Retirement Planning Guide
A lot of news you hear about retirement these days is negative: Social
Security won’t provide much; you may have to work longer; with longer
life spans you may not know if your money will last. It’s enough to
make you throw your hands up and decide to just worry about it later.
But that kind of approach will only make things harder.
Having a retirement free from money woes isn’t necessarily about
being a millionaire, but rather using the assets you do have wisely and
proactively. By identifying what you can control and focusing on that,
you can put yourself in better position to have a retirement that allows
you to achieve your goals.
This booklet is not intended as professional financial planning
advice. Rather it is a guide to get you considering the key issues in 595 Market Street, 16th Floor
San Francisco, CA 94105
retirement. Use it as an introduction to begin the exploration of your
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retirement options. www.balancepro.net
Retirement Goals
Harness the Power of Time
When working on retirement planning, it’s important The chart below reflects a savings plan of $2,000 a year at
to think about what your retirement will look like. Will nine percent interest.
you be content to focus on occasionally playing golf
$200,000
and spending quality time with family and friends? Or
does your ideal retirement involve lots of foreign travel
and dining out at fancy restaurants? When beginning $150,000
to think about what your financial needs will be in
retirement, it can help to write down five goals you $100,000
would like to accomplish in your golden years. These
don’t have to be monumental achievements, just
$50,000
what will make you happy. For example one of your
goals may simply be to fully relax after decades of
hard work. But by starting to think about these types $0
of things, you can begin to build a plan for your 15 years 20 years 25 years 30 years
retirement around those goals.
Start now Wait 10 years
How Much Will You Need? Knowing you will have enough on a monthly basis to
live comfortably is great, but how do you know if it
The traditional rule of thumb with retirement was that
will last? After all, you don’t know how long you might
you will need 70-80% of your income in retirement to
live, especially with increasing life spans resulting in
be able to live a comfortable life. However, everyone’s
retirements of 30 or even 40 years. If you are worried
situation is different: some people find that they about stretching your dollars over the full length of
actually spend more money in retirement than they your retirement, consider meeting with a financial
did the last few previous years and others find planner and taking one or more of the following
they are perfectly content to live their mature years steps:
modestly with simple pleasures.
• Complete a budget and stick to it both now and in
Completing a retirement budget is a far more retirement
comprehensive way to examine your money needs
than simply relying on a percentage of your current • Make conservative withdrawals from retirement
expenses. While it can be difficult to project your plans
lifestyle into the future – especially if you are currently
many years away from leaving the workforce – begin • Work longer and delay taking Social Security to
by using your current budget as a jumping off point. increase the amount you get each month
Think about expenses that may be less in retirement
- like clothing or gas – and expenses that could be • Work part-time in retirement
more - like airline tickets or healthcare expenses. Of
course, remember to calculate inflation, especially if • Consider an annuity
you are more than a year or
two from retirement. • Use assets – such as a home – as a source of
income
The financial calculators at
www.balancepro.net can help • Explore longevity insurance
you crunch the numbers. If The financial
you are close to retirement and calculators at
• Invest in financial products that generate dividends
www.balancepro.net
want to see if your budget is
can help you crunch
realistic, give it a test run for a the numbers. • Invest in bonds as security against dwindling
month. income
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Retirement Income contributions as a part of your monthly expenses is
a very strong plan for giving yourself fewer worries in
If you are currently among the gainfully employed, your later years. Making contributions every month
you are used to receiving a regular paycheck each allows you to harness the power of time and use
month. In retirement this may be different, since you compound interest to really see your investment
could have several sources of income making up grow substantially. Someone who is 40 years
your monthly “paycheck.” To see what your current from retirement and is putting $100 a month into a
retirement paycheck looks like, consider all potential
retirement fund and seeing normal returns could end
sources of income:
up with around $320,000 dollars in that account by
Source Contact the time they retire.
