How Much Do You Need To Retire?

It is amazing how many people share a single vision of the perfect post-career lifestyle: waking up late, playing golf or tennis, enjoying a nice lunch, and spending the afternoon in much the same way.

Guess what? It’s probably not in your future. Why? Well, even if you work long and hard enough to afford it, you will almost certainly be bored by leisure. (I know you don’'t believe me, but I can show you plenty of evidence: testimonials by dozens of businessmen I’'ve known who retired, found themselves bored, and went back to work.)

Maybe you will be the exception. Maybe you can walk away from a lifetime of creative, challenging work and be happy to idle away the rest of your life.

Which brings me to the question of money: the second big reason your retirement will probably be different than you imagine.

Living the Fantasy Lifestyle Is Expensive

Even if you find a relatively cheap place to do it in, playing golf or tennis all day and dining at fine restaurants costs a lot of money. And the mandatory first-class travel? As they say in Little Italy, “Fahgedaboutit.”

That kind of living will cost you approximately a quarter million dollars a year.

What Would It Take to Have That Kind of Money?

Let’s see what kind of retirement nest egg you will need to fund a quarter-million-dollar retirement lifestyle.

Assuming your retirement fund can earn 9% a year (which is about equal to the long-term stock market return), you’'d need $2.8 million.

If you go for a safer yield, let’s say US Treasuries, your retirement fund would have to be about $4.2 million.

And that'’s liquid. I’'m not counting the value of your house, your furniture, your collectibles, etc. Since you can’'t earn income from those “illiquid” investments, you can’'t really count on them for your retirement planning.

To have $2.8 million to $4.2 million liquid, you would probably need to acquire a net worth of about twice that, all other things being equal.

Not too many people are worth between $5 million and $10 million when they retire. Yet many, many fantasize about a retirement lifestyle that requires that kind of net worth.

If Your Current Financial Situation Is Meager, Don’'t Despair

Accumulating wealth is just another goal...like learning to ski or play the piano. It will take you time (1,000 hours to become competent at it and 5,000 hours to master it), but you can definitely do it. And I'’ll be happy to help you along the way.

In the meantime, there are ways to bring the target a little closer. The best way, by far, is to find a retirement paradise that is less expensive than the USA. If you can enjoy living in some other part of the world, you can definitely get that great retirement lifestyle for a lot less money.

The Good News Is This: There Are Places Where Living Well Doesn'’t Cost As Much Money

Top Ten List

Why retiring outside the U.S. is appealing.

#10) The people are friendly, engaging and emotionally reachable, less pretentious.

#9) There are new celebrations and festivals constantly. Every day is an adventure.

#8) There are plenty of volunteer opportunities and your expertise is both needed and valued.

#7) The weather is better than back home.

#6) You can afford a gardener, a maid and a cook. In your "old life" this was out of your financial reach.

#5) You might not need a car. #4) The cost of living is better than at home and quality of life is higher.  #3)  The healthcare is better, easier to access and more affordable.   #2)  You won't have to work through your Golden Years.

#1)  More freedom, more choice, less government regulation, less taxes.

My personal favorite is Panama. My goal is to have a winter residence there. Living abroad is definitely worth looking into and there are many resources to help you in determing what the best situation is for you.$


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How to Enjoy a Great Retirement

“It is impossible to enjoy idling thoroughly unless one has plenty of work to do.” – Jerome K. Jerome

To understand what I’m about to say, you have to understand this: Happiness in life comes not from idleness but from working. Not working at a job you hate, but working at a task you love.

Happiness comes when you are busy doing something you care about . . . such as teaching, taking care of your children, painting, watering your plants, or writing a helpful memo. When you are doing something you care about, and paying attention to IT (not YOU), happiness surprises you.

The secret to a great retirement is to figure out how to get paid for doing work you would gladly do for free — and to be able to do that work when and where you want to.

Name your dream . . . pick your price. Maybe you want to be a writer. Maybe your secret passion is food. Maybe you’ve always wanted to get back into astronomy or archeology or gardening.

Somewhere in your past is a buried profession — something you’ve long ago given up on. What if you could reprise that dream?

