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- Herausgeber: John Wiley & Sons
- Kategorie: Ratgeber
- Sprache: Englisch
Proactively plan for a successful financial future after leaving the workforce
Are you ready for retirement? Retirement Planning For Dummies is your comprehensive guide to shoring up your finances as you prepare to leave the workforce. Learn to manage and optimize your 401(k), balance retirement savings with other financial needs, and set up pensions and insurance. Plus, get the latest updates on all things retirement, including the SECURE Act and new withdrawal rules. Written by an expert investment writer, this beginner-friendly guide is full of financial wisdom that will smooth the road as you embark on your retirement planning journey.
- Learn the best saving practices to make your money grow
- Maximize your retirement knowledge to set you up for success
- Balance retirement savings with other needs
- Get up to speed on withdrawal limits, HSA rules, and self-employment considerations
This book is for anyone looking for the best ways to save and plan for retirement, whether you just joined the workforce or are contemplating retirement in the near future.
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Veröffentlichungsjahr: 2024
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Retirement Planning For Dummies®
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Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Getting Started with Retirement Planning
Chapter 1: Retirement Planning Is Up to You
Blazing Your Own Retirement Plan
Measuring Your Lifespan
Retirement Planning Beginnings: The Pension
Changing Times: The 401(k)
Social Security: The De Facto Safety Net
Chapter 2: Determining How Much You Spend
Finding Out Where Your Money Goes
Measuring Your Spending
Putting Your Spending in Context
Improving Your Numbers
Chapter 3: Calculating How Much You Need to Retire
Getting to Know the 4 Percent Rule
Using Online Retirement Calculators
Understanding Why Starting Early Is Important
Chapter 4: Choosing the Right Account
Retirement Planning in a Nutshell
Things Change with SECURE Act
A Great Place to Start: 401(k)s
IRAs: A Cornerstone of Retirement Planning
Self-Employed Plans
What’s the Catch?
Chapter 5: Gauging Your Appetite for Risk
Getting a Handle on Your Risk Tolerance
The ABCs of Asset Classes
Chapter 6: Opening Your Accounts
Getting Your 401(k) Up and Running
Plugging into Your IRA
Connecting with a Financial Planner
Part 2: Using Online Resources
Chapter 7: Managing and Optimizing Your 401(k)
Getting Online
Checking Your Portfolio Allocation
Powering Your 401(k) with Contributions
Discovering Other Nifty Aspects of Your 401(k) Plan Site
Chapter 8: Taking Your IRA to the Next Level
Getting Online with Your IRA Provider
Checking Your Portfolio Asset Allocation
Understanding Your IRA Contributions
Taking Money out of Your IRA
Chapter 9: Optimizing Your Retirement with Third-Party Offerings
Understanding Fees
Examining Your Portfolio Using Morningstar
Grading Your Retirement Plans in Other Ways
Chapter 10: Digging into Social Security
Discovering All the Benefits of Social Security
Managing Social Security Information Online
Planning for Social Security in Retirement
Part 3: Maximizing Your Retirement Knowledge
Chapter 11: Balancing Other Needs with Retirement Savings
Cleaning Up Your Personal Balance Sheet
Saving for a Home
Saving For College — If You Can
Chapter 12: Fine-Tuning Your Asset Allocation
Exploring Stock Strategies
Diving for Income
It’s Easy Being Green: The Rise of ESG
Chapter 13: Keeping Your Retirement on Track
Tracking Your Portfolio’s Health
Tracking and Updating Your Goals
Chapter 14: Gearing Up for Retirement
Creating a Retirement Budget
Thinking about Annuities
Unlocking a Goldmine: Reverse Mortgage
Chapter 15: Understanding Pensions
Checking a Private Pension’s Funding
Understanding the Problems with Public Pensions
Understanding Pensions Inside-Out
Managing Your Pension
Chapter 16: Getting Insurance
Building a Health Insurance Plan
Defending Your Money with Insurance
Part 4: The Part of Tens
Chapter 17: Top Ten Retirement Mistakes
Waiting to Save
Ignoring Fees
Not Securing Your Information
Prioritizing College Savings Over Retirement
Not Diversifying Your Portfolio
Waiting for the “Right Time” to Invest
Having Inadequate Insurance
Taking Money from Your Accounts Early
Not Checking Your Social Security Benefit
Not Thinking about Income
Chapter 18: Top Ten Retirement Questions
How Much Money Do I Need?
Is Medicare Enough?
What Will I Do with My Free Time?
Will I Run Out of Money?
Should I Have a Roth or Traditional IRA?
How Good Is My 401(k)?
What’s an RMD?
Can Retirement Rules Change?
What Can I Do If I’m Near Retirement Age and Don’t Have a Plan?
Do I Need a Financial Advisor?
