Money & Finance

Use these 10 ‘Commandments’ to help plan for retirement

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Even Moses had a retirement plan – walking 40 years. Nowadays people just work 40 years – or longer – to build a plan for their retirement.

If a 25-year-old works 40 years and saves $5,000 per year ($192.30 per pay period) he or she will be worth $1 million at age 65 – assuming the retirement plan makes 7 percent annually in compounding interest.

Here are "10 Retirement Commandments" from 

Get out of debt: High-interest credit card debt festers in your finances and costs more than can possibly be regained through saving and investing. Mortgages and student loans score a pass due to the deductibility of the interest, but car loans and credit cards can sport interest rates well above yields on aggressive investments. Pay off expensive debts and then accelerate retirement savings in earnest.

Emergency reserve: Getting out of debt and saving for retirement is hard enough, especially when you have to use a credit card for every crisis. Emergency funds are the cornerstone of every financial plan. Save three to six months’ worth of living expenses.

A good target is $10,000 cash – liquid – for true emergency "needs" not "wants."

You shall budget: Budgets underlie any wealth-building effort and keep you on track with everyday expenses and savings. Knowing the regular expenses and bills helps you see where your money is going and how much is paying for "the fat that could be cut" and put into savings. Pay yourself first. Savings, retirement and non-retirement should be "necessary expenses" to be paid every month, such as food, water and electricity.

You shall save: It takes many years to save a substantial sum, and even more for the magic of compounding to become apparent. Don’t put off saving for retirement. Save as much as you can every week instead of counting on the lottery. Put at least $50 a month into a 401(k) plan. The sooner you start, the less you have to save in the long run.

Take on risk: Retirement investing is long-term with investors taking more risk as their investments have longer to recover from market volatility. With a 401(k) it’s called "dollar-cost averaging." You tell the fund to buy $100 worth of Stock E every month. Volatility makes share prices rise and fall. So, in January the stock is $33, and for $100 you got three shares. In February it’s $25, and for $100 you got four shares. In March the share price is $20, and your $100 got you five shares – your 12 shares cost you $300 ($25 each), and when the price goes back to $33, your 12 shares are worth $396 instead of just $300.

Financial plan: Your plan tells how well the road through retirement is paved. You’ll need 80 percent of current annual income, minus annual 401(k) annuity payout and Social Security benefits, the leftover being the amount you’ll need in savings per year of retirement. If your "full retirement age" is 66 (those born 1946 through 1954) financial planners want you to run your financial plan out to 100 – 34 more years beyond retirement. Saving money probably won’t get you there, but investing might.

Set goals: Set goals within your financial plan in five-year increments. In five years you’d like it to be worth "X" and in another five years you’d like it to be worth "Y." Monitoring annual returns tells you if your investments are meeting the goals you laid out.

Maximize investment options through research

There’s a lot more to "tending the greens" than sowing and hoeing.

Small expense ratios: The more an investor pays in fees, the less there is available for investing and compounding. Investors minimize fees with low-cost custodians for their IRAs and "index mutual funds" (lower expense ratios, fees scooped yearly from fund assets). Index funds, on average, outperform "actively managed mutual funds." Studies show actively managed funds often fail to beat their benchmarks, and when they do the fees and expenses negate extra returns. Index funds include those tracked by the Standard & Poor’s 500, Russell 2000 (an index of 2,000 smaller company stocks), Wilshire 5000 (the entire 9,000-stock market of publicly traded firms – "the Wilshire 8934" sounds too funny). See The Motley Fool’s "Index Center" at

Insure working body: The retirement-planning process becomes moot when catastrophe stops your ability to make – and save – money. This makes disability insurance a must for younger folks. Most company-based health insurance plans include disability insurance (45 percent to 60 percent of gross income on a tax-tree basis) covering sickness that creates an inability to work.

The cost of buying disability insurance is based on your age, occupation and income, but you can buy as much or as little as your budget will allow. Policies are based on answers to these: Was the disability unpredictable (not resulting from previously known chronic illness)? Was the disability incurred while performing job- related duties? How long is the waiting period for claim payments to start? Will other insurance policies pay claims for this event? How much is paid per pay period? How many pay periods will they continue? What if the beneficiary is not totally disabled, but only partially?

Tax-favored retirement accounts: The government encourages saving for retirement with accounts providing tax breaks. Funds can be invested before taxes for investors expecting lower tax rates in the future. Money can be invested after taxes in Roth IRAs, where contributions and earnings can be taken out tax-free during retirement. Investors can open "individual retirement accounts" (traditional IRAs) or Roth IRAs. These allow contributions of up to $5,000 per year. Employers also offer 401(k) retirement plans that allow workers to save up to $16,500 yearly in pre-tax money. Seniors must take "required minimum distributions" (RMDs) from IRAs and 401(k) plans, beginning the April 1 after the year in which they turn 70 1/2 years old. The first RMD is 3.65 percent of the account balance and the percentage increases each year. Roth IRAs require no RMDs. Seniors should tap nonqualified accounts first, IRA and 401(k) accounts next and Roth IRAs last. This delays tax implications and allows tax-advantaged investments to continue growing.

(c) 2013 Tulsa World. Provided by ProQuest LLC. All rights Reserved.


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