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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.
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.
Matt Krantz is an investment writer with decades of experience writing for publications including Investor's Business Daily, USA TODAY, and The Motley Fool. He's the author or co-author of four For Dummies books, including Investing Online For Dummies, Fundamental Analysis For Dummies, and Investment Banking For Dummies.
Introduction 1
About This Book 2
Foolish Assumptions 2
Icons Used in This Book 2
Beyond the Book 3
Where to Go from Here 3
Part 1: Getting Started with Retirement Planning 5
Chapter 1: Retirement Planning Is Up to You 7
Blazing Your Own Retirement Plan 8
Measuring Your Lifespan 9
Social Security Administration's Life Expectancy Calculator 10
Bankrate's Life Expectancy Calculator 11
Living to 100 Life Expectancy Calculator 13
Retirement Planning Beginnings: The Pension 13
Changing Times: The 401(k) 14
Behold the power of the 401(k) 17
An opportunity to save 18
Social Security: The De Facto Safety Net 19
Chapter 2: Determining How Much You Spend 21
Finding Out Where Your Money Goes 22
Eyeing your expenses 22
Tracking your money's every move 23
Spending guidelines 24
Measuring Your Spending 25
Using your credit card company or bank's online resources 25
Diving into the world of third-party apps and online tools 27
Checking out other money-tracking options 30
Doing something with all this data 32
Putting Your Spending in Context 32
Using government statistics as a guide 32
Seeing how spending changes as you age 34
Improving Your Numbers 36
Figuring out if your latte is ruining your retirement 37
Finding easy ways to stop wasting money 38
Boosting your income with a side gig 39
Table of Contents iii
Chapter 3: Calculating How Much You Need to Retire 43
Getting to Know the 4 Percent Rule 44
How the 4 percent rule works 45
The magical power of the 4 percent rule 47
Shortcomings of the 4 percent rule 47
Using Online Retirement Calculators 51
Getting started 51
Exploring retirement calculators from mutual fund companies 54
Drilling in with detailed retirement calculators 56
Avoid gambling with retirement: Monte Carlo analysis 58
Understanding Why Starting Early Is Important 59
Compounding: The most powerful force in the universe 59
Inspiration to start retirement planning now 60
The race to $1 million: Doable if you start soon 61
Chapter 4: Choosing the Right Account 63
Retirement Planning in a Nutshell 63
Getting started 64
What about pensions and Social Security? 65
Things Change with SECURE Act 67
A Great Place to Start: 401(k)s 67
Advantages of 401(k) plans 67
Drawbacks of 401(k) plans 69
The Roth: An interesting twist on retirement savings 70
IRAs: A Cornerstone of Retirement Planning 71
Advantages of IRA plans 71
Drawbacks of IRA plans 73
A few IRA odds and ends 75
Self-Employed Plans 75
The spectacular SEP-IRA 76
The 401(k) for one: A one-participant 401(k) 77
Keeping it SIMPLE 77
What's the Catch? 78
Tax-deferred isn't tax-free 78
Beware the 10 percent early withdrawal penalty 79
Don't mortgage your future: Retirement plan loans 79
Chapter 5: Gauging Your Appetite for Risk 81
Getting a Handle on Your Risk Tolerance 82
Determining your investor type 82
Understanding risk tolerance 84
Looking at risk tolerance differently 85
Using risk-assessment tools 86
The ABCs of Asset Classes 88
Putting stocks in a box 89
Adding bonds 91
Including a few other asset classes 92
Seeing how risk tolerance and returns work together 93
Chapter 6: Opening Your Accounts 95
Getting Your 401(k) Up and Running 96
Understanding target-date funds 98
Knowing the people involved in your 401(k) 99
Getting familiar with your 401(k) plan 99
Plugging into Your IRA 100
Knowing what you'd like to own 100
Choosing someone to handle your IRA 101
Mutual fund companies 101
Traditional and discount online brokerages 104
Robo-advisors 107
Connecting with a Financial Planner 112
Finding a financial planner 113
Deciding what is right for you 115
Part 2: Using Online Resources 117
Chapter 7: Managing and Optimizing Your 401(k) 119
Getting Online 120
Registering for 401(k) access 120
Getting to know your 401(k) tools 124
Checking your performance 125
Checking Your Portfolio Allocation 127
Understanding the key asset classes 128
Looking at your current mix without using a calculator 130
Finding your optimal asset class mix 132
Changing your asset allocation 133
Powering Your 401(k) with Contributions 135
Inspecting your current contribution level 135
Deciding how much to contribute 136
Seeing the power of putting more away 137
Discovering Other Nifty Aspects of Your 401(k) Plan Site 138
Locating information on plan loans and withdrawals 138
Digging into the statements 139
Finding various plan documents 140
Chapter 8: Taking Your IRA to the Next Level 141
Getting Online with Your IRA Provider 142
Opening your IRA account 142
Logging in and looking around 143
Understanding your portfolio holdings 145
Checking Your Portfolio Asset Allocation 145
Understanding correlation 146
Viewing your asset allocation on your provider's website 147
Enhancing your asset allocation 148
Understanding Your IRA Contributions 152
Setting up IRA deposits 152
Roll over Beethoven: IRA rollovers 154
Funding an IRA with a Roth conversion 154
Taking Money out of Your IRA 155
