The Bogleheads' Guide to Retirement Planning (4 page)

The
Bogleheads’ Guide to Retirement Planning
is a great place to start building a long-term viable plan. The book covers most of the basics. However, it does not provide definitive answers to all questions. More research on your part is needed. Appendix II has a great book list compiled by Boglehead Taylor Larimore. Although Bogleheads tend to be do-it-yourself people, some issues do require the help of a professional. Trying to cut corners by doing complicated tasks yourself is not always the best course of action.

Chapter 1, “The Retirement Planning Process,” by Thomas L. Romens provides a great overview of things to come in the rest of the book. Tom takes you through the highlights and distinguishes the difference between saving for retirement and actually planning for it.

Chapter 2, “Understanding Taxes” by Norman S. Janoff is an important introduction to all types of taxes that can affect your retirement plan. Minimizing the impact of taxes while in retirement is critical because it maximizes your discretionary income from pensions, Social Security, and your portfolio.

Chapter 3, “Individual Taxable Savings Accounts,” by Dan Kohn explains why a taxable savings account is the most straightforward way of holding investments, though seldom the best way because you will be taxed on the income and capital gains each year.

Chapter 4, “Individual Retirement Arrangements,” by Jim Dahle shows why an individual retirement arrangement (IRA) is one of the best ways an investor can save for retirement. The advantage is that the assets in an IRA grow without being taxed each year, leaving more money to compound for your future benefit.

Chapter 5, “Defined Benefit Employer Retirement Account,” by The Finance Buff (an alias, of course). The focus of this chapter is on defined benefit plans. Funded by employers, an employee’s income benefit at retirement depends on salary and years with the employer.

Chapter 6, “Defined Contribution Plans,” by Dan Kohn covers an assortment of retirement plans, including the popular 401(k) and 403(b) plans, as well as profit-sharing arrangements and ESOPs. Dan explains the benefits and disadvantages of each plan.

Chapter 7, “Single-Premium Immediate Annuities,” by Dan Smith tackles the subject of guaranteed income streams in retirement. This interesting chapter covers all types of immediate payout annuities and includes a guide for getting the best deal.

Chapter 8, “Basic Investing Principles,” by Bob Davis covers exactly what the title says. The chapter includes good Boglehead principles, such as diversifying your investments to reduce the risk of a large loss, maximizing your return by minimizing expenses, and sticking with your plan.

Chapter 9, “Investing for Retirement,” by David Grabiner and Alex Frakt discusses the details of a good investment strategy while saving for retirement. This chapter focuses on creating the road map to a solid investment plan.

Chapter 10, “Funding Your Retirement Accounts,” by David Grabiner and Ian Forsythe provides an order to funding your retirement. It is devoted to helping you make an informed decision from among the various types of accounts available to you.

Chapter 11, “Understanding Social Security,” by Dick Schreitmueller is a critical chapter for everyone to read. Social Security is a primary source of income for many retirees, yet few people know as much as they should about this vast program.

Chapter 12, “Withdrawal Strategies,” by Carol Tomkovich explains that the end result of your retirement plan is to provide stable income that is high enough to maintain the lifestyle you wish to live. But how do you efficiently take money out of your various accounts? This chapter helps answer these important questions.

Chapter 13, “Early Retirement,” by Jeff McComas may sound impossible in today’s economic environment, but it is not. This chapter describes strategies to bridge the income gap between your last day of full employment and your first Social Security check.

Chapter 14, “Income Replacement,” by Lee E. Marshall is a critical chapter. The focus of this chapter is on life and disability insurance programs. With life’s uncertainties, protecting your future earnings from premature death or disability is a necessity.

Chapter 15, “Health Insurance,” by Lee E. Marshall is another issue that cannot be ignored in a good retirement plan. Planning for medical care provides a solid foundation for retirement.

Chapter 16, “Essentials of Estate Planning,” by Robert A. Stermer provides an overview of how you can control decisions made on your behalf when you are not able to do so. It includes life preservation directives during a critical medical problem and how your worldly possessions will be distributed after you are gone.

Chapter 17, “Estate and Gift Taxes,” by Robert A. Stermer provides insight into the complex and often changing world of distributing wealth without taxation. Planning today for sharing your wealth can save your heirs thousands of dollars in the future.

Chapter 18, “Seeking Help from Professionals,” by Dale C. Maley and Lauren Vignec offers guidance on whom to trust in the finance industry. This chapter will help you understand different types of financial advisers, how they work, how they are paid, and how to choose one for the need you have.

Chapter 19, “Divorce and Other Financial Disasters,” by David Rankine is required reading. The world is not perfect; people lose jobs, good health turns bad, and more than half of marriages end in divorce. David’s enlightening chapter will assist you to find the help you need to protect your retirement plan when life’s ugly side turns your way.

Chapter 20, “Meet the Bogleheads,” by Taylor Larimore and Mel Lindauer is a special chapter about how this group helps thousands of individuals. You’ll learn a bit of the history of how the Bogleheads came to be, what happens on the Bogleheads.org forum, and how the Bogleheads organization has flourished.

Appendix I, “Pearls of Wisdom,” is a collection of thoughts and sayings that are near and dear to the hearts (and wallets) of people who participate on the Bogleheads.org forum. Some of the pearls are originals, and others are oldies but goodies.

Appendix II, “Recommended Reading,” is a selection from Taylor Larimore’s popular “Investment Gems” on the web site. Taylor has read hundreds of investment and financial planning books. These are some of his favorites.

