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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?

Limited Investment Options in 401(k)s

increase retirement account

I’ve written before about taking a 401(k) match if your employer offers it and we’ve been blessed that my husband has such a plan and match at his job.  It’s basically free money so he puts in enough to get the match.

However when some invest in their company’s 401(k), they may find that their options in what to invest in are limited. What can you do then? Should you skip out on the 401(k) or should you take what is offered?

Contribute to Get The Match

First off, if you get a match for the 401(k), contributing enough to get the match is smart move. If the options are very limited than just get the match and direct the rest of money into an IRA where you can have more low cost selections.

Keep Your Mutual Expenses Low

When exmaining the investments available in the 401(k), besides looking at the performance, you should check the fees involved.  With actively managed mutual funds, the fees come out of your contribution, so you’re the one losing out.

How Fees Hurt Your Retirement

Why should you care what your mutual found fees are? There are a couple of reasons. According to MorningStar, the low cost funds have another advantage:

In every single time period and data point tested, low-cost funds beat high-cost funds.

Over time, these fees lower your return, sometimes dramatically. Take for an example of similar investments based on a $50,000  contribution and how fees can quickly eat up your money:

mutual fund costs

That’s almost $12,000 more in your pocket!

Review Your Asset Allocation

Of course, your 401(k) is just one piece of the puzzle. Whether you decide to retire early or later in life, you want to make sure that all of your accounts have their assets allocated according your retirement goals.

The main idea behind proper asset allocation is maximizing your portfolio’s return while minimizing your risk. While maximizing returns seems clear, risk is subjective and differs person to person.

You want to make sure that you’re not duplicating investments. Instead see if you can keep your overall portfolio diversified.

Thoughts on 401(k)s

I’d like to hear from you about your retirement accounts. How many of you have 401(ks) that offer a match? How many of you take advantage of it? What do you invest in for your 401(k)?

Photo Credit: Alan Cleaver

How Much Do We Need to Retire?

calculate retirement saving

When we did our taxes a couple years back, we were advised to contribute more to retirement. She explained to us that it could lower our taxable income and set aside our money for retirement. We’ve taken her advice and have been contributing towards our retirement. The problem was we didn’t have a hard core number to work towards. Instead, we set aside a percentage of our income towards retirement.

I started working on up on a number and I came up with a retirement number based on an estimated annual income of $45,000. It gave us an idea of what to shoot for, but it’s still just an estimate.

A few months ago J from Budgets are Sexy shared his retirement number that he received from ING Direct’s online tool. His turned out to be $2,652,343.

Seeing as it was a bit of fun and we could get an idea of what we needed, I did it. When I completed the short survey, My Number (which was for both my spouse and I) was $2,546,875.

Curious about getting a number and a plan together, I started looking at the different pieces of retirement planning. I hope it’ll help you figure how much you need to save to retire comfortably.

Identify Retirement Expenses

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. However if you’re looking for some specific numbers to base your information on, here’s some information from one study done:

The ongoing Georgia State University RETIRE (Retirement Income Replacement) project, conducted for the federal Department of Labor, looks at the income requirements of households before and after retirement at three-year intervals. In 2004, the project found:

  • A single-earner couple making $30,000 annually needs 84 percent of that income, or $25,200 a year, after retirement.
  • A $50,000 to $60,000 single-earner couple needs to replace 79 percent of their pre-retirement income, or $39,500 to $47,400 a year.
  • A two-income couple needs to replace 84 percent of $30,000 a year pre-retirement ($25,200), 77 percent of $50,000 ($38,500) and 78 percent of $90,000 ($70,200).
  • A $90,000 single-earner couple needs to replace 82 percent of pre-retirement income, or $73,800 a year.

Source: LendingTree

While these aren’t bulletproof numbers, they can at least help you determine how much you need for retirement. According to the GSU study,we’re looking at having expenses that around 77% of our current income.

Identify Retirement Income

Since you now have a general idea of how much you’ll need on an annual basis, you should do an  assessment of your expected income streams during your retirement period. I’m going to list the main ones people encounter, but if you have an additional income, please include it.

We do not have any expected windfalls or inheritance, so we aren’t including those in our calculations.

Social Security Payments

I’m personally a little leery of using Social Security as part of my calculations. There has to be a major overhaul of the program if it’s going to last when I retire. My assumption is that you’ll at least have to wait later until you can claim benefits. Since we’re planning on taking retirement before then, we’ll not be relying on these payments when working on our retirement contribution plan.

