Planning for Retirement 101

Planning for retirement is not an option. We all have to do it. This hub will lay out some basics to help you plan for retirement.

You need to think about how much money you will need, about how to invest it wisely and withdraw it wisely, and about how to start by living the life you want, right now.

Saving for retirement is not hard. It is almost 100% a mental game, however. If you can convince yourself to pay yourself first, the pieces will fall into place.

Deciding how much money you will need for retirement depends on a ton of factors. Some of the factors you control; some are out of your control. Factors you can control include how much income you have and how much is allocated to savings and investments, your health and your monthly bills. Factors outside your control: the stock market; inflation; health care costs and property taxes.

So, how much money do you need? The easy answer to that question is How much do you need right now because you probably need that much. It is not a great answer, but it is not so far off the mark either. Do you live in a huge house, belong to a country club, take at least one vacation a year? Why would that change when you retire?

People often say that they plan to downsize significantly when they retire, but most don't. They may move to a smaller house, but the house costs the same as the one they sold because the new house is on the golf course or in the SunBelt instead of cold, snowy Buffalo.

In truth you will probably need a little more money than you do now, because most seniors spend a hefty amount on prescription drugs each month. We are living longer, for sure and it is in part because the preventative care we get. You may get some money from Social Security, but with the mess it is in, it could be bankrupt as early as 2020 or as late as 2040. In 2040 I will be 75, so I am not banking that Social Security will provide me with any supplemental income. That is not to say that they won't figure out how to fix it in the next 20 or 30 years, I just prefer to plan for the worst case.

You primary tool for retirement investing is your 401k. In addition, you should save 10% of your income in a Roth IRA. In my opinion, this covers your tax situation nicely. The 401k grows with pre-tax dollars and the Roth grows with post-tax dollars. This mitigates the tax hit you take as you begin to withdraw the money from these accounts.

Most 401ks allow you to contribute a maximum amount of 10% of your income. If you are over 50, you have a "catch up" clause that allows you to invest another $5,500 yearly. You are probably thinking you could maybe swing the 10% for the 401k, maybe. But the other 10% for the Roth? Am I nuts? No, here's how you do it -- get out of debt. Get out of debt now and in a few years, you can be sending the money that used to go to Chase and CitiBank and American Express to your Roth instead. The average American could pay off their credit card debt in a little over two years. Two years of living frugally can create habits of a lifetime. You can become a saver instead of a spender. Millions of people have done it and you can, too.

When you stop working and you are ready to begin to live off your retirement, the prudent way to do this is to take 4% from the account(s). Four percent total, of course. By being conservative during the withdrawal phase you can perhaps stretch your dollars that much further. Some years the market is going to perform well and some years it will perform poorly. In lean years, your 4% withdrawal will not hurt much and in good years, the account can see some small growth. For example, the account grows 8% because of increases in the stock market. By taking only half of that gain, you just gave yourself an extra year of living expenses.

Most retired people, when surveyed, say that having hobbies, friends and community projects make their lives worth living. That is good advice for anyone. When you retire, consider volunteering at a local grade school, or helping out at a hospital. That is part of the puzzle. Here's another part -- do you like the work you do now?

Can you imagine doing the work you do now for another 40 or 50 years? How about even 5? Finding meaningful work is one of the most important things in life! Meaningful work will keep you healthy and active well into your 70s or 80s. Look at the career of the late George Burns or Betty White's career, now. Active and enjoying life is how we all should be, no matter our age. So work you enjoy, that also produces income is a big piece of our retirement puzzle.

If you are unhappy with your current career, start exploring your options. I recommend reading the book 48 Days to the Work You Love, by Dan Miller. If you find work that engages you and it pays, you can continue to work, at least part time into your 70s and beyond.