There were many people who generously contributed their time and effort to this ambitious project. First, we thank John C. Bogle for his vision and guidance and for agreeing to write the foreword. Second, we thank Bill Falloon of John Wiley & Sons for enthusiastically supporting this book. This would not have materialized without Bill’s strong backing. Finally, we wish to thank all the Bogleheads who participated in this bold experiment. They are listed alphabatically within categories:

 

 

Laura F. Dogu

Richard A. Ferri

Taylor Larimore

Mel Lindauer

Jim Dahle

Bob Davis

The Finance Buff

Ian Forsythe

Alex Frakt

David Grabiner

Norman S. Janoff

Dan Kohn

Dale C. Maley

Lee E. Marshall

Thomas L. Romens

Dick Schreitmueller

Dan Smith

Robert A. Stermer

Carol Tomkovich

Lauren Vignec

Ned Benz

Arleigh Clemens

Jason Good

Zack Hiwiller

Moira Keane

Paul Krafter

Shawn Larsen

Pat Marshall

Josh Meyer

Jeff McComas

David Rankine

The MN Bogleheads

Marlene Perrin

Amy Shao

Wendy Swanson

Adem A. Dogu

Derin B. Dogu

Daria A. Ferri

Retirement! You’ll be ready, but will you have the money to do it? Retirement planning is an exploration of alternatives that link present decisions to future implications. The objective of a retirement plan is to identify strategies that you can use to realize your financial goals—goals that will support your plan for living your postretirement years. Failure to link your retirement financing to your life plan in retirement might result in planning for the wrong future or failing to provide financially for the future you planned.

Saving for retirement and planning for it are two different topics. Young people who enter the workforce for the first time are encouraged to save for retirement, but they are not
planning
for retirement—at least not yet. But you are ready to plan. What should you do? How do you start? How much do you need?

The Bogleheads’ Guide to Retirement Planning
explores the planning process itself, emphasizing the linkage between saving for retirement and actually planning for it. We’ll introduce some basic financial planning concepts and provide suggestions regarding how much to save for retirement and how to budget for those savings. Lifestyle choices today directly impact the ability to save for the future. As the poet Robert Burns wrote, “The best laid plans of mice and men often go awry,” it is necessary to create a dynamic plan to address the uncertain nature of everyone’s health and financial and personal future.

Retirement as we know it did not exist until the twentieth century. People worked until they could not physically work anymore. There were no pensions, no Social Security, and no Medicare. You were on your own. Most people retired to their children’s home or another relative’s home, where they lived out the rest of their days.

A new concept of retirement evolved in the 1900s. It focused on a life of rest and leisure paid for by a pension from many years of hard work in an industrial world and modest government subsidies from government-paid Social Security and Medicare. At first, retirement was expected to last only a few years. The retirement age was 65 years when Social Security was created in 1935. That was life expectancy at the time. Accordingly, many people were not expected to live long enough to collect.

Times have changed since the early 1900s; people are living longer, private pensions are diminishing, Social Security benefits are likely to be reduced in the years ahead, and Medicare coverage is becoming very costly. These changes have dramatic implications for future retirees. Baby boomers and beyond must plan retirement differently than their parents or grandparents. Perhaps retirement should be viewed as a third phase in life, potentially equal in duration to the earlier development and full-time work phases of life.

Imagine yourself in retirement for potentially 30-plus years. Where will your income come from? How will you structure this time? Undoubtedly, you will see yourself as a healthy, active person. Following good health practices today, such as watching your weight, cholesterol, and blood pressure and getting regular exercise, can increase your chances of a longer, healthier life span. Unlike earlier phases of your life, you see retirement as unburdened by the pressure to pursue an education and a career. You will want to pursue all the leisure, social, or perhaps political activities that you had no time for while working full-time. A 2004 AARP survey on baby boomers’ expectations of life in retirement found that 70 percent of the baby-boom generation expects to spend more time on a hobby or interest, 68 percent will have more time for recreation, and 51 percent expect to be involved in community service or volunteering.

Those goals are all commendable. But how do you generate the income for your living needs, given diminishing pensions and the cloudy outlook for Social Security? The big change in retirement is that you will probably not be fully retired from gainful employment. Numerous surveys have found that more than 70 percent of retirees expect to work in some capacity, and for some of them, the primary reason will be social fulfillment. Retirement certainly has the potential to be a multifaceted phase of your life.

Money is undoubtedly important, and a steady source of income is critical to a happy retirement. However, money cannot buy happiness. In her book,
You Don’t Have to Be Rich: Comfort, Happiness, and Financial Security on Your Own Terms
, Jean Chatzky reports that at the $50,000 income level, increases in happiness level off. Statistically, people who earn around $50,000 a year are just as happy as those earning more than $100,000 per year. Your lifestyle is your choice; simply be aware that studies show that a more expensive lifestyle does not necessarily correlate with additional happiness.

Retirement is about what you are retiring to, not what you are retiring from. In addition to your financial goals, your retirement goals should include the elements of health, social interaction, intellectual stimulation, and happiness. In their book
What Color Is Your Parachute? In Retirement
, Richard N. Bolles and John E. Nelson present some of the findings of Charles Morris, who attempted to define a “good life.” His characterization of “ways of life” is a purposeful synopsis of what you might aspire to retire to. Some ways of life described are (a) improvement, working for realistic solutions to specific problems; (b) service, devoting yourself to the greater good and to others; (c) enjoyment, pursuing pleasures and festivities; (d) contemplation, introspection to achieve a more rewarding inner life; and (e) action, using physical energy to accomplish things.