Index
About the Author
Connect with Dummies
End User License Agreement
List of Tables
Chapter 1
TABLE 1-1 Life Expectancy of Americans At Birth
TABLE 1-2 Life Expectancy Based On Current Age
TABLE 1-3 Maxing Out a 401(k)
Chapter 2
TABLE 2-1 2024 Tax Brackets
TABLE 2-2 Typical American Budget
Chapter 3
TABLE 3-1 The 4 Percent Rule with $1 Million Saved
TABLE 3-2 The 4 Percent Rule With Less Than $1 Million Saved
TABLE 3-3 Adjusting the 4 Percent Rule, Based on Retirement Age
TABLE 3-4 No Pain, No Gain
TABLE 3-5 Start Early When Saving for Retirement
TABLE 3-6 Getting to $1 Million by Age 65
Chapter 4
TABLE 4-1 Where Americans Put Their Retirement Money
TABLE 4-2 Deductible IRA Contribution Amounts (2024)
TABLE 4-3 Roth IRA Eligibility (2024)
TABLE 4-4 Some Exceptions to the 10% Penalty
Chapter 5
TABLE 5-1 Key Market Indexes
TABLE 5-2 Reasonable Investment Expectations
TABLE 5-3 Popular Ways to Categorize Stocks
TABLE 5-4 Investments that Zig When the Market Zags
TABLE 5-5 Popular Bond Categories
TABLE 5-6 Saving $1 Million
Chapter 6
TABLE 6-1 Target-Date Funds Are Catching on Fast
TABLE 6-2 Five Brokers to Consider for Your IRA
TABLE 6-3 Comparing Robo-Advisors
Chapter 7
TABLE 7-1 Understanding 401(k) Contribution Rates
Chapter 8
TABLE 8-1 Investments That Zig When the Market Zags
Chapter 9
TABLE 9-1 Low Costs Equal Higher Investment Success
TABLE 9-2 Paying More Fees Costs You Dearly
Chapter 10
TABLE 10-1 Age and Work History Define SSDI Eligibility
TABLE 10-2 Benefits with Full Retirement Age of 67
Chapter 11
TABLE 11-1 Total Nonbusiness Bankruptcies
TABLE 11-2 How Americans Would Cover a Surprise $1,000 Cost
TABLE 11-3 U.S. Inflation Rate
TABLE 11-4 Interest Rates Greatly Influence Your Emergency Fund
TABLE 11-5 Forms of Debt and How Common They Are
TABLE 11-6 Debt Inventory
TABLE 11-7 College Cost Keep Rising
Chapter 12
TABLE 12-1 Defining Company Size
TABLE 12-2 REITs: More Risk but More Gain
TABLE 12-3 Know Your Bonds
TABLE 12-4 Standard & Poor’s Credit Ratings
TABLE 12-5 ESG Exchange-Traded Funds Are Plentiful
Chapter 13
TABLE 13-1 A Sample Glide Path for Someone Retiring in 2065
TABLE 13-2 A Prudent Portfolio
TABLE 13-3 Are You Above Average?
Chapter 14
TABLE 14-1 Average Spending Falls As We Age
TABLE 14-2 Suggested Stock Allocation at Retirement
TABLE 14-3 Retirement Benchmarks
TABLE 14-4 Sources of Retirement Income
TABLE 14-5 Effect of Inflation Riders on an Immediate Annuity
TABLE 14-6 Recent Inflation Has Been Volatile
Chapter 16
TABLE 16-1 HSA Annual Contribution Limits
TABLE 16-2 Cost of Long-Term Care
List of Illustrations
Chapter 1
FIGURE 1-1: Social Security’s Life Expectancy Calculator helps you see how your...
FIGURE 1-2: Bankrate’s Life Expectancy Calculator factors in more details to he...
FIGURE 1-3: Living to 100 Life Expectancy Calculator quizzes you with in-depth ...
Chapter 2
FIGURE 2-1: Like most banks and credit card companies, Wells Fargo tracks your ...
FIGURE 2-2:
CreditKarma.com
provides an easy, free way to see where your money ...
FIGURE 2-3: You have to pay for Quicken, but it gives you lots of control.
FIGURE 2-4: Microsoft Excel puts you in control of your budget.
FIGURE 2-5: Empower helps you see where your money is going.
FIGURE 2-6: Calculate how much that daily latte really costs.
FIGURE 2-7: Upwork will help you find a side hustle.
Chapter 3
FIGURE 3-1: Use Quicken to quickly size up your asset allocation.
FIGURE 3-2: Vanguard’s Retirement Nest Egg Calculator keeps details simple.
FIGURE 3-3: NewRetirement’s Retirement Calculator leaves few financial stones u...
FIGURE 3-4: FireCalc shows you the power of a Monte Carlo retirement analysis.
Chapter 5
FIGURE 5-1: Measure your risk tolerance with Charles Schwab’s questionnaire.
Chapter 6
FIGURE 6-1: This letter was sent to a newly hired employee, notifying them that...
FIGURE 6-2: Fidelity is challenging Vanguard for IRA dollars where it counts — ...
FIGURE 6-3: Charles Schwab offers just about any financial service, including i...
FIGURE 6-4: Betterment offers robo-advisor services and lets you set the level ...
FIGURE 6-5: Vanguard’s investment cost tool shows you if you may want a financi...
FIGURE 6-6: Fidelity’s BrokerCheck record shows you what the regulator knows ab...
Chapter 7
FIGURE 7-1: Your summary plan description tells you it’s time to set up online ...
FIGURE 7-2: Find the Register Now or a similar option.
FIGURE 7-3: Fidelity’s questionnaire recommends a portfolio based on what it kn...
FIGURE 7-4: The Investments section shows you how each of the individual invest...
FIGURE 7-5: Vanguard’s 401(k) site breaks down all your holdings and shows you ...
FIGURE 7-6: Voya’s fund summary page lets you see the asset allocation of your ...
FIGURE 7-7: A 401(k) reallocate system enables you to make shifts from differen...
FIGURE 7-8: An Annual Increase Program helps you automatically contribute more.
FIGURE 7-9: If loans are available from your 401(k) plan, you can find the limi...
Chapter 8
FIGURE 8-1: Vanguard’s online IRA application steps you through opening an acco...
FIGURE 8-2: Vanguard’s asset mix function shows how much of your portfolio shou...
FIGURE 8-3: Vanguard’s Portfolio Watch provides an in-depth analysis of your po...
FIGURE 8-4: Wealthfront’s site and digital app are aimed at people who want mor...
FIGURE 8-5: Vanguard makes it easy to make a one-time contribution to your IRA.
FIGURE 8-6: Vanguard calculates your RMD.
Chapter 9
FIGURE 9-1: Morningstar’s Quote tab is stuffed with information pertaining to y...
FIGURE 9-2: No pain, no gain? Morningstar’s Risk tab helps you see if your retu...
FIGURE 9-3: Morningstar’s Price tab reveals and explains the fees you’re paying...
