Contributions

The last hurdle for couples when it comes to retirement is not automating their contributions. How many times have you thought about investing, but by the end of the month, there’s hardly any money to give? Protect yourself now (and later when you need to retire) by setting up automatic contributions.

If you haven’t already, check with your employer and see if they offer a 401(k) with a matching contribution plan. That’s basically free money that boost your returns. Having it automatically deducted means you’d hardly miss it as you simly budget from your take home pay.

Depending on your employer, you’ll have different funds to invest in. If available, consider putting your contributions towards low cost index funds.

My advice is to increase the amount as you receive raises and promotions through work. It doesn’t have to be significant, just take it up a notch every increase. Besides allowing you to invest more, you’re also lowering your taxable income, a double bonus.

Build a Better Retirement Today

None of these mistakes are made intentional, as if someone wants to sabotage their retirement, but they are all too common and they will hurt your chances at your goals. So if you haven’t already, now is the time to start planning, get your contributions calculated, and automate them. Your future self will thank you.

Find out how to increase your odds of retiring successfully by joining MoneyTips.com’s #RetireeNextDoor (LIVE!) virtual event on November 18th, 11 am – noon PT. Register now to get answers to your retirement questions from more than two dozen of the top voices in personal finance, including yours truly.

Photo Credit:  Chris Potter

Setting Up Your Retirement with the Right Tools

happy couple retirement

This post is a part of #RetireeNextDoor movement, where bloggers are sharing stories and advice from those who have successfully retired. If you enjoy today’s post, please check out the others at Retiree Next Door.

Retirement can seem intimidating to some couples as the choices seem vast. Today I want to review some retirement tools you can use to build your portfolio and I’ll interview Doug Nord, a successful retiree, on how he create a plan that worked for him. This post is designed to get you off just planning for your retirement and into building the retirement plan you two have always wanted.

Retirement Tools to Build Your Portfolio

One of the biggest advantage of getting your retirement started is the amount of choices you have. There are great tax advantaged accounts like 401(k)s and IRAs that give you a chance to stash and grow your money. However, which tools are right for you?

Like much in finances, it depends on your goals and investment styles. While I can’t give you absolute rules for retirement, I can offer information that has helped others make the transition into retirement. MoneyTips recently ran a survey that examined how sucessful retirees reach their goals. One of the questions looked into the retirement tools they used and here’s what they found:
a target=’_blank’ href=’http://track.flexlinks.com/a.ashx?foid=1032690.679833&fot=9999&foc=2′ rel=’nofollow’ alt=’Betterment.com’ title=’Betterment.com’>

  • Traditional IRA
  • 401(k)
  • Defined Benefit Plan
  • Roth IRA
  • Tax Sheltered Annuities
  • SEP IRA
  • Rental Properties
  • 403(b)
  • Other
  • Health Savings Account

As you may have noticed, there are quite a bit of different tools to use when saving and investing for retirement. If you’re not familiar with the tools themselves, I’ve included links to more detailed articles on them.

Where Should I Start for Retirement?

Assuming that you’ve gotten out of high interest debt, now’s the time to contribute and grow your money.  As a general rule of thumb, you want to start with the account that will give you the biggest bang for your money. As time passes that advantage snowballs in your favor, another reason for you to start now rather than later.

I’m going to use as an example someone who  works for a company that offers a 401(k) and whose income also allows them to have a Roth IRA. Both accounts can be incredibly powerful when used correctly, but with your contributions limited for now, you want to optimize them. Which do you start off with? Here’s what I would do and why:

  • 401(k) up to the employer’s match
  • Roth IRA up to the year contribution limit
  • Rest into 401(k)

That 401(k) offers you some free money that over time will help you get to your retirement goal quicker. Once you have that match, though, the freedom Roth IRAs and the tax free withdrawals when you retire can offer you is something you can use to your long term benefit. If your employer doesn’t offer a match, then you may want to contribute your money to the Roth IRA’s maximum and then any additional to your 401(k).

If you have a unique situation or you want to bounce ideas with a financial professional, I’d suggest finding a a fee-only, independent financial advisor through an organization such as The National Association of Personal Financial Advisors (NAPFA) to help you come up with a practical and affordable  game-plan.

Who Should I Invest With?

The good news is that there are plenty of options when it comes to opening an IRA. Banks, brokerages, and credit unions typically offer them as a part of their services. Some charge a flat fee for the year, some take a fee for each transaction made, others can take a percentage, and some do all of this.