Social Security www.socialsecurity.gov
Completing a budget is also
Retirement accounts great exercise in identifying
Plan administrator
(401k, 403b, IRA)
retirement drainers like high
Pension Employer amounts of unsecured debt
Investments Account administrator or a lack of savings. Some Completing a
of your debts can add value, budget is also
Part-time work Estimate based on current wages
like a mortgage or student great exercise
Home equity loan or Estimate home value or equity
loans. However, debts that in identifying
reverse mortgage position
aren’t producing benefits for retirement drainers
Assets that can be you, like perhaps credit card
Adjust current figures for inflation like high amounts of
liquidated
debt or personal loans, can unsecured debt or a
Cash value insurance be thought of as a negative
Plan administrator lack of savings.
policies
investment in your future.
Annuities Account administrator You may be seeing great
Interest on savings, CDs Consult with provider and use returns on your retirement investments, but because
or bonds financial calculator of your unproductive debts, the net total is that you
Income from rental
Adjust current figures for inflation
are actually losing money. As a part of the budgeting
properties process, examine how much of your money each
Inheritance Consult with benefactor month is going toward paying on debts that aren’t
bringing you a return. While it is important to always
Add your monthly expected retirement totals from be putting some money toward retirement, it may
all these potential sources of income to see how make sense to dedicate a portion of that money in
your income projection currently sizes up. If this falls your budget to first paying off expensive debts.
short of what you had projected in your retirement
budget, look for ways to increase the amount you Another enemy of retirement is insufficient
are currently putting toward retirement or ways to emergency savings. Retirement accounts aren’t
generate extra income during retirement.
meant as a safety stashes of cash you can access
when unexpected expenses arise, but unfortunately
many people use them that way. Rather than
Creating a Retirement-empowering Budget sacrificing your retirement money the next time the
car breaks down or the furnace stops working, try
Doing a budget isn’t just about making sure you have
enough money to cover your bills month-to-month. to build up 3-6 months of your monthly expenses
It’s also about having a plan in place to achieve your in an emergency savings account to help protect
life goals. As you complete a budget for your current the money set aside for your golden years. This
financial situation, think about your future as a bill may mean making a few temporary sacrifices in
that needs to be paid every month. Whether it is $25 the discretionary spending in your budget, but the
a month or $500 a month, maximizing your retirement decrease in stress down the road will be worth it.
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Maximize matching contributions
You don’t have many chances in life to get free
money. But a lot employers offer just that when
they agree to make matching contributions to your
retirement savings. Usually these funds are given
dollar-for-dollar to a certain amount, or provided
as a percentage of your contribution each month.
If your employer offers matching contributions, do
everything in your power to try to get as much of this
free money as possible.
Diversify
When choosing how to allocate your money among
different types of investments, it’s important to
not put too much of your funds into one type. By
spreading your investments among different types of
products – stocks, bonds, cash equivalents, etc. –
Understanding the Retirement Fundamentals you give yourself protection against major losses by
one type of asset class while also providing yourself
Start early exposure to potential gains in different areas.
Time is one of the biggest advantages you can have
in saving for retirement. Unless your retirement is next Grow and protect
month, you have the opportunity to take advantage of In deciding what types of specific investments your
compound interest. Because the interest you receive retirement funds will go toward, it’s important to
from investments or savings is calculated on your think about both risk and reward. Some types of
running total of deposits plus your past accumulated investment products, like stocks for example, come
interest, you have a chance to see even a relatively with a higher risk of large fluctuations but in turn give
small amount of money set aside each month add you a greater chance for growth. Others are more
up to a large bundle when you choose to retire. conservative choices that have little chance for huge
Someone who is 30 years growth but are much less likely to vary widely. A
away from retirement could prudent retirement investor has a mix in their portfolio
put $100 per month into a of both growth and security.
