Retirement Planning For Dummies Cheat Sheet

How long $1 million will last in retirement

Hitting $1 million in retirement savings is a lofty goal. And having a million saved for retirement is a target many people share. Why? A million dollars is an impressively large round number. And a million seems like it should be enough to sustain you a long time in retirement.

But is hitting a million bucks enough for your retirement? Well, that depends on a few factors only you can determine.

Measuring how much you spend

Knowing how long a million will last starts with understanding how much you spend a year. You can measure your spending habits in several ways. Quicken software is good at measuring your spending, but you need to pay for it and install the software on your computer. Another option, which is much easier and won’t cost you anything, is Mint.com:

1. Go to the Mint website at https://mint.intuit.com/.
2. Click the Sign Up button to open an account.
3. If you don’t already have an account, create an ID. Use your email address and a unique password.
4. Sign into the Mint account.
5. Click the + Add Accounts tab at the top of the page.
6. Look up and enter all your spending accounts, such as your credit card accounts.
7. Go to the Trends tab.
8. Choose the Over Time option under the Spending category.
9. Make sure the During option is set to Last 12 months. Mint.com tells you how much you spent in all the major categories.

Think about costs you may incur when retired. It’s generally thought that most retired people spend 90 percent of what they spent while they were working. But make adjustments as needed. For example, do you expect to travel more? Also consider your healthcare costs. If your employer was paying for some of your medical expenses, you’ll need to factor in more medical spending.

Measuring how long $1 million will last

Now that you know how much you spend, it’s time to look at the other part of the equation: How long will the money last? One way to measure how long your million dollars may last is to use the FIRECalc online calculator:

1. Go to the FIREcalc website at https://firecalc.com/.
2. In the Start Here box, enter the following:
3. Enter your annual spending. The spending number you calculated using Mint goes into the Spending blank.
4. Enter your portfolio size. Add up all the money you saved. For our example, it’s a million dollars, or 1000000 (don’t use commas).
5. Enter the years you’d like your money to last.
6. Click the Submit button.
7. Look at the results. FIREcalc runs more than 100 possible scenarios to see whether your money will last as long as you’d like. For example, if you spend $30,000 a year and want it to last 40 years, the million dollars lasted long enough in all the scenarios tested.
8. Revise your assumptions. FIREcalc is customizable. For example, change the years variable and see how your million dollars holds up. You can also make your investment portfolios more aggressive (include more stocks) or more conservative (by including more bonds) and see how the results change.

Tips for retiring early

If you love what you do for a living, retirement isn’t something you probably think much about. But if you hate your job, are burning to do something else with your life, or are just tired of the nine-to-five, walking off the job well before you turn 65 probably sounds appealing.

Join the FIRE movement. FIRE, or Financial Independence Retire Early, is spreading like fire. You don’t have to wait until you’re 65 to call it quits with a job you hate or to make more time to do activities you enjoy (some of which may also make you money).

Building a retirement plan that lets you exit the workforce in your 40s or early 50s requires some extra considerations.

Scrutinize your spending

The easiest way to retire sooner is simply needing less money. This may sound obvious, but the less you need to spend means the less you need to save for retirement. And your spending is mostly under your control. Here are some tips to help you spend less so you can retire sooner.

• Know your run rate. If you don’t know how much you’re spending a year, this is the first place to start. For a quick estimate, use the spending-tracking capabilities on the Mint website. (https://mint.intuit.com/)
• Boost your savings rate. Saving 20 percent of your pay is the minimum for those who want to retire in their mid-60s. If you want to retire sooner, you’ll need to save more. Much more. Think 50 percent or more saved from your pay.
• Banish wasteful spending. If you’re looking to retire early, you need to think creatively to save more money. Be especially mindful of monthly subscriptions; these seemingly small charges add up. Only you know what you consider wasteful spending.
• Monitor your housing costs. Some people who retire early spend much of their effort holding down housing costs. But do you need a $2 million home in the trendy part of town? Consider a smaller home or buy in a less costly area.
• Amp up your earning power. If your ultimate goal is to retire early, you may be willing to do a job you’re not crazy about in exchange for a bigger paycheck. It’s best to maximize your earnings early in your career and get that money invested. The sooner you invest, the longer the money has to grow. Then later in your career, you can afford to take a lower-paying job in a field that’s you find more interesting.

Invest wisely

Retiring early is one part aggressive saving, and another part smart investing. After you saved enough for your money to work for you, you likely won’t have to work as hard yourself:

• Sign up for all the retirement accounts you can. Holding off the taxman and letting your nest egg grow will be a huge help in letting you retire early. Get to know your 401(k) plan and max it out. If you can run a Roth IRA, do that, too. And if you have a side gig, look into opening an SEP-IRA. The more you can shield from taxes while you’re saving and working, the better.
• Keep investment costs down. When you’re looking to retire early, every little bit counts. If you can choose between a low-fee investment and a more expensive one, go for the lower cost one. No one can predict investment returns, but fees are disclosed and have a huge impact on how much money you make from investments.
• Stay diversified but don’t be overly cautious. You need to balance your exposure to riskier stocks with safer bonds with great care. Going overboard on stocks may cause you to flip out during a bear market and sell in panic. One mistake like this can dash your early retirement dreams. On the other hand, if you play it too safe and go overboard on bonds, your portfolio will be doomed with inadequate returns. Find the right balance.
• Maintain an emergency fund. Cash isn’t going to help you reach your retirement goals. Returns on cash are very low. But making sure you have enough cash to get you through a tough path in your life helps you avoid selling stocks at a bad time to raise cash. A healthy cash cushion also helps prevent you from going into debt if your income is disrupted or you face a large and unexpected cost. It’s widely recommended you have at least six months’ worth of expenses in cash. More is better.