FIGURE 9-4: Morningstar’s X-Ray tool studies your entire portfolio in depth.
FIGURE 9-5: The Quicken version of the Morningstar X-Ray is powerful enough for...
FIGURE 9-6: Empower’s Investment Checkup provides a good reality check on how t...
Chapter 10
FIGURE 10-1: A typical paycheck deducts Social Security and Medicare tax.
FIGURE 10-2: Schedule SE is where self-employed people calculate their Social S...
FIGURE 10-3: A rundown of the information you need to determine your Social Sec...
FIGURE 10-4: You can drill down into your Social Security and see how much you’...
FIGURE 10-5: Social Security makes it easy to apply for retirement benefits, as...
Chapter 11
FIGURE 11-1: The PNC Emergency Fund Calculator helps show you how big your emer...
FIGURE 11-2: The Ally Bank mobile app makes it easy to deposit or transfer mone...
FIGURE 11-3:
Bankrate.com
helps you find the best place for your emergency mone...
FIGURE 11-4:
Bankrate.com
helps you see how much you’re paying for your credit ...
FIGURE 11-5: The Zillow Affordability Calculator does the math to help you see ...
FIGURE 11-6: Excel comes with a variety of templates to help you see how a mort...
FIGURE 11-7:
Savingforcollege.com
is a valuable tool to use if the state’s 529 ...
FIGURE 11-8: The Vanguard College savings planner helps you set a college savin...
Chapter 12
FIGURE 12-1: iShares categorizes its stock-exchange-traded funds by size.
FIGURE 12-2:
IFA.com
’s Risk Return scatter plot shows you which asset classes d...
FIGURE 12-3: Morningstar’s Portfolio page highlights the key aspects of bond fu...
FIGURE 12-4: Morningstar’s Portfolio feature offers an in-depth sustainability ...
Chapter 13
FIGURE 13-1: The
IFA.com
Style Drifters chart illustrates how different assets ...
FIGURE 13-2: Vanguard provides a central information hub to help you on your wa...
FIGURE 13-3: The Schwab Portfolio Checkup gives you a detailed look at where yo...
FIGURE 13-4: Quicken examines your entire financial picture to see if your asse...
FIGURE 13-5: Quicken picks apart your plan to show your asset allocation.
FIGURE 13-6: Excel can help you keep your asset allocation on track — to the do...
FIGURE 13-7: The AARP retirement plan calculator helps you play what-if with yo...
Chapter 14
FIGURE 14-1: Calculating an annuity payment.
FIGURE 14-2: Seeing how various options affect annuity payments.
FIGURE 14-3: The LendingTree reverse mortgage calculator helps you find the mos...
Chapter 15
FIGURE 15-1: General Electric discloses key facts about its pension plan in its...
FIGURE 15-2: Your pension site calculates your expected monthly payment given v...
FIGURE 15-3: Our retiree can get $338.46 a month in a single-life payout or $70...
FIGURE 15-4: An annuity calculator helps you measure your lump sum payouts.
FIGURE 15-5: The Charles Schwab Income Annuity Estimator helps you determine th...
Chapter 16
FIGURE 16-1: The Fidelity online tool helps you get an idea of your future medi...
FIGURE 16-2: Most HSA providers give you several options for investing.
FIGURE 16-3: Medicare’s site helps you select a Medigap plan.
FIGURE 16-4:
HealthCare.gov
steps you through the process of finding and signin...
FIGURE 16-5: Find a plan that balances the cost with your healthcare needs.
FIGURE 16-6: Check your homeowner's and auto policy limits to see if you can bo...
FIGURE 16-7: The Kiplinger umbrella insurance tool helps you protect yourself w...
FIGURE 16-8: Life Happens provides many useful tools to help you see how much l...
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Index
About the Author
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Retirement Planning For Dummies®, 2nd Edition
Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com
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Published simultaneously in Canada.
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Library of Congress Control Number: 2024942281
ISBN: 978-1-394-27150-4 (pbk); ISBN: 978-1-394-27152-8 (ebk); ISBN: 978-1-394-27151-1 (ebk)
Introduction
Retirement. The word conjures up different things for different people.
You may picture a life of leisure, walking hand-in-hand with your significant other on a beach. Someone else, maybe even your significant other, may dream of opening a flower shop. Some people can’t wait to escape their day jobs, while others either love their careers and don’t want to stop or want to start a new career — even if they’re 70.
You may have heard that you’ll have a comfortable retirement if you save a certain amount of money by a certain age. “Just save a million bucks and you’re good,” such advice goes. Others say you need to max out your 401(k) or give up your daily cup of coffee. Perhaps you’re starting to fear retirement planning because you’re not doing something that experts say you must do to retire.
This book is different. My guiding principle is that each person's idea of a happy retirement is different. Your goal for retirement is as unique as you. That’s why a rule of thumb or guidance for someone else’s retirement is not an exact roadmap for your vision of the future.
This realization is both liberating and challenging. It’s liberating to know that you can work with your current situation and goals and still find solutions for retirement planning.
So what’s the challenge? The tougher part is figuring out what you want your retirement to look like, especially if your retirement is decades away. So if guessing what you want your future to look like is so challenging, why bother? Simply, the sooner you start, the easier the task will be. Time is your greatest ally when preparing for retirement, so don’t waste it!
Luckily, many tools are available to help. Think of this book as your guide to mapping out your retirement plan. You discover not only what your retirement goals should include but how to make those goals a reality.
About This Book
This second edition of Retirement Planning For Dummies (new and improved) will help you picture what you want your retirement to be, determine what you need to do to make it happen, and discover ways to find out if you’re on track. I share the tricks, tips, and secrets I’ve learned from a career writing about retirement for readers just like you. Unlike other retirement books that try to scare you into saving more, this book looks at retirement planning as an exciting way to think about your future.
