by Martha Walling

When planning for retirement, you should start as soon as possible. By beginning early, you will have more time to create a portfolio of investments that should generate a comfortable income when you retire. Here is an example illustrating how saving early can be beneficial. At age 25, if you save $2,000/year or about $230 per week at 4% fixed interest for 40 years, you will have accumulated approximately $2,000,000. To accumulate the same $2,000,000 starting at age 45 you'd have to save $54,500/year or about $996 per week.

You might be saying to yourself, how much money will I need in retirement and therefore how much do I need to save each year and for how long. To help answer these questions, follow the steps below.

Step 1 - SET GOALS - What are your plans for retirement? Do you want to travel, move closer to family, relocate to a warmer climate, or remain where you are and pursue your interests & hobbies? Make a list of these retirement goals so that you can see them all together in one place. Achieving your goals will require money and that is why planning is so important.

Step 2 - MAKE A BUDGET - For two or three months jot down how much you are spending, account for every penny spent. Be sure to note what the expenses were for. And, include the amount you are saving for your retirement. Then, review your spending and divide them into categories such as the ones listed below. After your current budget is complete remove items that will be unnecessary in retirement such as work expenses. You may also need to add items that correspond with the goals you identified in step 1.

Work expenses:
  • cleaning bills
  • gas
  • parking
  • lunches out
  • work related contributions like union dues
  • contribution to department collections for helping a fellow employee
  • sponsoring your co-workers kids for school fun raisers
  • football pools
  • other items
*Some of these current expenses may be eliminated or reduced in retirement.

Incidental Expenses:

  • Starbucks
  • Lunches out
  • Vending machine purchases
  • other
Since you are getting a periodic pay check you may spend money for extras like a $7 cup of coffee at Starbucks. In retirement, Starbucks might be eliminated as you may need to mind your budget more closely. Or, now that you have more time you may want to get Starbucks more frequently.

Debt Expenses

  • Car payment
  • House payment
  • Loans
  • Credit Cards

*It is a good idea to have as much debt paid off before retirement as possible.

Necessary Expenses:

Look closely at the necessary expenses as some of those may go up.

  • Water bill
  • Heating bill
  • Electric bill
  • * Remember you likely have spent the last 30 summers and winters at work and setting your thermostat accordingly. Now that you will be home during many of those hours, you may need to increase these expenses.
  • Food - Check your food bill and determine if it needs to go up or down based on more time at home to cook.
  • Health Care - Add health care or supplemental health care depending on whether you have some or all medical paid for through a pension plan or some other source.

Recreation Expenses

  • Clubs
  • Golf
  • Gyms
  • Other
  • * If you anticipate joining clubs or recreation centers requiring new monthly expenses, add these to your budget.
  • Travel
  • * Add in any travel plans in your goals or a monthly set amount should you decide later to take a trip.

Step 3 - HOW MUCH YOU NEED - Figuring out how much money you need in retirement is the hard part. Using a retirement calculator is an excellent way to help you determine the amount of money you will require. Use this website to get you started:

Step 4 - HOW MUCH YOU HAVE - The next step is to determine how much money you'll have in retirement if you stay at your current savings rate. Use the following savings calculator to determine this number

Step 5 - COMPARE TOTALS - At this point you have an estimated amount of money needed in retirement and an estimated amount of money you'll have in retirement. Now is the time to compare these two numbers and see where you are. If you are short of your required number you'll need to make decisions about your retirement. Either save more, retire later or revisit your goals.

Now let's discuss financial planning in general. When I was in the market for a financial planner I talked to friends and relatives, and chose one that I was comfortable with. It is very important to feel comfortable with the person you are depending on to give you sound advice on how to invest your hard earned money. I moved my 401K and IRA into a portfolio with his firm. We discussed my situation and I chose to invest my funds in Long Term Investing of Bonds and Mutual funds. At age 70 , I am required by the IRS to withdraw a percentage of these funds. Adding together my pension, social security and the small income I get from an annuity, I disbursed this into my short term portfolio, checking, savings and CD's, from here I pay all my daily and monthly, bi-monthly & yearly bills and this is also my mad money, which if I budget carefully will sustain me until I reach age 70 , when I will have additional money.