Set your financial target

All the saving and investing in the world isn’t going to help you if you don’t have a retirement goal. Know what you need to save in order to retire early. Some retirement savings goals that may help you include:

• Follow the 4 percent rule (with a twist). The 4 percent rule says that you can take out four percent of your portfolio for 30 years and have reasonable confidence your money will last at least 30 years. Some early retirees are turning the 4 percent rule on its head. The same math says if you save at least 25 times the amount of money you need a year, you’ll have enough to take out four percent annually. A basic early retirement financial goal is to save at least 25 times as much as you spend a year.
• Think about saving more. The 4 percent rule applies to a 30-year retirement span. If you plan on retiring early, you’ll need money for a longer period of time. Plus, who knows if the market’s historical returns will continue. You may also face some unexpected costs such as a leaky roof or a car that needs major repairs. Think about saving more than 25 times your annual spending. If you’re in your late 40s, you’ll want to shoot to save 35 times your annual spending or more.
• Get to know online retirement calculators. No one online retirement calculator is perfect. But using several of them can help you get a good understanding of how much you’ll need to retire when you want to. Check and cross-check the results you get from several of these calculators to make sure you’re on target.

If it turns out that you can’t save enough to retire as early as you want to (or you decide you don’t want to retire early), following FIRE techniques will help you waste less money, save more, and at least make financial independence a strong possibility. It’s better for your money to work for you, rather than you having to work only for money.

Build a retirement plan in 15 minutes or less

Building a retirement plan is important. But that doesn’t mean building a retirement plan needs to be time consuming. If you’re just looking to get a retirement plan set up in the shortest amount of time possible, there’s a strategy for that.

Start with your employer plan

If you’re looking for an easy way to start your retirement plan and you are an employee, retirement options at work are your best bet:

• Check with the human resources department to find out what retirement savings options are available.
• See if your employee offers a 401(k) and, if so, how much of your contributions the employee matches.
• Sign up for the 401(k) and contribute at least as much as needed to get the maximum matching contribution from your employer.
• Choose the target-date fund option closest to the year you plan to retire.
• If you can afford to save more for your retirement:
  • See if you’re eligible for a health savings account (HSA). You need to have a high-deductible medical plan.
  • If you’re eligible, in 2020 you can contribute up to $3,550 for individuals and $7,100 for families. If you are older than 55, you can contribute an additional $1000.
• Have money left over? Increase your contribution to your 401(k).
  • In 2020, you can put up to $19,500 in your 401(k). If you’re 50 years or older, you can put in an additional $6,500.
• Can you still contribute more and have time? Think about opening a Roth IRA.
  • You can open a Roth IRA with most online brokers or mutual fund companies. If you’re eligible to open a Roth (you’re not in what the IRS considers a high-income bracket), you can contribute $6,000 a year ($7,000 if you’re 50 or older).

If you don’t have access to a retirement plan at work

Not everyone has a 401(k) or other retirement plan at work. If that’s the case, you still have option:

• Commit to saving for your own retirement. If you don’t have a retirement plan at work, the responsibility to save falls on you. You need to have the discipline to save on your own. It’s important to realize that retirement planning is your responsibility.
• Set your budget. Look at your monthly spending and carve out what you can save for retirement. Earmarking money you can save can help you determine how much you can afford for other expenses.
• Choose a Roth IRA or traditional IRA. As an employee with no retirement plan at work, your best option will be an Individual Retirement Account, or IRA. You can choose between a traditional IRA and a Roth IRA. You can contribute up to $6,000 a year ($7,000 if you’re 50 years old or older) to either IRA.

Traditional IRAs give you a tax break now, and you pay tax when you take money out later. With Roth IRAs, you don’t get a tax break now, but your withdrawals are tax free when you take them out in retirement. In general, a Roth IRA is best if you think you tax bracket will be higher in the future. Roth contributions are phased out if your income is $122,000 to $137,000 as a single taxpayer and $193,000 to $203,000 if you’re married.

Traditional IRAs are best if you have a high income or think your tax bracket will fall in the future.

• Open your IRA. Nearly all online brokers or mutual fund companies can happily open an IRA for you. If you already have an online broker, you can quickly open an online account.
• Invest. Put your money in a target-date fund closest to your retirement date. If a target-date fund isn’t available, look into a robo-advisor option. If that’s not available, split your money between a low-cost stock index fund and a low-cost index bond fund. If you’re young or bold (or both), hold 85 percent in stocks and 15 percent in bonds. Note that 60 percent in stocks and 40 percent in bonds is more prudent.

You’re the boss

If you work for yourself, you have even more retirement planning options. Depending on the size of your business, it may take more than 15 minutes to set up a retirement plan. But if you’re a one-person business, or a gig economy worker, you can get up and running quickly.

• Choose your retirement plan. As a self-employed person, you have three main retirement plan options: a SEP-IRA, an individual 401(k), and a SIMPLE IRA. If you own the company and want to put away the most money possible, an individual 401(k) is tough to beat. If you’re a gig economy worker and already have a 401(k) plan in place, the SEP-IRA is a great option. Vanguard provides an easy-to-understand comparison of the three plans to help you decide which is best for you.
• Open the account. If you already have a relationship with an online broker, the same firm can quickly open an employer plan for you. If not, all major online brokers and mutual funds companies will be happy to open one for you.
• It’s up to you to make the contributions. You’ll need the discipline to hold back some of your annual profits to contribute.
• Invest. Put your money in a target-date fund closest to your retirement date. If a target-date fund isn’t available, look into a robo-advisor. If that’s not available, split your money between a low-cost stock index fund and a low-cost index bond fund. If you’re young or bold (or both), hold 85 percent in stocks and 15 percent in bonds. If you’re more cautious, hold 60 percent in stocks and 40 percent in bonds.