retirement account, receive
a fairly typical 9% return on Rebalance
their investment, and end If one category of your investments realizes gains
up with close to $180,000 disproportionate to the other types of investments
for retirement. If that same Time is one of the in your portfolio, your allocations could get out of
person waits 10 years to biggest advantages balance. For example, if the stocks in your portfolio
begin investing for retirement, you can have in see tremendous growth while the bonds lag behind,
the total saved would only be saving for retirement. the value of your stocks could grow beyond the
around $67,000. original percentage of your portfolio they were
intended to represent. This is when it is necessary to
Use tax-deferred growth contact your retirement plan provider to return each
So-called defined contribution plans provided by piece of the asset pie back to its original relative size.
employers, such as 401(k) or 403(b) plans, allow This process is called rebalancing.
your retirement savings to be free from taxes while
they grow in value. Your investment will only be While there is no set consensus on how often you
taxed when you withdraw money from the account. should rebalance your portfolio, the most common
A defined contribution plan also has the benefit of suggestions from experts vary from once per quarter
reducing taxable income when you file your return to once per year. Other experts advise to rebalance
every year. Individual Retirement Accounts (IRAs) any time your allocations have swung five percent in
also can provide tax benefits. See descriptions of the any direction. Many retirement funds automatically
different plans below for more information. rebalance your allocations for you, so check with your
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fund’s administrator for more information. If you need
to manually rebalance your settings, make sure you
are aware of any fees charged for making these kinds
of changes.
Dollar cost averaging
If you have a significant amount of money invested
in stocks, you likely keep a pretty close eye on what
the market is doing. When it goes up, you probably
have a positive feeling about continuing to contribute
money to equity investments. However, when stocks
go down, it can make you want to pull your money
out quickly. If these emotions get the better of you,
the net effect is that you consistently buy stocks
when they are relatively high-priced and then abstain
from buying them when they are priced lower. Using
this method will mean that the average price of the your employer allows you to control the investment
stocks you have bought will always be higher. choices for your plan, you can decide which mix
of different types of investments you want your
There is a way to combat particular plan to put money into.
this emotional “chasing the
market” type of trading, Traditional IRA
though. Dollar cost averaging
This type of Individual Retirement Account lets you
means that when beginning
invest pre-tax income that will also grow tax-deferred.
an investment strategy, you ...take a “bigger
decide on a period of time Depending on your income, filing status and other
picture” approach factors, you may be able to deduct your contributions
for which you will commit a
consistent amount of money to your investing... to a Traditional IRA on your tax return. Like a defined
to be invested at regular contribution plan, there are limits on what you are
intervals. Using dollar cost averaging is a way to take able to contribute. If you are 50 or older, you may
a “bigger picture” approach to your investing that can be allowed to make catch-up contributions beyond
in the end give you much better value for the money the normal limits. You are able to make any type of
you have invested and help you avoid the pitfalls of investment you like, as long as it is allowed by the
reactionary investment choices. custodian (usually a financial institution or brokerage)
of the account. Generally speaking there are no
requirements for making contributions to a Traditional
Types of Retirement Savings Plans IRA, but any distributions taken before age 59.5
are subject to taxes and a 10% penalty, unless the
You have several different choices for how to invest distribution meets certain conditions.
your money for retirement. You don’t have to pick
just one, and in fact, many people use a combination Roth IRA
of different types of plans to achieve their retirement Unlike a Traditional IRA, under which your
savings goals.
contributions are taxed upon withdrawal, in a Roth
IRA your contributions are taxed. Withdrawals can
401(k) or 403(b)
thus be taken tax-free. Like a Traditional IRA, the
These retirement plans allow you to take advantage
of tax-deferred growth since neither contributions gains made by your investments are not taxed. Many
nor growth are taxed. Taxes aren’t taken until you people who feel they may be in higher tax bracket
withdraw money from the account. Many employers when they retire than they are now find that a Roth
also provide matching contributions that are IRA is a good fit for their needs. In order to contribute
essentially free money added to your retirement to a Roth IRA, you or your spouse must have earned
account. There are restrictions on contribution income. Direct contributions to a Roth IRA can be
amounts and penalties for early withdrawals. If withdrawn tax-free at any time.
