Since I have been too lazy to write my own posts for this blog lately I thought I would share with you a few retirement related posts from the past couple Carnival of Personal Finance and elsewhere.

• “How to select the right IRA beneficiary” from Wealth Pilgrim.  He basically says the youngest beneficiary is the best beneficiary but read the post to see why.
• “Ways to trick yourself into saving for retirement” from Pop Economics.  These are some simple behavioral adjustments that could help you save more for retirement.  Plus the site has cool art.
• “Traditional and Roth IRA contributions and phaseouts” from Smart On Money.  This is something I have posted on before but this post sums up the subject nicely.
• “Living to 100 and beyond: How will it affect your retirement plans?” from Invest it Wisely.  Living a really long time will definitely impact your retirement plans.

There are always plenty of interesting articles on retirement.  I will post a new article here later in the week.

There are many risks to your retirement savings. Here are five of the more common ones.

1. Starting too late -  When you are young it seems like retirement is far way.  However, by starting to invest for your retirement while you are young it will be much easier to save enough for a comfortable retirement.




2. Not saving enough -  Just saving enough to get your 401k match is better than doing nothing but it probably won’t add up to enough for you to be able to retire.  Even the conventional 10% figure probably isn’t enough.  Another bonus to saving more is the ability to retire early.




3. Lack of diversification – It is possible to be over diversified but most people’s savings suffer from a lack of diversification.  Putting all your money into your company’s stock is a common example.   That didn’t work to well for Enron employees.  You should have your retirement savings in several investments.




4. Taking too little risk -  People are naturally adverse to losing money.  The stock market slide in 2008 has made even more people risk adverse.  Saving your money in a money market paying 1% isn’t going to allow you to retire.  You need to take some risk.




5. Taking too much risk -  Examples of this would be betting all your money on one stock or one sector.  This could have a huge return but it could also cripple your chances of retirement.  You also need to move more of your money out of stocks and other riskier investments and into fixed income investments as you get closer to retirement.

That is just a brief overview of potential risks to your retirement savings.  Now that you have an idea of what the risks are you can do further research and educate yourself to avoid or minimize these risks.

When I read the statistics from Vanguard, in their How America Saves 2008 report, I was astounded by the statistic that 60% of Americans who change jobs will cash out their 401(k). That’s right, for every ten people that switch jobs, six will take all the money they’ve diligently saved into their 401(k) accounts and withdraw it, minus the taxes they owe and the whopping 10% penalty the IRS demands. It is likely one of the biggest mistakes of their lives.

For some, there is no choice. If you are fired and facing mounting bills, you may have no choice but to cash out your 401(k) to meet your obligations. In that situation, it’s unfortunate but you have to do what you have to do. However, in 2008, 4 million people hadn’t lost their jobs. In 2008, the economy was weak but not in the state it’s in today. In 2008, 60% of people leaving their jobs cashed out their 401(k)s and they likely didn’t have to. They weren’t in dire straights, they were just making a mistake.

Your 401(k) is your nest egg, it’s supposed to be untouchable and safe and put in a safe place so it can grow. While it’s true that the market has been pounded, if you’re ten, twenty, or forty years away from retirement; the last thing you want to do is to arrest that growth by withdrawing the funds. To make matters worse, not only have you stopped its growth, you’ve paid a 10% penalty on top of that.

The best thing for you to do if you don’t feel like the 401(k) is right for you, which for many is erroneous, stop contributing or contribute the bare minimum.

A recent survey from Bank of America found that 18% of respondents admitted to withdrawing money from their retirement accounts early to help pay for credit card debt, mortgage payments, and job losses. It’s a difficult time for everyone but cashing out your 401(k) should be seen as a last resort because it is so very expensive. When you withdraw money from a 401(k), you not only pay income tax on the money but you also pay a 10% penalty on top of that. If you’re in the 25% tax bracket, you’d pay 35% on the money you withdraw… that can hurt a lot.

However, sometimes you have no choice. Sometimes you are forced to look for options and the last one left is your retirement. If you have to change your retirement plans, try to do it in this order:

1. Cut expenses elsewhere: Cut all the non-essentials, which means anything that you don’t need to survive. That means cut the cell phone, end Netflix, shut off cable, everything. You need to get down to as lean as possible, then start searching for funds. If you need some ideas, here are a 100 money saving tips you might be able to take advantage of.
2. Contribute less: If you don’t contribute it in the first place, you avoid the 10% penalty for withdrawing it early. You may be surrendering an employer match but you can’t afford to take it out on the backend, the 10% eats away any match you’d be getting.
3. Withdraw from a Roth IRA: You can withdraw your principal from your Roth IRA without penalty, so that should be the first place you go to if you must raid an account. Check out the exact rules involved because sometimes there are penalties if you aren’t careful.
4. Withdraw from a Traditional IRA or 401(k): If you’re down to this last option, you’re down to it and there’s not much that can be done.