Foolish Assumptions
No matter your skill or experience level with investing, you can get something out of Retirement Planning For Dummies, 2nd Edition.
I assume that some readers haven’t saved a dime and don’t know the difference between a 401(k) and a 747. Or maybe you finally decided that it’s time to start thinking about the future. Part 1 is custom-made for both types of readers, stepping through all the key points in plain English. Although I cover all the technical mumbo-jumbo, such as SEP-IRAs and 401(k)s, I do so only to show you how these are just tools to help you get the retirement you want.
I assume also that some armchair quarterbacks may pick up this book, looking to discover a few things. Planning for retirement is like a second job for some people. For these folks, this book describes more advanced topics and provides select online resources that can add new tools to a retirement toolbox.
Icons Used in This Book
The Remember icon highlights information that you should never forget, even when you’re getting caught up in the excitement of retirement planning.
Read the Tip sections to quickly pick up insider secrets that can boost your success when planning for retirement.
I use this icon to flag complicated topics, non-essential topics, or both. Feel free to skip these sections. If you do decide to tackle the information, it may be loaded with retirement lingo, so don’t be surprised if you need to read the text a second or third time. Hey, you didn’t want this book to be too easy, did you?
A Warning icon signals information that helps you avoid the landmines scattered throughout Wall Street that can decimate your good intentions of building a successful retirement.
Beyond the Book
In addition to the content in this book, I provide an online cheat sheet. The cheat sheet shows you how to get started with retirement planning in just 15 minutes, offers tips for retiring early, and shows you how long a million dollars would last. To see the cheat sheet, simply go to www.dummies.com and type Retirement Planning For Dummies in the search box.
Where to Go from Here
If you’re just starting to think about retirement or are about to sign up for your first 401(k), consider starting at the beginning. That way, you’ll be ready for some of the more advanced topics I introduce later in the book.
If you’ve been planning for retirement for some time and have a strategy you think is working for you, you may want to skip to Part 2.
And if you want to know more about a specific topic, simply look it up in the index or check the table of contents and then flip to the appropriate page.
Part 1
Getting Started with Retirement Planning
IN THIS PART …
Put away your fear of retirement planning and look at it as a positive way to build your future.
Gain a better understanding of your run rate, or how much you spend on a regular basis.
Determine how much you’ll need for retirement.
Discover the unique characteristics and benefits of various retirement accounts.
Measure how much risk you can tolerate in your retirement plan.
Chapter 1
Retirement Planning Is Up to You
IN THIS CHAPTER
Understanding the importance of retirement planning
Seeing how retirement planning has evolved
Discovering the new role for employers in retirement planning
Finding out how defined contribution plans have taken over pensions
Understanding why Social Security isn’t enough for a comfortable retirement
If you’re like most people, you want to retire someday. You may love your job and plan to work well into your 70s. Or maybe you’re part of the financial independence retire early (FIRE) crowd and want to escape your corporate ball-and-chain at 40 years old. The beauty of retirement planning is that the timing of your retirement can be up to you.
The goal of this book is to help you get excited about retirement planning. All too often, people are fearful of saving and investing for retirement. You may fear that you aren’t saving enough or that you’ve started too late. Fear, I’ve found, isn’t a great motivator. Instead, it causes retirement-planning paralysis.
In addition, some people get so discouraged about being off track with their retirement planning that they just give up. They figure they’ll never catch up to where they think they need to be. Cautionary tales of people who have not saved enough only make people more depressed. You can find lots of those stories. Maybe people you know shared their stories with you.
Put the fear and discouragement aside for a minute. This retirement-planning book is different. I want you to embrace, not dread, retirement planning. What better way to plan for the future than picturing what you want it to look like and then making it happen? Expectations must match reality, but you may be amazed at what you can do when you set your mind to a goal.
Retirement planning is an important way to plot your financial course. And the course you set by reading this book can help make sure that your life 20, 30, 40, or 50 years from now is what you think it should be.
In this chapter, you find out why retirement planning is largely an opportunity for you to plan your own future, rather than have it dictated to you by your employer or government. You also see why getting your plan started as soon as possible pays off in a big way.
Blazing Your Own Retirement Plan
Retirement planning is simply about making sure you have resources available after you’re no longer generating them from your labor. However, the financial industry hijacked retirement planning, and now it’s all about deferred tax accounts, 401(k)s, and mutual funds. It wasn’t always that way.
More than a hundred years ago, more Americans relied on direct labor for their basic needs. In the late 1800s, for instance, about half of Americans were involved in farming. Back then, retirement planning was “an heir and a spare.” You wanted to make sure that you had enough kids to keep the farm running after you no longer wanted, or were able, to push a plow.
But now, less than 5 percent of the population touches food before it arrives at the grocery store. And people are more mobile, so your adult children are just as likely to live on the other side of the state (or world) as in your basement. In addition, birthrates are falling as more people decide against having children.
These shifts have turned money into the currency of retirement planning. Rather than having a house full of children who will take care of you in your grand old age, retirement planning is about having enough money when you can no longer work. Famous investor Warren Buffett addressed the importance of putting your money to work when he said, “If you don’t find a way to make money while you sleep, you will work until you die.”
Measuring Your Lifespan
Adding to the planning complexity is the fact that Americans are living much longer than they used to, as shown in Table 1-1. That news is great for humans, but it also means retirement planning for most people must stretch an additional 10 years or longer.
TABLE 1-1 Life Expectancy of Americans At Birth
Year You Were Born
Life Expectancy (Both Sexes Combined)
1955–1960
69.70
1960–1965
70.2
1965–1970
70.51
1970–1975
71.56
1975–1980
73.34
1980–1985
74.50
1985–1990
75.07
1990–1995
75.85
1995–2000
76.6
2000–2005
77.42
2005–2010
78.44
2010–2015
79.22
2015–2020
79.15
2020–2025
79.50
United Nations, Department of Economic and Social Affairs, Population Division (2019). World Population Prospects: The 2019 Revision; custom data acquired via website (most recently available at press time).