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Annuity
Annuities are issued by insurance companies and are
designed to grow in value and then pay out a stream
of guaranteed monthly payments in retirement. They
are usually considered an option after 401(k) or
IRA options have reached maximum contributions.
Drawbacks can include the high fees and lack of
flexibility often associated with annuities.
Brokerage account
While investment accounts opened with brokerages
can give you greater flexibility with accessing your
money and making investment choices, they lack the
tax advantages of other retirement savings options
and thus are usually not a top choice for this type of
savings goal.
Self-employed Plans
If you are your own boss planning for retirement Asset Allocation
may take a little extra work, but there are some very
beneficial options for you too. Below are a few of the Once you have decided what type of plan you will
most popular choices. (For specific questions about use to harbor your retirement nest egg, it’s time to
any of these options, contact your employer or a choose what types of investments will make up your
financial planner.) plan.
Individual 401(k)
When choosing where you will invest your money,
As the name implies, the Individual 401(k) –
it is important to think about the time window you
sometimes called the Solo 401(k) – is similar to the
have until retirement. If you have more than 20 years
retirement plan offered by employers. However,
this plan is only for sole proprietors who have no until retirement, it is essential that your portfolio have
employees. Like IRAs, the Individual 401(k) comes the ability to grow significantly in that time. For that
with Traditional or Roth options. This plan also has reason, you should be willing to take on some risk of
the benefit of allowing you to borrow money against periodic fluctuations in exchange for the long-term
your savings. growth of your money. If you have a shorter time
horizon, say 5 years until retirement, you need to have
SEP IRA a greater level of security in your investments to make
A Simplified Employee Pension, or SEP IRA, is a way sure you don’t get caught in
for business owners to receive the same advantages a major downswing in your
for their business that would ordinarily be provided investments just as you are
through a Individual Retirement Account. If the about to retire. Most people
business owner has employees, the employees do a mix of stocks, bonds,
receive the same benefits as the owner under the cash equivalents and other
plan. The employer receives a tax deduction for plan
choices to give themselves When choosing
contributions.
diversity and exposure to where you will
SIMPLE IRA growth opportunities. invest your money,
A Savings Incentive Match Plan for Employees, it is important
called a SIMPLE IRA for short, requires businesses Below are some popular to think about
owners to contribute once it is opened but is investment choices that can the time window
discretionary for any employees. This plan requires help you build a retirement you have until
certain contributions by the employer on behalf of the investment plan with both retirement.
employees. growth and protection.
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words, when you are ready to start taking out your
money, the value of your account hasn’t grown as
much as the cost of the common goods and services
you will need to spend that money on. However, since
many cash equivalent investments are insured by the
government and losses are rare, this asset class can
be a good choice when you are looking to preserve
money in the months leading up to your retirement
date.
Mutual funds
If you’re like most people and
want to protect your retirement
money by diversifying your
investments, a mutual fund
could be a solid choice for
your needs. Since mutual If you’re like most
funds are designed to spread people and want
your money among different to protect your
Stocks
types of investments, you retirement money
Stocks, sometimes also called equities, give you an
automatically get exposure to by diversifying
ownership interest in a company. For this reason,
varying types of products. This your investments,
there has traditionally been great potential for growth
variety can be within an asset a mutual fund
with stocks as the economy grows and companies
class or across assets classes. could be a solid
flourish over time. The trade-off with investing in
stocks is that there is a greater likelihood of dramatic choice for your
swings in value in the short-term. However, the best For example, you can needs.
argument for investing in stocks is that they have choose a stock mutual fund
historically far out-paced inflation in any large period that will invest in different
of time. For this reason, stocks should always be on types of companies, such as energy, technology,
your retirement savings menu. pharmaceutical, mining, etc. Or you can choose a
mutual fund that divides your monthly investment
Bonds among stocks, bonds, cash equivalents and other
When you invest in bonds you are lending money asset classes. The money you put into a mutual fund,
either to a company or to the government. In which is pooled with other investors, is managed by a
exchange for this loan, you get interest paid to you at professional as a single investment product. You can
predetermined times and amounts. This offers more request a prospectus to see how a particular mutual
safety than stocks, which can vary greatly in value. fund has performed in the past.
