Pick a date!

You can’t predict the future, but you need to start somewhere. Retiring at 65 is no longer the default. Your target age should stem from your values, so revisit or define them.

Ten years out

This is a time to get a reality check on your financial life and start to envision what retirement will be like.

• Time to take a basic retirement planning class. Look to your local community college, retirement system pension planners, or professional organizations. You’re not trying to become an expert or nail down your plan. But you are trying to figure out what you need to know and what you need to think about.
• How much money have you saved in a 401(k), 403(b) or other retirement account?  Do you need to save more?  Will you need to work longer?  Do you need to adjust your allocations to make them more aggressive or (more likely) conservative
• Will you get a pension? When will you reach the vesting requirements?  How much will you receive? How will it be paid out? In a lump sum, monthly, etc.?)
• Do you have a copy of your Social Security statement? How much can you expect to receive?
• What other assets and investments can contribute to your retirement? Are there any potential drains on your income?
• Start having conversations with your close friends and family members about your vision for your “retirement.”  How do you want to spend your time?  What skills might you want to keep using in part-time or volunteer work?

 Five years out

• Revisit the questions from 10 years out.
• This is a good time to start a journal. Take some of those daydreams you put away and make them more specific. For example, rather than “spend time with grandkids,” you might write “spend two dinners a week with grandchildren.”

 Two years out (or less)

Time to get serious.

1. Make sure your partner/spouse is involved, if you have one and they aren’t already. Communicate and negotiate with them about how you expect to spend your days and money.
2. Hire a financial planner if you haven’t already done so. You want a fiduciary. The Financial Planning Association is a great place to find one.
3. Create a realistic budget. Figure out if you’ll need to work for income or where you may need to cut back on expenses.
4. Figure out when you’ll take Social Security, whether and when you will sign up for Medicare, etc.
5. Turn that “stake in the ground” into a real retirement date. Put a date in the calendar to retire, whether you share this with your employer or not.
6. Get more specific about how you’ll spend your newly found time.

 I often say it’s not about the plan, it’s about planNING. Life happens. Mid-flight corrections are necessary, and you can’t schedule those.  But following this schedule will help minimize the changes and the surprises.

Take the pressure off!

You do not have to have all of the answers now, so start by separating the financial part from the how-to-pass-the-time part. I often tell clients who are “stuck” on how to begin planning for retirement to focus on the first three years and then on the last three years. This takes the stress out of a big question like, “What the heck am I going to do for 20-30 years?!”

For the first three years, write down the collection of projects you want to get done. This often leads to a very satisfying feeling of purpose and direction. It’s like you’re still working, but you’re working on the stuff you want to work on and have been putting off. I’ve had clients travel for a year, remodel homes and take care of grandchildren, to name a few.

Then write down your ideal last three years, which are also usually easy to envision. These are typically slower, easier, quieter. This part also comes with specifics, such as:

• where you’ll live,
• who you’ll rely on for companionship and support,
• how you’ll want to manage your physical slow-down,
• how you want to be cared for and who will take care of you, and
• how you’ll feel at the end of each day

This process helps you figure out how much money or assets you need to set aside to meet these criteria, which will help build the financial part of your retirement plan.

Now for the years in between. I recommend making a list of the skills you want to keep using. This will likely have far fewer specifics than the first or last three years. That’s fine. For instance,

• I’ve had teachers that want to continuing teaching, so they consider tutoring.
• Those leaving executive positions find there are all kinds of nonprofit boards looking for expertise in leadership, development and managing a budget without having to manage employees.
• Some people enjoy mentoring others and find places to create those relationships.
• Talk to others who have retired. Keep your networks going with people who are or are not in the workforce. You don’t need to know exactly what you want to do, but it’s helpful to identify those skills of which you are most proud, most willing to “give away,” and most likely to energize and satisfy you.

In my experience, most people take two to three years to settle into a “retirement groove.” They tackle all of their projects early on, then they hit the end of that list and it takes a while to figure out how to spend their days. Even those who have done a “whole lotta nothin’” in the first year of retirement realize they want to make a change in how they spend their time. This is typical and normal. I also find it takes two to three years for the budget to work itself out. Rest assured, both how to spend time and how to spend money do work out. And both begin with figuring out how to spend the first three years and how to spend the last three years.

A little education can go a long way

It should be no surprise to you if you’re following this blog that I’m not a fan of 401(k) plans.  Most of my clients have them, though.  They need help identifying the best funds, and they need a way to manage those funds.  As you also have probably gathered, I’m a big fan of not losing money and taking advantage of opportunities to make money. 

Time for shameless self-promotion.  If you want to know if you’re in the best performing funds in your 401(k), and if you want to have some guidance as to when you should be taking advantage of the best times to make money in the markets, you ought to check out this tool:  http://lanning.mutualfundmarketalert.com/. Please fill out the sign-in form and watch the video.  I don’t spam.  I don’t sell my database to anyone at any time for any price for any reason.  You may have limited options with your 401(k).  The least you can do is make the most of them.