If you want to slice-and-dice life expectancy data to glean more precise insights about typical lifespans, you’re in luck. The United Nations’ World Population Prospect data query tool is a treasure trove of life expectancy data. You can see forecasts going out for decades, how females fare compared to men, and the changes to your life expectancy as you get older. Dig into this fascinating data by using the tool at https://population.un.org/wpp/DataQuery/.
But wait? Table 1-1 shows you how long you could expect to live at birth. If you were born in 1955, you clearly aren’t likely to drop dead in a few months. Table 1-2 shows how much longer odds say you’re likely to go if you’re going strong.
TABLE 1-2 Life Expectancy Based On Current Age
Age
Life Expectancy Remaining (Both Sexes Combined)
1
75.6
10
66.7
20
56.9
30
47.6
40
38.6
50
30.0
60
22.0
70
14.8
80
8.6
90
4.1
100
2.0
Source: The National Center for Health Statistics (NCHS) https://www.cdc.gov/nchs/data/vsrr/vsrr023.pdf
Time to take a break from the history of retirement planning to answer the question you’re probably asking now that you’ve read this far: How long will you live? I am not getting fatalistic. Knowing how long you can expect to live is a big part of retirement planning. After all, a person who expects to live to 90 will save and work differently than someone likely to die younger.
I cover this topic in more detail later, but now’s as good a time as any to think about your lifespan a bit. I keep the discussion optimistic by focusing on how long you’ll live (versus when you’ll die). In this section I provide my favorite tools to help you make this calculation.
Social Security Administration’s Life Expectancy Calculator
The U.S. government has a good idea about how long you’ll live. After all, as the largest payer of income to older people, it’s in the government’s best interest to know this information.
The Social Security Administration’s Life Expectancy Calculator at www.ssa.gov/OACT/population/longevity.html looks at your gender and date of birth to estimate how long you’ll live.
For example, if you’re a 40-year-old male in 2024, you would see a table such as the one in Figure 1-1 after entering your gender and date of birth. You would be expected to live until 81.6, which means at 40 you’d be just about ready for a mid-life crisis. If you were healthy enough to make it to 67, the Social Security Administration would figure that you would make it to 86.
FIGURE 1-1: Social Security’s Life Expectancy Calculator helps you see how your lifespan compares with others.
Bankrate’s Life Expectancy Calculator
You probably know that not all 40-year-olds will live exactly 81.6 years. Some lifestyle choices, such as smoking, have a bearing on how long you live. (Let’s forget about George Burns, the chain-smoking comedian who lived until 100.)
Bankrate tries to capture that variability in its Life Expectancy Calculator at www.bankrate.com/calculators/retirement/life-age-expectancy-calculator.aspx. You enter not just your age and gender but also personal details: height, weight, whether or not you smoke and drink alcohol, and a little family history.
Go back to our 40-year-old male. He’s 6-feet tall, weighs 150 pounds, doesn’t touch alcohol, but does smoke. With that added detail, his life expectancy is now estimated to be 72.6 years, as shown in Figure 1-2.
FIGURE 1-2: Bankrate’s Life Expectancy Calculator factors in more details to help you figure out how long you’ll go.
Life expectancy calculators, such as many calculators described in this book, provide estimates. Clearly, if you knew exactly how long you’d live, retirement planning would be a lot easier. Unpredictability is a key aspect that makes retirement planning — and life — an imprecise science. With that said, new biological genetic testing tools are adding more precision to this ultimate estimate. Services such as 23andme (www.23andme.com/) use techniques to help you guess how long you’ll be healthy.
Living to 100 Life Expectancy Calculator
Your life expectancy is an important input in your retirement plan. It’s worthwhile to revisit this factor periodically and carefully. The Living to 100 Life Expectancy Calculator at http://www.livingto100.com brings rigor to this process.
The calculator, shown in Figure 1-3, asks a battery of questions covering everything from personal traits about your sleep patterns to lifestyle habits, nutrition, medical history, and family history. The calculator is free, but you need to set up an account with your email address.
FIGURE 1-3: Living to 100 Life Expectancy Calculator quizzes you with in-depth questions to estimate your lifespan.
Retirement Planning Beginnings: The Pension
As the U.S. industrialized and farmers hung up their bib overalls and moved to work in factories, a major shift occurred in retirement planning. Workers would sign up with a company and pretty much assume they’d stay their entire careers. Over time, workers counted on their loyalty and decades of service to result in companies providing for them their entire lives — even after they retired.
Given what you know about lifespans, you can see why it wasn’t a huge deal for companies to take care of employees for life. Say an employee in a steel mill worked until age 65. Look back at Table 1-1 and you see that in the mid-1950s and the 1960s, he’d be expected to live only until 70. His company would have to provide retirement income for only five years.
Hence, the pension was born. In a pension plan, which is sometimes called a defined benefit plan, the employer commits to pay the pensioner a set amount of money each year after retirement. If employees stay with the company, they know how much income to expect.
During an employee’s working years, their employer would contribute to a fund. It was the company’s responsibility to not only add to the fund but also to prudently manage it with investments on the employees’ behalf. The company was required to hold and protect sufficient amounts of funds to pay pension proceeds. If the fund’s balance got low, typically because money was paid out faster than the fund grew, the company had to use part of its profits to refill the reserves. As you can imagine, investors weren’t happy when this happened.
If you’ve recently joined the workforce, pension plans probably sound strange. But in the 1950s through the 1980s, most employees, especially those working for large companies, expected a pension. Pensions are still common for public employees but have largely vanished for everyone else. As of 2011, only 18 percent of private sector employees participated in a pension plan, according to the Bureau of Labor Statistics. That amount dropped to just 15 percent in 2017 and 11 percent in 2023, according to an updated estimate from Pension Rights Center (https://pensionrights.org/resource/how-many-american-workers-participate-in-workplace-retirement-plans/).