Our personal choices for our Roth IRAs have been Vanguard and Betterment. Both offer low cost index funds that allows us to passive invest our money and keep expenses much lower than with other providers. It’s an investment strategy that we have looked into and fit our financial philosophy.

Vanguard is known for having great customer service and being a valuable resource when it comes to investing.  I currently use them for my Roth IRA and I’ve been quite happy. Being with Vanguard means I can buy their ETFs free. Since I already buy these it would save me some money. If you’re interested, you can sign up for a new account at Vanguard.

Betterment fits my husband’s investment style -his contributions are automatically invested and re-allocated to make sure he stays on target to the growth plan selected. If you’re interested, you can sign up for a new account at Betterment here.

I definitely like Vanguard and Betterment as places to invest your IRA contributions. They are both some great no hassle, low cost options that make it simple to invest in your future.

Managing All Your Accounts Easily

Now that you have a plan and you’ve sign-up for your contributions, your job is making sure your investments are working for you. If you’re looking for a way to track all of your bank accounts and watch your retirement portfolios, Personal Capital offers a free portfolio check-up.

To me, Personal Capital is like Mint (easy to set up and use), but on steroids (more features).  I believe Mint is more suited for general purposes and Personal Capital is focused on investments and growing your portfolio.  Personal Capital does have cash flow report and there are some wonderfully useful tools that can help you optimize your investments such as a 401(k) fee analyzer and asset allocation examiner.

Personal-Capital-Portfolio-Allocation

How to Start Your Retirement and Finish Early

I’m also excited to share how couples can succeed together with their financial goals. Today, I’m proud to share Doug Nordman’s story about retiring early, what tools did they use to invest, and what lessons has he learned and wants to pass on to his daughter and others?

Doug  was kind enough to talk to me this week about how he successfully retired at 41 after serving 20 years in the U.S. Navy. Now he’s helping others plan for early retirement through his blog The Military Guide and book The Military Guide To Financial Independence & Early Retirement (All royalties are donated to military charities including Wounded Warrior).

Doug, when did you start investing for retirement? What retirement accounts did you use and why?

Doug is enjoying his retirement

Doug is enjoying his retirement

When I finished college and started my Navy service, I had very little free time.  I was frugal and kept a tight budget, but I had no idea what to do with the money.  I eventually stumbled across a nice young broker from Paine Webber (whose tag line in 1982 was “Thank You, Paine Webber”) and ended up in a nice bond fund.  Interest rates had just hit a peak so that turned out to be a sensible recommendation, but I had no idea what I was doing and I was paying hefty fees.  This went on for four years until I finished my sea duty, married, and started shore duty.

(Note: The Thrift Savings Plan had been just a recent development, so when Doug retired from the service he only had accrued about 5 months of savings. His wife, who also served, accumulated about 6 years. )

When my spouse and I consolidated our finances in 1986, she had equity mutual funds.  (She’d learned much more about investing from her parents than I had from mine.)  My Dad suggested a copy of Business Week’s annual mutual funds guide and said that he’d been happy with Fidelity.

After a few weeks of phone calls and mailed forms, we were finally with Fidelity and 20th Century (they later became American Century). Back then you paid a 2% sales charge to buy Fidelity mutual funds– and if it was a popular fund then you paid 3%.  But they had great customer service, they were an easy answer, and I had other interests.  Every two weeks I’d write out a few checks and deposit slips, stamp the envelopes, and drop them in the mail.

I’m drawing a military pension now, which includes an annual cost of living adjustment.  We’re still frugal and that pension covers half of our expenses.  We acquired a rental property along the way, and that finally has cash flow.  Because those two assets cover the majority of our spending, the rest of our savings is aggressively invested in equities– over 90%.  (The rest is in a money market and CDs to cover two years of spending for bear markets.)

We have exchange-traded funds in domestic dividend stocks, international dividend stocks, and small-cap value stocks.  We also have a portion of our portfolio in Berkshire Hathaway “B” shares.  There are no more sales charges, of course, and our overall portfolio expense ratio is about 0.23%.

What were some of your biggest challenges? How did you overcome them?

My biggest obstacle back then was ignorance– I’d never been raised with investing skills and I didn’t really take the time to learn them until the 1990s.  If I was starting over today then I’d read about investing from books like the Boglehead Guides or Rick Ferri or William Bernstein.