You can have confidence managing your 401(k)

When I meet my clients with 401(k)s for the first time, most of them have no idea why they chose the funds they did, have no idea whether they’re in the right funds, and have no idea what to do next. So they have done nothing for years and are continuing to do nothing. This does not have to be you. Here’s a game plan for you:

•   Get out your last statement.  Since it’s not been so scary to open it lately, you might actually know where it is.  

•   Check out:  http://lanning.mutualfundmarketalert.com/. It’s the best tool I’ve seen so far to make managing a 401(k) easy.  It’s an educational tool. That’s all. But it might help.  

•   When I tell clients to talk to their 401(k) administrator about their plan, I get either a blank stare or the somewhat rhetorical questions, “yeah, who is that?”  Your company does have a 401(k) administrator somewhere.  Find that person.  

•   Ask the administrator these questions: 
     o   May I please have the list of funds in which I can invest?
     o   How often can I change my allocation?
     o   How do I change my allocation?
     o   Are there any penalties for changing allocations?  

•   Implement the Mutual Fund Analyzer tool. Follow the signal. Make your adjustments. 
 

This is simply an educational tool that might allow you to catch the upsides of more of the markets. You won’t catch the highs and you won’t necessarily miss the lows.  But that’s better than blowing with the volatile wind of this bear market.  And, if you can make some money in the meantime, all the better.

Remember that taxes do good things and you do have choices

First, breathe.  Lighten up.  We’ve all been there in one year or another.  Find gratitude.  The taxes you pay do good things – libraries, schools, roads, people to fix the roads, street lights, police, courts, and the list goes on.  These things may not be perfect, but for the most part, they’re functional.

Second, remember that you have choices.  Here’s something else a bunch of you did this tax season:  You funded your qualified retirement plans.  When you looked at the difference in your tax bill based on whether you funded that plan or not, it felt like a no-brainer to fund it.  You thought, “Look at all the money I saved in taxes!”  You probably thought with pride, “I put money away for retirement just like I’m supposed to and look at how much I put away!”

If you had these thoughts, I want you to contemplate these thoughts:  (1) If you believe taxes are going to remain the same or go down for you in retirement, it makes sense to fund qualified plans.  But if you believe taxes are going up, you’ve just “kicked the can down the road,” when taxes in retirement will likely be much higher.  Did you really save money?  Frankly, taxes are on sale right now.  (2) You may have been better off funding a tax-free retirement with after-tax dollars, rather than a qualified plan, so that when you go to retire, you’ll have fewer taxes to pay, less fear about tax deadlines, and a simplified tax return.  Starts to make retirement look even better, doesn’t it?  Remember that you have choices about how you earn, invest, and spend your money.

What your 401(k) advisor likely won’t tell you

The book makes some excellent points about 401(k)’s that are worth noting:

1. 401(k)’s were designed to supplement employer pension plans. When employers realized they could save buckets of money by offering only 401(k) plans, pension plans went by the wayside.
    
2. Not surprisingly, a whole new industry of “401(k) plan advisors” cropped up because advisors could make a bucket of money for putting these plans “under management.” These plans are structured to benefit the institutions and advisors who administer them and the government.  Not you.
    
3. The investment options are usually painfully limited, and the advisor available to you is around maybe once or twice year.  In some plans, you can change your investment allocation only once a year.
    
4. 401(k)’s lack liquidity.  If you access the money before you are 59-and-a-half years old, you pay a 10% penalty.  Sure, you can pull it out for medical emergencies, education or to buy a house.  But most people need it when they are unemployed or in some other financial crisis, which isn’t exempt from the 10% penalty.
    
5. Some employers won’t let you shut down your 401(k) unless you quit your job.
    
6. 401(k) investments are often limited to stock market investment choices and most people don’t have the expertise or the time to research the choices.  The stock market volatility can be a killer, and most people are fully exposed.
    
7. Employers can modify, suspend, or eliminate the company match anytime they want.
    
8. If you borrow against your 401(k) and your employment is terminated for any reason, you usually owe the money back in 90 days.  Or pay the taxes and penalty.
    
9. Administrative fees can easily exceed 3%. If you only take 2% off the top, it can cut your long-term return in half.  If hypothetically, if the administrator invests its 3% from your $8K contribution to your 401(k), in 40 years, the administrator would have more money.  Whose retirement are you funding?
    
10. You’re sold on this story:  Save money in your 401(k) now to get a tax benefit, and then when you retire, you’ll take money out in a lower tax bracket.  The story’s unlikely to be true.  First, I believe tax rates are going up.  But even if they don’t, you’ve likely lost all the deductions you had while contributing to the 401(k) like the deduction for mortgage interest, your dependents, and your 401(k) or IRA contribution.  Those have likely disappeared by the time you retire.
     
