Retirement Solutions...
  Get Your Retirement on Target





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Be on Target for a Secure Retirement

Whether your retirement is 40 years or four years away, it's a good time to do a "wealth checkup" to see if your 401(k) savings are on track.

Most pension experts agree that people who haven't spent their entire career at a company that offers a regular pension need to aim for a nest egg that's equal to ten times their salary as they near retirement. In other words, if you're earning $65,000 at age 65, you most likely will need to have saved $650,000. This total would include your current 401(k) account balance, along with any account balances at previous employers and balances in rollover IRAs, along with other savings.

Where does this rule of thumb for account adequacy come from? Pension actuaries, who traditionally have advised employers on how much they have to set aside to provide an adequate pension for long-service employees.

Will everybody need 10 times their salary in their retirement savings? Not necessarily. If your salary is modest Social Security will likely replace most of your earnings. For example, If you're making around $20,000 at retirement and you retire at age 66 you'll get about 57% of your paycheck at retirement from Social Security, or about $11,500 a year. However, the bigger your paycheck, the smaller the portion that Social Security will replace. Someone earning around $107,000 would only receive around $29,000 or about 27% of it. More examples are below.

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Will your monthly income from Social Security and your retirement savings be enough to meet expenses? Let's say you have a nest egg worth $100,000 at age 65 and your salary at retirement is $65,000. Financial advisers say that you should withdraw about 4% a year, which means you can spend $4,000 a year, or about $333 a month along with about $2000 a month in Social Security payments or $2,333 a month in retirement savings. Will that be enough? It depends on your expenses. If you're paying off a mortgage of $226,000 with monthly payments of $1517 you'll only have $816 left over to meet other expenses such as utilities, groceries and other necessities.

When you think about it, very few of our regular expenses go down or away in retirement, except perhaps commuting costs--and, depending on what state you live in-- you may get a break on property taxes if you're a homeowner. On the other hand, some expenses may actually go up--for example, if you're keeping the health coverage you had at work you'll likely have to pay premiums that your employer used to cover. What's more, even when you go on Medicare you'll have to fork over about $100 a month for Part B coverage, (along with a deductible), which helps cover doctor's services and outpatient care, along with paying a monthly premium of about $40 for prescription drug coverage.

For the most part, the people who need the most generous retirement paychecks are those still paying off mortgages. Why? The higher our paychecks, the more expensive our homes tend to be. For example, someone earning $100,000 is likely paying about $2300 a month in mortgage payments, (assuming a $346,000 mortgage), which would eat up most of the $2,700 monthly income stream from Social Security and retirement savings (assuming $100,000 in retirement savings).

On the other hand, if your mortgage is paid off by the time you reach retirement age and you don't have significant credit card debt or aren't still paying loans for your kids' college costs, you may not need this much.

Bottom line: the majority of people whose incomes aren't mostly replaced by Social Security will have to work longer. That's because the stock market slump has eaten into 401(k) savings along with home values, which are also a big chunk of most Americans' retirement wealth. Need some guidance? What follows are smart strategies for those just entering the workforce and those who have been working for awhile.

Five Steps to A Successful Retirement

Step One: The best time to save is when retirement is the last thing on your mind--when you're in your 20s. The longer you wait to start saving, the more you need to save. You should contribute at least 10% of your pay to your 401(k) account if you start when you're in your 20s, at least 15% if you wait until your 30s and about 25% if you wait until you're 40s. The maximum you can save in your 401((k) account is $17,000 in 2012 or $22,500 if you're 50 or over and the maximum in a deductible IRA is $5,000 in 2012 or $6,000 if you're 50 or over. Most people or households earning more than $100,000 a year will need to save outside of their 401(k) and IRAs.

Step Two: Convert your traditional 401(k) account to a Roth 401(k), if your employer offers that option--and try to talk them into it if they don't! Unlike a regular 401(k) in which you postpone paying taxes until retirement, a Roth allows you to "get taxes over with" when you're collecting a paycheck. It also allows you to have a more realistic picture of whether you're on track for a secure retirement because all the money you've saved "belongs to you" rather than some of it being owed to Uncle Sam. Below is a graph that shows the difference in the "tax bill" paid with a conventional 401(k) and a Roth. While the taxes in a regular 401(k) aren't paid all at once in retirement, but gradually as withdrawals are made from an IRA, it's still a big expense as the graph below demonstrates.

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Step Three: Get financial planning software such as Quicken so that you can "see all of your eggs in one basket" along with monitoring how your nest egg is growing. Why do you need to do this? Because you'll not only need to keep track of your 401(k) and deductible IRA savings but you'll likely switch employers throughout your career so you'll need to stay on top of multiple investments. Americans rarely work for the same employer throughout their careers, on average they change jobs every four years--the typical Baby Boomer works at more than 10 different employers between the ages of 23 and 34 alone.

Step Four for those starting their careers: Vow to roll over ALL of your "vested" 401(k) account balances to an IRA when changing jobs--preferably to one that you'll continue to use throughout your career. Why pick a one-stop rollover? It will lower your fees and make it easier to keep track of your finances. What's the danger of "cashing out," or spending, some or all of your savings when you leave a job? Because you'll cough up penalties and taxes to Uncle Sam, not to mention depriving your nest egg of investment returns. Unfortunately, more than half of job changers typically don't roll all their 401(k) money into a new plan; more than 75% of those under age 31 didn't roll the entire amount over. The chart below shows the consequences of "cashing out" for someone in the 25% federal tax bracket and 5% state tax bracket, as opposed to leaving the money in the plan--or rolling it over to an IRA-- over the course of a couple of decades.

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Step Four for those in the middle of your career: Do you have multiple 401(k) ac counts at previous employers? Roll them over, preferably to an IRA rather than into an account at your current employer's plan. A rollover IRA is a smart strategy for three reasons. First, it will make it easier for you to keep track of your money because it's all in one place. Secondly, you'll likely have more investment choices at a mutual fund company than you do at your workplace. Thirdly, you'll pay lower fees because you're consolidating mul- tiple accounts into one.
For more information, see this link at the Department of Labor: http://www.dol.gov/ebsa/publications/wyskapr.html#chapter5.

Step Five: Keep track of your pension benefits, if you have them. Have you worked at a company offering a pension long enough to qualify for a benefit--most companies require you to work at least five years before you "own" a benefit? If you have a summary plan description (SPD) of your benefits, review it to see how many years you are required to work and at what age you're eligible to collect benefits. Contact your former employer's HR department to find out how you can collect this benefit.
Here is more information on how to do it from the Department of Labor: http://www.dol.gov/ebsa/publications/Filingretirementclaim.html.

 

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