Good luck, it’s a difficult economic time and the last thing you want to do is make it worse by jeopardizing your retirement.

Developing a productive savings plan is something that anyone can afford, even if you think your budget is already stretched tight enough. Regardless of the amount of money you are currently left with at the end of the month, a savings plan is something that is essential to every household and really needs to be developed. There are multiple ways that can accomplish the same goal: a savings that becomes something substantial. Without a savings plan, you could be caught unawares by emergencies or might be left unable to do any real investing into your future. No one wants to work into their old age or to depend on state aid or other types of minimal payments.

Establish a Budget

The most important first step is to establish a budget for your family or household. Without a budget, it is impossible to determine what can be put away towards savings and what exactly your household or family is spending. Through the use of a budget, you can then determine what of your income can be applied to savings with the goal of insuring a stable and comfortable retirement. A budget should include all of the monthly expenses for a household or family, such as mortgage/rent, utilities, car payments, credit cards, student loans, insurance payments, or other costs. It is important to also include expenses such as gasoline, entertainment, clothing, groceries, and other miscellaneous expenses.

Once you have determined a budget for your family or household, the next step is to try to determine the cost of living expenses that will be expected during your retirement. It is far more important that you just come up with a ballpark figure than it is for you to spend time, frustrated, trying to come up with an exact amount.

Once you have come up with a clear estimate of the funds you want available during your retirement, you must set up a game plan for acquiring them. The first step is to calculate what, if any, of this can be derived through the use of Social Security benefits, pensions, 401(k) plans or other means of maturing funds. It is important to use a conservative estimate when calculating what these sources will be able to supply you with during your retirement; it is better to plan for too little and end up with too much.

Now that you have a rough estimate of the financial means that will be necessary during your retirement, it is now time to plan on achieving those financial goals. The simplest and most functional part of a savings plan begins with the 10% rule. The 10% rule means that it is essential, if you are to take your savings seriously, to save a minimum of 10% of all income. This is referred to as “paying yourself;” without this, there will be no capital for your future.

The 10% that you are paying to yourself through time is often much less then you would think and yet it becomes something that can be invested to grow even faster. An average household with a yearly income that has a 10% savings plan would put over six thousand dollars into a savings account. This money, since you know will not be necessary for month-to-month necessities, can be put into high yield bonds, CDs, high interest rate savings accounts or other investment options.

One way to force the 10% rule upon you and your household is to set up an automatic payroll deduction. You can have the deduction go directly into a separate high interest savings account. If you set up predetermined times for withdraw, then you can often get much higher interest rates, and thus earn more from your money. With the funds automatically placed into a savings account, it is much less likely that you will spend the money as it is not as readily available. This is especially a good idea for beginning a savings routine.

An auto debit system creates a habit out of savings and helps make saving for your future a regular part of your routine life. It is just as important to try and increase the monthly contributions on an annual basis. Once you become comfortable with 10% savings, try to increase it to 15%. In a matter of a few years, this money will begin to take on staggering amounts. If you have loans with an interest rate, it is more important to increase these payments than to increase savings, but it is equally as important not to acquire any additional loans. The money lost on interest payments or the cost of being financed can make the difference between a successful retirement plan and an amazing retirement plan.

Bonds are a particularly good choice for long-term investors because they play the role of financial instruments to increase the interest earned on savings. Government bonds are risk-free and can play a large role in a family or household savings plan. Another common form of household investment is TIPS (Treasury Inflation Protection Securities). TIPS are securities issued by the U.S. Government. They carry the government’s full faith and credit backing for greater security overall. The value of TIPS is directly affected by the Consumer Price Index; this is a monthly measurement of the price for a fixed amount of goods and services.

An additional step towards an overall comfortable savings environment has to do with your tax refund. This is usually money that is not (or should not be) budgeted into bills or other expenses. This money is usually something that comes as a financial surprise to most families and households; the money was expected, but was not required for any bills or upkeep payments. If the money received through a tax refund was applied to either making an additional payment towards your principle balance on a mortgage loan or an additional credit card payment, you could save thousands of dollars in savings over the course of the loan.

It is simple steps like this that separate smart consumers from those trapped in debt. One of the key points of developing a strong savings plan is in reducing debt. If the money applied to interest related loans could be put into savings accounts, then family savings would skyrocket, and a stable financial future would be certain.

A recent study by the Americans for Secure Retirement foudn that 3 out of 5 middle-class Americans will outlive their retirement savings because they will fail to reduce their expenses in retirement. It’s a scary study but it makes sense, people think they will spend less in retirement but often don’t. You might pay less in taxes, less in work related travel, but you go on more vacations and spend money on new leisure activities that you didn’t have time for.