Include your spouse in your financial planning. Both of you should agree on a plan and work together for mutual benefit. Two people contributing to a 401K or IRA or saving in some other manner helps a great deal in achieving the goals you desire. It also helps to have another person in which to explore options, gather information and make decisions. In other cases, such as mine, there is no spouse. I had to find other avenues for becoming informed and weighing my options. I attended as many seminars in my area as I could. They all included a nice meal, and I gathered information to help with my selections. Every seminar covers the many choices we Americans get to make. I found two types of investing that really caught my interest-short term investing and long term investing.

  • Short Term Investing/ involves Checking accounts, savings accounts, money market funds, and certificates of deposit, to name a few. Money in these accounts is readily available. These accounts pay a small percentage of interest if a set balance is maintained. This money is insured by the FDIC. Having money buried in your yard or stuffed under your mattress are not good choices.
  • Stocks allow you to have partial ownership in the company in which you invest. If the company grows and is successful, you will make money when you sell the stock.
  • Bonds are loans to businesses, government, etc. Bonds are held for a certain period of time. The money earns interest for the term of the bond, and you are paid at the end of the term. Some bonds are insured by the FDIC.
  • Mutual funds are good for small investors; they give you more diversification than individual investing. This means that you are investing in several different companies and if one loses money, another should gain.
  • Long Term Investing is for funds that are not needed immediately. This includes stocks, bonds and mutual funds. IRA, 401(k)
    • Traditional IRA
      • Contributions are tax deductible
      • All earnings are tax deferred until withdrawal
      • Withdrawal before 59 results in a 10% penalty fee & income taxes
      • A once in a lifetime withdrawal of up to $10,000 to buy a first home is penalty free but subject to income tax
    • Roth IRA
      • Contributions not tax deductible
      • Withdrawal in retirement is not subject to tax
      • Withdrawal amount invested at any time with no tax or penalty
      • Early withdrawal of earnings is subject to penalty & tax
      • No mandatory withdrawal amount in retirement
    • To determine if a traditional IRA or Roth IRA is better for you visit
    • Spousal IRA
      • Full time homemakers can contribute up to $5,000 (in 2008) even if they don't generate income
      • Eligible regardless of spouse's retirement arrangements
      • Roth IRA contributions not tax deductible
      • Withdrawal in retirement is not subject to tax
      • Withdrawal amount invested at any time with no tax or penalty
      • Early withdrawal of earnings to subject to penalty & tax
      • No mandatory withdrawal amount in retirement

Employee Retirement Accounts

  • 401(k)
    • Employer sponsored retirement plan
    • Contribution paid directly into plan on pre-tax basis lowering taxable income
    • Deferred tax on both contributions and earnings until withdrawal
    • Employer may match contributes on a percentage basis
    • Withdrawal is allowed after age 59
    • Early withdrawal results in a 10% penalty and income tax
    • Withdrawals must start after age 70 unless still employed at the same company sponsoring the plan
    • Required minimum withdrawal amounts set
    • Loans from balance are allowed with set interest rates applied
    • Interest then become part of the plan balance
  • 401(b)
    • Designed specifically for public-sector employees such as public educations organizations, some non-profit employers & self-employed ministers
    • Similar to the 401(k) plan
    • Contributions made on a pre-tax basis
    • Contributions & earnings taxed as income at withdrawal
    • Designed for small business & self-employed
    • Contributions made on a pre-tax basis
    • Early withdrawal is subject to penalty & tax
    • Higher contributions limits
    • Employers with employees must contribute the same amount to their employees
    • Account, as they do their own account

By planning ahead you can have the freedom in retirement to do what you want, when you want. It all depends on you. The best thing to do is put money aside and forget you have it. When the time comes you will be glad you did.