As parents, what knowledge have you passed to your daughter?

Our daughter just finished college in May and started her own Navy career.  She has no free time either but as you can imagine, she’s had quite a bit of investing education during her life.  She’s turned out to be at least as frugal as her parents, and she keeps a budget too.  However she started out with the military’s Thrift Savings Plan, which has expenses as low as 0.02% (lower than Vanguard).
She maximizes her contributions to that and then maximizes her contributions to her Roth IRA.  That’s invested in Fidelity’s Spartan index funds– the U.S. extended market index, an international fund, and a dividend fund.  She’s investing even more of her money in taxable accounts with Fidelity in the same funds.  She’s set up all of this online and it’s automatically deducted from her pay (and her checking account).
She knows that if she wants to be financially independent in her 40s then she needs to save at least 40% of her gross pay for 15-20 years.  She’s set up her budget, chosen her asset allocation in passive index funds, and put all of the decisions in autopilot.
She knows that every year she’ll try to maximize her TSP and IRA contributions and then do the rest of her savings in taxable accounts.  Her biggest decisions will be remembering to boost her contributions whenever she gets a pay raise, and to occasionally rebalance.
(Doug and I wholeheartedly agree that automating your contributions makes things so much easier and can help you stay on track for your retirement.)
When she becomes part of a couple, she already understands the basic investing concepts.  If she wants more then I’d point her toward the books & websites.  We’d spend more of our time talking about investor behavioral psychology, too.  But I think most of our time will be spent showing her (them) how to sort through all the information to arrive at a few choices, make a decision, and automate it.

Thoughts on Retiring as a Couple

I hope Doug’s story and tips help you two to create a retirement plan that you want. As Doug showed, you don’t have to have a perfect building to finish early. You just have to get started and be willing to learn as you go.

I’d love to hear about your progress so far, whether you’re new or a long time reader. How far along are the two of you with retirement?

Keeping Tabs on Our Retirement Accounts

Over the last few years as we’ve been working together and I’ve been sharing our progress on Couple Money, you may have noticed a few constant themes coming across in several posts, two of them being automate your finances when possible and save for retirement.

I think that one of the most helpful things we have done as a couple is creating a financial system that basically takes care of the essentials so we are freed up to  spend more time on people and activities that matter to us. As working parents, we would honestly rather do other things than looking over everything continually.

Stressing over finances can take a toll any family, so automating our finances is both a way to reduce needless noise and build our net worth. Our retirement accounts are pretty much on autopilot and it has made things much easier to manage.  For those interested in looking under the hood, I want to share what we use.

Set It and Forget It

I know everyone is different, so what works for us may not work for you. There are some people who love to constantly track every peak and valley of the market, getting alerts on all the news of the day.

Neither of us are like that.

We are the type who have no problem reading books, articles, and talking with others to come up with an investing plan. From there we want to be able to have automated contributions based on our plan and have access to check on our accounts as needed (which is hopefully once a quarter).

When we were devising our plans for the 401(k) and the Roth IRAs, we were looking at passive investing and in particular index funds. My husband’s job offers a match with their 401(k) so we made sure to max his contributions to take advantage of  this wonderful benefit. The down side is the 401(k) has limited options, so we choose a few solid funds.

With the Roth IRAs, we have a bit more freedom so we are able to get the accounts to our desired asset allocation. In general, I based mine on David Swensen’s model.  The general asset allocation Swensen recommends includes:

  • Domestic Equity (30 percent)
  • Real Estate Investment Trusts (20 percent)
  • Foreign Developed Equity (15 percent)
  • U.S. Treasury Notes and Bonds (15 percent)
  • Emerging Market Equity (5 percent)
  • U.S. Treasury Inflation-Protection Securities (TIPS) (15 percent)

Since I have decades before I expect to draw money from this account, I don’t really have much in the way of bonds and the more conservative investments so I have a bit more in foreign developed equity than in treasury bonds.

investing for future

Using Vanguard and Betterment for Our Roth IRAs

I’ve written the process of open an IRA with both Betterment and Vanguard so if you are thinking about using either please check out my reviews. I highly recommend both companies as we’ve been happy with both their services. So far we haven’t had any problems, which has made investing that much easier. Both of these companies suit our personalities and allow us to painlessly sock away money.

Betterment is great for my husband as everything is automated for him, including rebalancing his portfolio. For those just starting out or with low balances, you may want to try Betterment as most of Vanguards fund have a minimum of $3,000 (the big exception are their target funds).