How do you prevent this? First, create a budget and stick to it. The rule of thumb is always to spend only 4% of your retirement savings each year. If you have a million dollars squirreled away, that’s $40,000 a year. Another rule of thumb works in the reverse and focuses on spending. You should estimate that your expenses in retirement will be about 70-90% that of your pre-retirement spending and save accordingly. This also means that when you do retire, you must spend only the amount you budgeted for in the first place!

Most Americans will outlive savings. [Marketplace]

I recently started playing golf, I have a huge blister on my right thumb from gripping it too hard, but I’m starting to get that itch. Golf is hard but it’s extremely rewarding and it’s easy to see why retirees would enjoy the sport, especially if you have plenty of time to practice and hone your skills. Even if you’re not a golf fanatic, the spots listed are still fine spots to retire because golf courses are often designed and installed in idyllic locations anyway.

Here are the top ten, in no particular order:

• Auburn, Ala.
• Bonita Springs, Fla.
• Charlotte, N.C.
• Georgetown, Texas
• Lemont, Ill.
• Mount Pleasant, S.C.
• Portland, Ore.
• Rancho Mirage, Calif.
• St. George, Utah
• Sun City, Ariz.

10 Great Retirement Spots for Golf Nuts [US News & World Report]

###

My Retirement Blog’s post on how you shouldn’t gamble your safety net was included in this weeks’ Carnival of Personal Finance.

$376,000 is the highest amount recommended by the Employee Benefit Research Institute in a report released yesterday. What the EBRI, which is a D.C.-based public policy group, recommends for a couple, with premiums not subsidized by their former employer, have approximately $376,000 if they are not willing to take on any risk (meaning they don’t want to save less and risk being underfunded). So, while the $376,000 does appear scary, at least we know that’s the recommended maximum.

According to a report released Tuesday, the retirement health tab can run between $64,000 and $122,000 for a 65-year-old man whose former employer pays his insurance premiums, and between $86,000 and $140,000 for a woman of the same age. For retirees who don’t have access to an employer-offered plan, the costs – mostly for prescription drugs – run even higher [Source: CNN Money].

The table in the article outlines most scenarios (permutations of the premium covered or subsidized or not at all subsidized by employer, the age and gender of the retiree) with the lowest dollar amount being a 65-year old man willing to take on a high level of risk and who has premiums covered by the former employer ($64,000).

Here’s another interesting stat, according to the Metropolitan Life Insurance Co. (that’s MetLife), the average cost of a private room in a nursing home is $77,745 a year. The price at an assisted living community is $35,628 a year.

Everyone knows that it’s important to save for the future and everyone has played with the fun little retirement calculators that tell you how much you need and by when. However, what most people don’t talk about is how well you’re doing versus everyone else in your age group. It’s not about competition, it’s about knowing where you stand so you can make smart decisions.

Here’s how retirement savings breakdown by age group:

25 – 34

70% saved less than $25k, 12% were between $25k-$50k, 9% were between $50k-$100k, 5% were between $100k-$250k, and 4% were above $250k.

35 – 44

50% saved less than $25k, 15% were between $25k-$50k, 14% were between $50k-$100k, 10% were between $100k-$250k, and 10% were above $250k.

45 – 54

41% saved less than $25k, 14% were between $25k-$50k, 13% were between $50k-$100k, 17% were between $100k-$250k, and 16% were above $250k.

55+

39% saved less than $25k, 12% were between $25k-$50k, 7% were between $50k-$100k, 23% were between $100k-$250k, and 19% were above $250k.

All (Combined)

52% saved less than $25k, 13% were between $25k-$50k, 11% were between $50k-$100k, 12% were between $100k-$250k, and 11% were above $250k.

Now that we’re deep into high school graduation season, with thousands of former high school students readying themselves for both the summer and the next four years of education, you might be wondering how the heck you will be able to pay for their education right? Conventional personal finance advice states that you shouldn’t sacrifice your retirement for your children. It goes against every parenting principle you’ve ever felt because it always seems like you’re sacrificing for your children and doing what’s best for them. However, putting off your retirement for something they can handle themselves will put a greater financial strain on your family.

College Loans

Many students have put themselves through school through a combination of hard work, student loans, and frugality. I have nearly $25,000 of student loans from my four years of higher education and that’s far less than some of my friends. Many student loans are very affordable, tax deductible, and enable your child to pay for their own education after they’ve graduated and secure a job.

Retirement Is Long

The average lifespan of an American is close to eighty and if you plan on retiring at 65, that’s at least fifteen years of living you’ll have to fund from your nest egg. Considering your child has many years to pay for their college education, years where they will have little in the way of other expenses, it seems foolish to sacrifice your more valuable retirement years in order to make their young professional years more comfortable. While this may seem selfish, $100 to you in retirement is far more valuable than $100 to someone who will spend it at a bar.

Saving For Retirement Is Rewarded

At a bare bare minimum, you should be taking advantage of all the retirement options you have. Get the employer match on 401(k)s, max out your Roth, and all the other accounts you need. After your future is secure, then think of how you can put money towards your child’s education.