Getting money out early: 72(t) distributions 156
Taking your required minimum distribution 156
Setting up a beneficiary 157
A word about inherited IRAs 158
Chapter 9: Optimizing Your Retirement with Third-Party Offerings 159
Understanding Fees 160
Improving success with lower fees 160
Knowing the types of fees 160
Uncovering the shocking truth about fees 162
Examining Your Portfolio Using Morningstar 163
Pulling up individual funds that you own 163
Putting your entire portfolio to the test 170
Grading Your Retirement Plans in Other Ways 173
Getting up close and personal with Empower 174
Going mobile with Quicken Simplifi 176
Chapter 10: Digging into Social Security 177
Discovering All the Benefits of Social Security 178
Disability coverage (SSDI): The forgotten bonus of Social Security 178
Medicare for All 180
Survivors benefits 181
Retirement benefits 181
Managing Social Security Information Online 183
Examining what you're paying into Social Security 183
Signing up for and accessing Social Security information online 185
Understanding your history of Social Security credits 188
Planning for Social Security in Retirement 190
Claiming your Social Security benefit 191
Applying for benefits 193
Part 3: Maximizing Your Retirement Knowledge 195
Chapter 11: Balancing Other Needs with Retirement Savings 197
Cleaning Up Your Personal Balance Sheet 198
Building an emergency fund 199
Cutting loose the debt anchor 206
Opening a taxable brokerage account 211
Saving for a Home 212
How your retirement plans can help you buy a house 213
Knowing how much home you can afford 214
Budgeting for homeownership 216
Saving For College - If You Can 217
Why your college-savings help matters 218
Choosing a college-savings account 219
Choosing a 529 provider 220
Figuring out how much you should save 221
Chapter 12: Fine-Tuning Your Asset Allocation 223
Exploring Stock Strategies 224
Understanding small versus large companies 225
Knowing where your money is: international, global, and emerging markets 227
Trusting real estate investment trusts 229
Diving for Income 231
Getting to know bonds better 232
Going to town with municipal bonds 234
Using Morningstar to study bonds 235
It's Easy Being Green: The Rise of ESG 237
Deciding whether to include ESG in your retirement plan 238
Understanding ESG investments 239
Buying into an ESG 240
Chapter 13: Keeping Your Retirement on Track 243
Tracking Your Portfolio's Health 244
Measuring returns and asset allocation 245
Modifying your plan 251
Tracking and Updating Your Goals 253
Assessing your goals 253
Seeing if your goals change your plans 254
Tracking retirement progress and milestones 259
Chapter 14: Gearing Up for Retirement 261
Creating a Retirement Budget 262
Test-driving your budget 262
Keeping your stock exposure 264
Waiting until 70 to collect Social Security 264
Having a healthcare plan 265
Knowing the bucket strategy 266
Working longer 266
Thinking about Annuities 268
Understanding the types of annuities 269
Finding an immediate annuity 271
Running sample annuity numbers 273
Unlocking a Goldmine: Reverse Mortgage 276
Understanding reverse mortgages 276
Understanding the drawbacks of reverse mortgages 277
Using a reverse mortgage 278
Chapter 15: Understanding Pensions 281
Checking a Private Pension's Funding 282
Understanding the Problems with Public Pensions 283
Understanding Pensions Inside-Out 286
Choosing a lump sum versus ongoing payments 286
Choosing single life versus survivor 288
Managing Your Pension 291
Using online tools 291
Calculating the value of a lump sum payment 292
Rolling over a pension 293
Chapter 16: Getting Insurance 297
Building a Health Insurance Plan 298
Unlocking the health savings account 298
Understanding Medicare supplemental plans 302
Exploring the exchanges 304
Considering long-term care insurance 305
Defending Your Money with Insurance 307
Checking property and casualty coverages 307
Getting ready for a rainy day: Umbrella insurance 308
Protecting your family with life insurance 310
Part 4: the Part of Tens 315
Chapter 17: Top Ten Retirement Mistakes 317
Waiting to Save 317
Ignoring Fees 318
Not Securing Your Information 318
Prioritizing College Savings Over Retirement 319
Not Diversifying Your Portfolio 319
Waiting for the "Right Time" to Invest 319
Having Inadequate Insurance 319
Taking Money from Your Accounts Early 320
Not Checking Your Social Security Benefit 320
Not Thinking about Income 320
Chapter 18: Top Ten Retirement Questions 321
How Much Money Do I Need? 321
Is Medicare Enough? 322
What Will I Do with My Free Time? 322
Will I Run Out of Money? 323
Should I Have a Roth or Traditional IRA? 323
How Good Is My 401(k)? 324
What's an RMD? 324
Can Retirement Rules Change? 324
What Can I Do If I'm Near Retirement Age and Don't Have a Plan? 325
Do I Need a Financial Advisor? 326
Index 327
Chapter 1
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.
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."
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/.
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
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.
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.
www.ssa.gov/OACT/population/longevity.html
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.
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...
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