But the downside here is the lack of growth potential.
Bonds are often thought of as a way to temper Now that you know some of the popular options
the effect of tempestuous investments. Generally for retirement investments, how do you know how
speaking, bonds are another standard choice for to make your allocation choices? Usually the most
retirement savings because of their nearly guaranteed important factor is your retirement time frame. If you
returns. are decades away from retirement, you have time
to ride out the ups and down of the stock market
Cash and cash equivalents in exchange for the likely continued growth in stock
Certificates of Deposit (CDs), money market funds, investments. You might consider an aggressive mix
money market funds or treasury bills tend to be of investments such as 75% in stocks, 15% in bonds
among the safest investments you can make but also and 10% in cash equivalents. Once you get closer to
generally offer the lowest returns. Since the returns retirement, a conservative blend of 25% stocks, 25%
are so modest, there is a risk that your investment in bonds and 50% in cash equivalents could better
doesn’t grow as much as the rate of inflation. In other suit your desire for protection.
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latter two haven’t been doing so well, while the value
of your stock investments has gained significantly
such that now, stocks actually make up a total of
80% of the money you have invested. This doesn’t
match with your current allocation plan since you
wanted to have 70% of your investments in stocks.
Rebalancing your account would require you to move
some of your gains in stocks into your bond and cash
equivalent allocations to “rebalance” your investment
choices. While you can do this on your own, you will
likely find it much easier to use a plan that does this
automatically.
If you have a set amount of money that you put into
a retirement plan each month and you don’t tinker
with your allocations, you are using dollar cost
Monitoring Your Accounts averaging. As mentioned above, dollar cost averaging
means that you invest the same amount of money
Naturally you will want to check your retirement each month in a particular asset class no matter the
accounts periodically to see how your money is current value of those investments. For example, if
progressing toward your retirement goals. It is wise you are putting $100 per month into stocks, you put
to make sure your allocations are still appropriate that same amount into stock in the same companies
for your time frame, that your investments are still regardless of whether the prices of those stocks
balanced correctly among the different asset classes, has risen or fallen. In the long-run this lets you buy
and that you are sticking to your original plan for more shares at a lower average price. Dollar cost
investing. This can be a lot of work to do on your averaging guards against the natural tendency to put
own, but luckily there are retirement accounts that less money into a particular investment when prices
are set up to do this for you. have fallen and more in when prices have risen. This
micromanaging of your investments, often called
Retirement accounts or mutual funds with a target “chasing the market” can do much more damage to
date allow you to choose your plan based on your your retirement than if you simply exercise patience
anticipated retirement year. As you get closer to and stick to your original plan.
retirement, a target date plan automatically moves
your investments to more conservative choices.
This saves you the trouble of having to remember to Getting Help
make the adjustments on your own from year-to-year.
It’s still a good idea to review the account every six When your financial future is at stake, there truly
months, but at least you don’t have to worry about are no bad questions. And with the complexity of
figuring out new allocations. many retirement planning issues, there are bound
to be queries that fall outside of your current areas
Another helpful feature of certain retirement plans is of knowledge. There is no shortage of people
an automatic rebalancing. This comes in handy since who will be glad to answer any questions you
your allocations can get out of whack if they are just have about obtaining your retirement goals. Your
left alone. Think of it like this: Let’s say you are in a financial institution, the counselors at BALANCE and
phase of your retirement when you want to have 70% professional financial planners can help you turn
of your investments in stocks, 20% in bonds and 10% your money into an engine for a financially healthy
in cash equivalents. However, your investments in the retirement.
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