So how are you supposed to plan for retirement if you don’t have a pension plan? That’s where our story takes us next.
Changing Times: The 401(k)
Those of you who were around in 1978 probably recall the debut of the Garfield comic strip. Another big milestone in 1978 was the end of production of the Volkswagen Beetle. But something far more important for retirement planning happened that year: The 401(k) was born.
The 401(k) is practically synonymous with retirement planning now because this plan is the predominant way most people save for retirement, especially those relatively new to the workforce. This popular retirement plan has steadily replaced the pension plan.
Employer-sponsored defined contribution plans are typically called 401(k)s. But they have close cousins at different employers. Employees at nonprofits access 403(b) plans, government workers have 457(b) plans, and some schools have 401(a) plans. The letters and numbers are different, but the plans are essentially the same as 401(k)s in terms of taxation.
As mentioned, pension plans are defined benefit plans. The plan sponsor, typically the employer, promises the retiree a certain monthly or annual income in retirement. In contrast, 401(k) plans are defined contribution plans. The only element that’s set is how much will be contributed to the plan. Typically, employees make most of the contributions. Contributions for standard 401(k) plans are generally made by paycheck deductions using pre-tax dollars; I cover exceptions in Chapter 4. (When you contribute to a 401(k), you lower your tax bill.) Many employers then make additional contributions, usually a matching percentage of what the employee puts in.
The amount that you will get out of a defined contribution plan is not guaranteed. You can select how your money will be invested, as I describe in later chapters, but you can take out only what’s in the account. This is an important difference from defined benefit plans such as pensions.
Why is the traditional 401(k) so powerful? The company match, if available, is great, but the main benefit is the tax-deferred contribution. Suppose you earn $100,000 and elect to contribute $10,000 to your 401(k). The $10,000 would be taken from your paycheck and not immediately taxed. Assuming that you’re in the 24 percent tax bracket, you would not pay the $2,400 in tax that would have ordinarily been due the year the money was earned. Instead, the money is taxable in the future when you withdraw it in retirement. This deferral is a powerful tool in retirement planning.
Contributions to a 401(k) offer tax deferral, not tax elimination. With most traditional retirement plans, you don’t pay taxes now, but you do pay taxes eventually. The idea, though, is that when you pay taxes down the road, when you’re not working, your tax rate will be lower.
If you think your tax rate will be higher after you retire, consider a Roth IRA or Roth 401(k) plan. These plans tax your retirement contributions immediately, but you take out already taxed money later. For more on these Roth plans, see Chapter 4.
MEET THE FATHER OF THE 401(K)
Not many sections of the Internal Revenue Service’s tax code are famous. But the 869-word paragraph k added to Section 401 of the Internal Revenue Code in 1978 is a rock star. And we can thank not a forward-looking Congressperson but a detail-oriented lawyer in Pennsylvania named Ted Benna.
Benna created the first 401(k) plan — and revolutionized retirement planning in the process. He’s known as the “Father of the 401(k).” Benna, a benefits consultant, was working with a bank, hoping to find a better way to keep employees that didn't involve handing out fat annual (and taxable) bonuses. The bank wanted a profit-sharing plan that would keep them competitive with other banks in terms of compensation — and give them a tax break on the contributions.
In 1979, Benna knew that IRS code 401(k), passed in 1978, was going into effect in 1980. Although many accountants knew of the provision, they paid little attention to it because it was intended to serve a different purpose. But Benna saw how employees could contribute all or a portion of their bonus into a 401(k) and get immediate tax relief. To sweeten the pot, Benna added a matching contribution option for the bank.
Benna’s bank client took a pass on his invention, afraid to do something new and worried that the Internal Revenue Service would reverse it. So Benna created a 401(k) plan for his own company, The Johnson Company (not Johnson & Johnson as widely believed).
Did Benna make a fortune creating this retirement-planning tool? He told me he did fine consulting with firms looking to create 401(k) plans. But since 401(k) is an IRS tax code statute, he couldn’t trademark the retirement account structure. It wasn’t long before the Fidelities and Vanguards of the world rushed in.
In Benna’s book, 401(k) Forty Years Later, he acknowledges that 401(k)s aren’t perfect. He laments the high fees charged by financial companies that administer these plans. (This book will help you with those.) But he also takes issue with the idea that pensions were better. “There is a widely held myth that we once had a wonderful retirement system that is now corrupted,” he writes in his book.
He points out several problems with pensions, most of which 401(k)s solved or at least addressed:
Restrictive inclusion rules: Many pension plans would not allow you to participate until you were 30 or older. This restriction delayed the accrual of benefits to workers when time was on their side. 401(k) plans are typically open to employees after a month or a year at the longest.Onerous vesting rules: In many pension plans, you had to stay at the company until you reached 60 before you vested. Leave before then and you got nothing. Some employers would try to dump employees before they vested, saving them a pension liability. 401(k) plans vest, too, but employees are always entitled to the funds they contributed. Employers can hold back employees’ access to only the matching funds. Typically, vesting happens gradually, with a maximum holding period of six years.Limited availability: Benna says only a third of non-farm workers in the private sector had access to a pension plan. Employees at large companies had pensions, but they were rare in smaller firms. Lower costs of 401(k)s make them much more feasible for more companies.Risk of failure: For many years, the rules were lax as to how fully companies needed to keep pension plans funded. Many companies simply didn’t put the necessary funds in the pension, so retirees couldn’t collect the money they thought was coming. 401(k)s are filled with actual contributions, not promises of future payments. Employees can always check their 401(k) balances and see how much they have.“The truth is that the private pension system of the 1960s was far different than the image that is commonly presented today. It was far from ideal and may have, in fact, been much worse than what we have today,” Benna writes.