I love Vanguard because they have numerous funds that have low fees, meaning more of your money goes towards growing for your benefit. They also are considered the leader in their field, offering a ton of resources and research on investing.

Either one you choose, you can easily grow your portfolio by signing up for automated contributions. If you’re interested, you can sign up for a new account at Betterment * here or Vanguard here. It will probably take you 20 minutes to set up and open.

 Thoughts on Setting Up Your Retirement Portfolio

Like I mentioned earlier, what works for us may not be your cup of tea so I’d like to know how you two manage your retirement accounts? How did you set it up? What companies do you use? How often do you check your accounts?

Disclaimer – I am an affiliate of Betterment. 

Photo Credits: Behavior Gap and Chris Potter

How Much Money Do You Need to Retire?

I usually reserve my book and financial reviews for my other site, but I just finished reading Todd Tresidder’s book aptly named How Much Money Do I Need to Retire and I feel like it deserves a special mention as there are many Couple Money readers asking that question.

I’ve written how I had gotten a ballpark figure before, using financial calculators and basing assumptions on averages and historical data. I still believe it’s better to have some goal for how much to save than to just go without a plan. However if you can get smarter with your target number, than go for it.

How Much Do You Need with Conventional Retirement Planning?

What makes Todd’s book a resource is how he doesn’t give a one size fits all solution. He takes you step by step on how you can build a nest egg that fits your particular needs and situation. To give you an idea of wealth of information he shares, I’ll highlight just a few questions tackled in the first section where he explains how conventional retirement planning works.retirement book review

  • How much income do I need for retirement? While the traditional rule of the says that you should plan for around 75% of your current income, Todd shows that it’s more practical to look at your expenses and make a reasonable ballpark figure as to what you will need. He references studies where most categories see a significant decrease with the exception of health insurance.
  • How does inflation impact the amount of money I need for retirement? Todd gives some compelling reasons why you shouldn’t just assume the standard 3% rate and instead stress test your savings requirement.
  • How does life expectancy impact the amount of money I need to retire? While actuary tables are useful for insurance companies, Todd explains why they aren’t valid for you and your retirement.
  • How much will my company pension and social security pay during retirement? While those closer to retirement may want to factor in their pension and retirements, Todd goes into why you can’t treat them as secure solutions.

What I appreciate is that Todd pulls no punches with these questions and more. He shares the math and studies relevant to each question. You are encourage to run the numbers yourself and decide whether or not conventional retirement planning suits your needs.

From here, the second section covers creative retirement planning. Todd goes over how you can adjust and tweak your current lifestyle and assumptions based on scenario analysis. He gives some practical advice on how you can turn activities and hobbies that you enjoy into income streams that you can utilize when you retire. For couples approaching their retirement and are looking to shore up their finances, this section is for you.

The last section gives the cash flow model, which Todd used himself and allowed him to ‘retire’ (be financially independent) at 35. He crafted a three rule system handles inflation and life expectancy plus gives you diversified sources of income.

I can say that going through the questions he asked, I feel more prepared and knowledgeable. Instead of being focused on that ‘magic’ number, I have a doable plan that would work for us. If you two are looking for a retirement planning resource, I highly recommend Todd’s book. It is packed with information without getting too dry or long winded.

Autographed Book Giveaway!

I had the pleasure of chatting with  Mr. Tresidder last month in St. Louis and I attended one of his sessions. Not only is he extremely knowledgeable about investing, he is also a genuinely concerned about helping others get their retirement plan squared away.

He was kind enough to offer a couple pf autographed copies of his book and I’m giving them away on both my sites – one for a Couple Money and one for My Financial Reviews. It’s simple to enter; I just want you to share your biggest retirement question by November 30, 2013. I’ll pick a winner December 1, 2013.

There are several ways you can submit it:

  • Facebook: Go to Couple Money’s page and leave it as a comment.
  • Twitter: Tweet it out to me (please use  @Elle_CM so I can see it).
  • Email: Send it to elle AT couplemoney.com

Once you do, just leave a comment below so I can record your entry in my handy dandy spreadsheet ;) As always, I want to say thank you for reading and sharing your thoughts on Couple Money.

How Much Do You Need to Retire?

How many of you are looking at optimize your retirement plans now? How are you handling your portfolio now? What are some of your biggest concerns?