However if you’re closer to retirement, you may want to go ahead and include your expected Social Security payments into your calculations.

401(k)

A 401(k) is part of the US Internal Revenue Code that deals with retirement plans, and which defers the taxation of your retirement savings. One big benefit of some 401(k) plans is the employer match. Some employers will match a percentage of your retirement contributions – effectively adding free money into your account. That can help you as the money grows along with your contributions, speeding up the progress that you make.

Not every company offer this, but it is definitely to your benefit to check with Human Resources and see if your company does. You’ll also want to check to see if there are stipulation on your 401(k) matches, like a vestment period.

My husband’s job offers a 401(k) plan and a matching plan, which he takes advantage of. He had set up a portion of his pay to be taken out automatically be invested in his plan. He invests in some of the index funds offered with the plan. He started as soon as he could (when he became a permanent employee) and

Individual Retirement Accounts (IRA)

If you’ve never opened an IRA before, you should review some of the pros and cons of a traditional or a Roth account. The main difference between the two IRAs has to do with when you’ll be taxed:

  • Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
  • Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

Source: IRS Publication 590

I have a Roth IRA that I contribute towards. I invest mainly in various index funds.

Maximize Your Retirement Contributions

If you have the money, then look at maximizing your contributions. Here are some of the more common annual contribution limits for 2011:

  • 401K – $16,500
  • Roth IRA – $5,000
  • Traditional IRA – $5,000

Please keep in mind that these annual limits are per person. For example, a couple can contribute $10,000 total annually to their Roth IRAs. Of course, if you have high interest debts, then you may want to hold off on making contribution on your IRA and only contribute to your 401(k) to get the employer match. With credit card rates around 20% and higher, it would be smarter to pay this debt first off first.

While you may be limited on what you can contribute now, you should plan ahead for when you can increase your deposits.

Developing a Retirement Plan

Now that there’s a general number, the next step is coming up with a plan to actually get started with investing for your own retirement.

Participate in 401(ks)

Like mentioned before, my husband has been regularly contributing to his account at work.  Some personal finance experts suggest put 5- 10% of your paycheck. You can always increase the amount as you receive raises and promotions.

If your company an Employee Stock Purchase Program, you may want to consider participating.  ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price. Just remember to be diversified with your retirement fund and not too heavily invested in your company.

Contribute to an IRA

If your job doesn’t offer a 401, then you may want to look into opening an IRA. You have many options on starting one. Banks, brokerages, and credit unions offer IRAs. 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. Compare your options to see if you’re getting a good deal.

If you want a system that is easy to manage and has a track record of long term growth, you want to look for low cost index funds to put your money in. These are mutual funds that track a market index such as the S&P 500. They have low expense fees because they not usually actively managed.

Retirement Spreadsheets

If you really want to run the numbers for yourself,please check out some of the spreadsheet below.

Thoughts on Your Retirement Number

How many of you have come up with a ballpark figure on how much you need to retire? What tools have you used to estimate your retirement goals? Are you counting on Social Security for your retirement plans?

If you’re looking at getting started, check out my Betterment review and my guide to investing with a $1,000 or less. I hope the posts can help you create a plan that works for your own family.

Photo Credit: cw3283


Click to learn how to get a handle on your finances.

How to Automate Your Savings and Retirement Easily

investing in the stock market

I’ve talked a bit before about starting your retirement planning while you’re young. While that’s an important part of your finances, that’s not the only thing you should work on. Automating your savings, bills, and retirement can ease your stress and help you build your net worth more quickly.

Automated System for Our Own Finances

Here are some things we’ve done with our finances to help us reach our money goals:

We have a portion of our paycheck transferred to a high interest savings account.

We have some money transferred over from checking to savings regularly, like a bill. Start small and automate your money to put into savings. You’ll become use to the slightly small paycheck as you start savings. The first thing you need to save for is an emergency fund. This step can help you build financial cushion, especially in turbulent economic times like these. Find an FDIC bank or CUNA credit union that offer high interest rates for savings and watch it grow faster. For us Capital 360 provides us an easy to grow our savings. You can open a checking account with Capital 360, simply click here to get started.

We’ve set up free online bill pay with our bank.

This has been a great system for us. Most banks and credit unions offer this money and time saving feature. Spend an hour setting this up with your bills, account numbers, due dates, and amounts, and you’ll only need a few minutes a month to keep it up. Online bill pay can help you manage your bills without having to worry about paper bills and checks.