The rise of defined contribution plans changed retirement planning forever. Employers shifted to employees the responsibility of generating and providing future retirement income not provided by Social Security.
Although employees take on more risk and responsibility, they also gain some freedom. They can decide how much, if any, to contribute to the plan. They’re also less beholden to their employer. If they get another job offer, they’re free to pick up their 401(k) and go elsewhere. They can roll over, or transfer, their 401(k) to a personal retirement account or to their new employer’s 401(k) plan. The only catch is that employees can tap only the part of the 401(k) that they contributed or is vested. Vesting is described later in this book, but for now just know that employers can hold back some of their contributions to a 401(k) if the employee doesn’t stay a certain number of years.
Behold the power of the 401(k)
To build a nest egg that will help them live the life they want in retirement, most people take advantage of the 401(k). For example, assume that in 1993 you were a 35-year-old worker. You decided to put the maximum allowed into your 401(k) that year and every following year until you turned 65. The money was invested aggressively for the first 10 years, with 80 percent stocks and 20 percent bonds. The risk was dialed back in following decades, with 70 percent stocks and 30 percent bonds from age 45 to 55, and 60 percent stocks and 40 percent bonds going forward. (At this point, don’t worry about the mix of stocks and bonds.)
As Table 1-3 shows, you never contributed more than $30,000 to your 401(k). But after more than 30 years of saving, you end up with $1.9 million! Now that was worth the sacrifice, wouldn’t you say?
TABLE 1-3 Maxing Out a 401(k)
Year
Age
Contribution Limit (Including Catch Up)
Ending Balance
1993
35
$8,994
$9,967
1998
40
$10,000
$118,918
2003
45
$14,000
$182,351
2008 (U.S. stocks fell 37% this year)
50
$20,500
$287,145
2013
55
$23,000
$696,040
2018
60
$24,500
$1,116,707
2023
65
$30,000
$1,912,925
Based on actual contribution limits from 1993 to 2023. Stock returns indexed to the Standard & Poor’s 500 and bond returns, while 10-year Treasury bond yields used for bond allocation.
Don’t let the fear of market volatility scare you from saving for retirement. As you can see in Table 1-2, some years the market declined and hurt the portfolio’s balance but remaining in the plan and maintaining contributions won out. Also, keep in mind that the government lets you make catch-up contributions, or additional money you can put more in your 401(k) after you turn 50.
An opportunity to save
Looking at Table 1-2, you no doubt appreciate why contributing to your 401(k) is powerful. But this contribution is a sacrifice because you need to give up spending now so you can put your money to work for you tomorrow.
Most employees don’t contribute the maximum to their 401(k) plans, but they still benefit. During the third quarter of 2023, the average 401(k) savings rate was 13.9 percent. This savings rate is very close to the savings rate of the recommended 15 percent, says Fidelity (Fidelity® Q3 2023 Retirement Analysis: Workers Commit to the Long-Term While Navigating Uncertain Markets and Short-Term Challenges https://newsroom.fidelity.com/pressreleases/fidelity--q3-2023-retirement-analysis--workers-commit-to-the-long-term-while-navigating-uncertain-ma/s/d5824701-cdfa-4cd2-8796-602b7b1dc541). The average 401(k) balance reached $107,700 in the period.
Social Security: The De Facto Safety Net
I cringe when someone says, “Why do I need to plan for retirement? I have Social Security.”
Yes, Social Security, the nickname for Old-Age, Survivors, and Disability Insurance (OASDI), is designed to prevent you from ending up on the street after working your entire life. But don’t you have higher hopes for your retirement than just scraping by?
Social Security isn’t a savings plan. All the money you pay into the system isn’t going into an account with your name on it, such as a 401(k) plan. It’s a pay-as-you-go system. In other words, the money you pay in as you’re working is used to pay income to people in retirement now. After you retire, you don’t withdraw the money you paid into the system. Your retirement income will be paid by people in the workforce at that time.
As a general rule, Social Security replaces 40 percent of a retiree's income (www.ssa.gov/planners/retire/r&m6.html). The number is lower for wealthier people who need to keep the gas tank full in their yachts.
Social Security is a fine safety net, but don’t bank a comfortable retirement on it. Your retirement-planning strategy needs to be more than just Social Security for three reasons:
Social Security is just one leg of a four-legged stool for retirement income.
Social Security was designed not to replace your income in retirement but to reduce the odds that you will starve in your old age. Social Security is intended to be accompanied by a pension, if you have one, retirement accounts, and personal savings.
The funding future of the program is uncertain. The curious structure of the Social Security program — where current workers pay the benefits of current retirees — doesn’t leave much room for error. When you have a big wave of retirees, as you do with Baby Boomers retiring now, the system is strained.
In 2010, the cost of Social Security outstripped its non-interest income for the first time since 1982 (www.ssa.gov/oact/TR/2023/tr2023.pdf). Some of the shortfall has been made up with a small amount of reserves, but until the system is reformed, the reserves are forecast to be depleted in 2034, at which point they could not pay scheduled benefits. When you hear the word reform, that likely means either workers will pay more in or retirees will get less out.
Meanwhile, the full retirement age to get the entire payout from Social Security has changed from 65 to 66 and now to 67, as follows:
Birth Year
Full Retirement Age
1937 or earlier
65
1938
65 and 2 months
1939
65 and 4 months
1940
65 and 6 months
1941
65 and 8 months
1942
65 and 10 months
1943-1954
66
1955
66 and 2 months
1956
66 and 4 months
1957
66 and 6 months
1958
66 and 8 months
1959
66 and 10 months
1960 and later
67
You receive reduced benefits if you retire early.
The earliest you can claim retirement benefits is age 62. But if you do that, your benefit is reduced by 30 percent. Even if you retire at 65, which many people think of as retirement age, your benefit is reduced by 13.3 percent. The following lists the benefit reductions when retiring early.