11. The government is ALWAYS your 401(k) partner. The bigger your account gets, the bigger the government’s share.  Whose retirement are you planning?
     
12. If you die owning a 401(k), your heirs could get as little as 27% of it after taxes.

  There is a better way.  Let’s talk.
 

You must make your own path

Start here:  It’s not your fault.  Your parents probably had their retirements built this way:

     • By the government (Social Security)
     • By their employer(s) (a pension)
     • By their savings (what they saved)

But your retirement probably looks more like this:

     • Your savings (maybe a 401k plan)
     • Your savings
     • Your savings

Not only is this a daunting proposition, but the people who probably help you with advice about many things (your parents) are often unable to help you at all in retirement planning because what they did won’t work for you.  As a result, this generation is a little lost.  Not your fault.  But it is your responsibility to recognize that you may need some assistance and help in learning what needs to be done, when and how.  Read.  Ask questions.  Do research.  This is your life and your money.  You can do this.

And, well, that’s what I’m here for.  I can help, too.  Let’s get started.

Finding the right retirement income sources

What about the government?  Will Social Security income go away?  Hard to say.  Social Security income is a huge political football that no one wants to drop or be accused of ending.  As workers (a large electorate), we pay into the system and would like to see money out of the system.  Yet, the Social Security statement itself discloses that it predicts to pay on 78% of benefits in 2037 (http://www.ssa.gov/mystatement/currentstatement.pdf).  Even my clients in their late 50s don’t think they’ll get a dime of Social Security.  Here’s my take:  If it’s there, I want my clients to get their share and have that share be taxed as little as possible.  That takes some planning now.

What about employers?  Will employer pensions ever come back into vogue?  Unlikely.  They’re expensive and complicated to manage.  Employers faced with rising costs (medical insurance being high on that list) are looking to give retirement income benefits as cheaply as possible.  In years past that has meant the 401k, which for most highly compensated employees and business owners is inadequate.  The 401k was never intended to be the sole retirement benefit. It was designed to supplement the pension offered.  Even if my clients fund a 401k, we have to find alternate investment vehicles.

What about personal savings?  No one feels they’re saving enough.  That might be true.  Only to make it worse, no one feels like they made any money with their investments in the last 10 years.  There are many solutions here besides winning the lottery (and, by the way, if this is your solution, remember that you have to play to win – it’s always about the follow-through).  One of the tricks, I believe, is to find retirement income sources that provide tax-free income.  No, not the Roth IRA which most Bay Area families don’t quality to fund, and even if they did, they’d only be able to put away $5K.  Business owners (especially of C corporations), in particular, have potentially one of the best strategies to make this happen.  The other trick is to find non-stock market related investments.

The government might create a universal retirement funding plan.  You might win the lottery.  Or, you might just explore some of your personal savings options.

What are your options?

     The stock market is not inherently a bad place to be.  Like every investment, it has a risk-reward trade-off.  You must decide how much risk you’re willing to take.  In the last several years, many people have re-evaluated for themselves what that means.  First things first:  figure out what kind of investor you are.

     Then, consider other options besides the stock market if you can.  If the better part of your savings is in your 401k at your employer, you’re most likely stuck with those investment options.  But if you have cash on the sidelines or you have IRA monies from previous employers, you have more options.  People think of the stock market because it’s what most publicized and most accessible online.  However, there are other pretty interesting and pretty great options in the insurance and real estate worlds where your returns might be greater and your risk perhaps lower.  You might consider these other opportunities.

To Roth or Not To Roth

There’s much to consider in deciding whether to convert an IRA:

• Do you think you’ll be in a higher tax bracket in retirement?
• Can you pay the taxes owed as a result of the conversion out-of-pocket?
• If not, will you suffer a 10% penalty for paying the taxes by withdrawing the money from the Traditional IRA?
• Should you pay those taxes in 2010 or spread them out over tax years 2011 and 2012?
• And more….

Do:  Talk to your accountant and financial advisor.  Find your IRA statements and your 401(k) statements from previous employers.  You’ll want to make this conversion early in 2010 (as close to January 4^th as possible), so that you have lots of time to see that account perform.  If it doesn’t produce positive returns, you might want to “recharacterize” it back to a Traditional IRA.

Don’t:  Forget that there’s a tax liability incurred by making the conversion. Talk to your financial professionals about how you’ll handle that liability.  Keep in mind that 2011 and 2012 might bring higher tax rates, making an election to pay that liability in 2010 preferable.

And remember:  The removal of the income limit for conversions is permanent.  You don’t have to make a decision this year.  But the opportunity to spread the tax liability over two years is temporary.  You should also note that the income limitations on contributing to a Roth remain.

This might be a great opportunity for you.  Or maybe there’s a better way to spend that tax money.