With auto debit, the company automatically takes the amount out of your checking account at the due date. If you set up either correctly, you’ll avoid late fees. I like have more control over my account and online bill pay can help me if something happens with our direct deposits. I had a friend who got burned due to a Human Resource error with her deposits. Even though she called her bills and explained the situation some still withdrew the regular amount (they already had her banking information)  and it caused a cascade of fees.

Automate contributions to your company’s 401k program.

My husband’s job offers a 401(k) with a match and we try to take advantage of it. Try to at least set aside enough money to receive the company match as it’s basically free money in your pocket. Look for low cost index funds to put your money in. Pay off your high interest debt first, before investing for retirement.

Some personal finance experts suggest put 5- 10% of your paycheck into a retirement account. You can always increase the amount as you receive raises and promotions. If your company an Employee Stock Purchase Program, you may want to consider participating.  ESSP allows you to have some of your paycheck deducted to buy your company’s shares at a discount from its market price. Just remember to be diversified with your retirement fund and not too heavily invested in your company.

Have a small portion of your paycheck transferred into an IRA account.

I have an IRA set up for me to transfer money. Once your build up your emergency fund (like 3-6 months of expenses) and eliminated your high interest credit card debt, funnel some of your income into an IRA. Banks, brokerages, and credit unions offer IRAs. 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. Compare your options to see if you’re getting a good deal. We have an account with Betterment that has been really easy to maintain. If you’re interested, you can sign up for a new account at Betterment here. If you want a system that is easy to manage and has a track record of long term growth, you want to look for low cost index funds to put your money in. These are mutual funds that track a market index such as the S&P 500. They have low expense fees because they not usually actively managed.

Thoughts on Automating Your Finances

How about you? How much of your finances is automated? How has automating your finances improved (or worsen) since switching?

Retirement Planning in Your 20s

retirement money

Retirement planning is usually not on the minds of most twenty-somethings. There is just so much on your plate: family, bills to pay, including student and car loans. You’re trying to build an emergency fund and possibly saving up for a house. Retirement is so far away in your timeline, it’s tempting to put it off or keep your contributions to a minimum, but that’s not the best move for your finances both now and years down the road.

When we started filing our taxes as a couple a few years back, we were advised to contribute more to retirement. She explained to us that it could lower our taxable income and set aside our money for retirement.

Pay Debt or Invest for Retirement?

You can’t grow your money until you’ve gotten out of the quick sand. The average credit card debt forAmerican household is around $10,000. With credit card rates around 20% and higher, it would be smarter to pay this debt first off first.

The only exception I would consider to that general rule is to put in enough to money in to get your company’s match. It’s doubling your contributions.

Where Should My Money Go?

Assuming that you’ve gotten out of high interest debt, you may now want to go ahead and optimize your money. We searched to find some answers. Some financial gurus encourage the following process to maximize your retirement contributions.

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

401(k) Contributions – How Much?

Start small if you’re cautious and decide what will work well with your budget. Some financial experts suggest put 5- 10% of your paycheck into a retirement account. You can always increase the amount as you make more money. When I made it a year into my internship, I called the human Resource Department to get started with the company’s 401(k) plan.  I was fortunate that I qualified to participate and I wanted to take advantage of it.

If you don’t qualify for a 401(k) at work, though, you can still open an IRA.  Opening an IRA isn’t hard at all and it can be a huge benefit for you. You have to decide if you want to open a Roth IRA or a traditional IRA.

Roth IRA vs Traditional IRA- Which is Better?

The main difference between the two IRAs has to do with when you’ll be taxed:

  • Roth IRA – contributions are made with after-tax assets, all transactions within the IRA have no tax impact, and withdrawals are usually tax-free.
  • Traditional IRA – contributions are often tax-deductible (often simplified as “money is deposited before tax” or “contributions are made with pre-tax assets”), all transactions and earnings within the IRA have no tax impact, and withdrawals at retirement are taxed as income.

Right now you can contribute $5,500/year to a Roth IRA if your modified AGI is:

  • $178,000 for married filing jointly or qualifying widow(er),
  • $112,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and
  • $10,000 for married filing separately and you lived with your spouse at any time during the year.

Sources: IRS Publication 590 and Wikipedia

Where to Open Your IRA

If you don’t have an IRA open, then here are some places to consider and look into:

Deadlines for Contributing to Your IRA

Remember, you can make contributions all the way up to April 15  or whenever you file your taxes.

Photo Credit: mynameisharsha