Retirement Age
Retirement Benefit Reduction
62
About 30%
63
25%
64
20%
65
13.3%
66
6.7%
So you can see why Social Security isn’t your ticket to retirement riches. It’s up to you to plan for your retirement. Now it’s time to find out how.
Chapter 2
Determining How Much You Spend
IN THIS CHAPTER
Calculating your monthly and yearly run rates
Discovering the starting point for retirement planning
Finding the best ways to spend money
Using online tools and apps to monitor and measure spending
Finding easy ways to make more and waste less
You may be tempted to jump right into crafting your retirement plan. Wait a second! Let me explain why you need to complete another step first: figuring out your run rate.
Your run rate is how much you spend now. You need to understand how much money it takes to maintain your current standard of living before you can calculate how much you’ll need when you say goodbye to the 9-to-5.
Some other retirement books teach you to figure out what you want your retirement to look like and then figure out how to reach that number. This approach is frustrating. What if you want to retire off the coast of France, but that goal doesn’t match reality?
The biggest determinant of what you need and how much you can save is your current spending. And here’s the good news! This key factor is measurable and under your control, unlike many other aspects of retirement planning.
Are you thinking of hiring a financial planner to build your retirement plan? Calculating your run rate is still worthwhile. Any planner will need to know how much you’re spending each year to build a retirement scenario for you.
In this chapter, you examine your spending habits with the goal of figuring out how much money you need to live the way you want. This calculation is critical because it determines how much you need to save before you retire.
Finding Out Where Your Money Goes
Do you ever get to the end of the month and find that you have barely any money left? Or perhaps you’re in a different situation, where you’re miserable in your high-paying job and not sure if you need the excess money you’re earning?
Some of you may already fastidiously track your income and expenses, but most people don’t. Fortunately, helpful (and almost automatic) ways exist to figure out where you’re spending your money.
Eyeing your expenses
When it comes to tracking your money, you need to know a few details about your expenses:
Category:
Classify what you’re spending into groups, such as food, transportation, and housing. Then break down these groups further into subcategories. For example, food is composed of groceries and dining out, and transportation includes gas for your car and bus tickets. Keep in mind, too, that some of your costs are necessities (such as rent and groceries) and others are discretionary (for example, concert tickets and dining out).
Amount:
Tally these costs. Even seemingly small expenses can add up over time.
Frequency:
Some expenses are weekly, such as a grocery store run. Others occur monthly, such as utilities. And still others are due once or twice a year, such as property taxes. You may be feeling rich one month, only to be blindsided by a semi-annual auto insurance bill the next.
Tax deductibility:
Some expenses may be associated with your business or deductible at tax time for other reasons. Keep track of tax-deductible expenses.
Savings:
Okay, so savings isn’t an expense, but it’s part of your budget. Keeping track of how much you’re able to sock away helps you forecast your savings progress.
Taxes:
Keep an eye on how much is withheld, or pulled out of your earnings, each pay period, so you understand how much of your income is going to the tax man.
Tracking your money’s every move
You’re probably thinking, “How the heck can I track all this with any kind of precision?” After all, if you’re like most people, you typically just whip out a credit card when you pay for something, toss the receipt, and worry about the bill later. Or you may be even less actively involved because you set your bills on auto payment and forget about them.
Take any expense and divide it by 12 or even 24 and it doesn’t seem so bad. You may pause before you pony up $1,000 for a smartphone. But if it’s “only” $42 a month (for 24 months), that’s not so bad, right? Companies are onto this and offer monthly fees and subscriptions for almost anything. And many of these fees are automatically billed to your credit card, so you may not even remember you’re paying them. These auto charges are like vampires, sucking away money from your retirement plan.
I’m not going to tell you that your monthly Netflix subscription or daily run to Starbucks is a bad idea. Again, the way you use your money is up to you. I will, however, show you how to figure out what these things are costing you. Then it’s up to you to decide whether they’re worthwhile.
When you track your expenses, know that most fit into one of four main groups:
Overhead:
You need food, clothing, and shelter. These items don't necessarily bring you joy, but they’re required to survive. Rent or mortgage payments, groceries, and utilities are the biggest overhead line items.
Taxes:
Another massive line item for people is Uncle Sam’s piece. Refer to the tax brackets in
Table 2-1
if you need a reminder.
Savings:
As mentioned, you may not think of savings as an expense, but that’s how it functions in your budget.
Discretionary money:
After you pay your other expenses, I hope money is left over for you to buy goods or experiences you enjoy.
TABLE 2-1 2024 Tax Brackets
Rate
Single Individual, Taxable Income More Than
Married and Filing Jointly, Taxable Income More Than
Head of Household, Taxable Income More Than
10%
$0
$0
$0
12%
$11,600
$23,200
$16,550
22%
$47,150
$94,300
$63,100
24%
$100,525
$201,050
$100,500
32%
$191,950
$383,900
$191,950
35%
$243,725
$487,450
$243,700
37%
$609,350
$731,200
$609,350
Spending guidelines
Following are guidelines on how much you should be spending on the four main expense categories:
Overhead:
50 percent or less of income. Generally speaking, your housing spending should be 30 percent or less of your income. Add insurance, utilities, food, and other necessities, and the total should be about 50 percent or less of your income. If you can spend less on necessities, good for you.
Taxes:
20 percent federal plus state and local. Taxpayers on average paid 20 percent of their income on federal tax (
www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-size-of-adjusted-gross-income
). State income taxes range from 0 percent in seven states to up to 13.3 percent in California (
https://turbotax.intuit.com/tax-tips/fun-facts/states-with-the-highest-and-lowest-taxes/L6HPAVqSF
). Good retirement planning can help you lower the slice the taxman takes.
Savings:
10 percent to 15 percent. Most experts recommend socking away for retirement 10 to 15 percent of your
pretax