I know a man whose dream was to be a professional pilot. After working 30 years in a wallpaper business, he took my advice and got himself a job flying part-time for a small airline. A few years later, he became a part owner. He’s making more money now doing what he loves than he ever made selling wallpaper. And he only “works” 20 hours a week.

My buddy's dad gave up a promising career in show business to become a teacher. Fifty years later, he went back into the acting business and became a professional actor. He acted in all kinds of commercials and soap operas, had small talking spots in some big movies, and did some big spots in some off-Broadway plays. He did it for 10 years, made some money, and had a great time.

The Internet has opened up a world of possibilities for “retirees.” I met a guy who trades cigarette lighters online. This happens to be something he always wanted to do and planned to do once he stopped working. But by taking advantage of eBay and all the other Internet auction sites, he is already making more than $30,000 a year doing it just on weekends. Trading cigarette lighters!

There are plenty of other examples. You can become an Internet copywriter, an Internet editor, an Internet travel agent, or an Internet teacher, for example. You can make money giving marriage or dating advice on the Internet, or even selling rubber underwear. You can use the Internet to make a living from your interest in wild roses, say, or your up-until-now useless knowledge of 19th-century swords.

Start your retirement planning right now. Ask yourself the three Big Questions:

1. “What work would I really enjoy doing?”

2. “Who would be the best person to do it with?”

3. “Where would I most want to do it?”

You may not be able to find a partner or relocate right away, but you can definitely start working on mastering the skills you’re going to need for your new line of work.

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What If You Can’t Afford To Retire?

““Cessation of work is not accompanied by cessation of expenses.”” – Cato the Elder (2nd centuryB.C.)

Aging baby boomers are starting to realize that there is very little chance most of them will be able to retire at 55 or 65 and live off their savings. That’s because most of those closing in on retirement don’t have enough saved. A recent survey conducted by The Insured Retirement Institute found the following:

* Only 60 percent of baby boomers report having any retirement savings
* 36 percent said they plan to retire at 70 or later
* 27 percent are confident they will have enough for retirement

The survey found that 27 percent of baby boomers are confident they will have enough money to last through their retirement, down from 33 percent a year ago and 37 percent in 2011. Only 6 in 10 boomers report having any retirement savings, down from roughly 8 in 10 in previous surveys.

Of those who were willing to answer, about 40% have an investable net worth of less than $50,000, 60% less than $100,000, and 80% less than $250,000.

If you figure on making 6% on your money, this means fewer that one out of five Americans who are nearing retirement age have the wherewithal to enjoy a passive retirement income of more than $15,000.

How well can you live on $15,000 a year?

And it’s only getting worse. During the Great Recession, government numbers showed that Americans were in a net spending rather than saving mode. Fortunately, that has turned around but the vast majority of Americans are not rich enough to retire and they are getting less rich every year.

I'’ve made the argument that retirement,– the idea of not working, of living off passive income – was a short-lived phenomenon in this country. It was sold to us by the government and by the banking and the insurance industries, yet it only worked (and only partially) for one complete generation:– the parents of the baby boomers, who benefited from the appreciation of their homes.

Other than that, most Americans have worked most of their lives,– just as most Europeans, most Asians, and most Africans have done since recorded history.

Still, it’'s a great fantasy and one you should not give up on entirely.

If you work hard and invest your savings, you can still retire comfortably. But you’'ll have to do those things over a long period of time,– which you may not have. (Or you’'ll have to get lucky, which you shouldn'’t count on.)

But even if you are able to stop working and live off your savings, retirement may turn out to be less than the wonderful experience you’ve imagined. A former colleague of mine retired with a personal net worth in excess of $20 million about five years ago. Since that time, he has done everything you can do in retirement:– traveled the world, spent time with his family, played a lot of golf, etc. But the other day, he pulled me aside and said, “Ray, let’s do something together. I’ve got to get my blood moving again.”

He wasn’t talking about golf. And he’s not alone. The golf courses of America are full of lonely retirees fantasizing about the good old days when they were involved in something meaningful.

And they are right. There is nothing more rewarding than working on something you think is important. And there’'s nothing less satisfying than whiling away your time with distractions, waiting for your body to shut down.

Someone smart once told me that they should invent a new period of life for Americans today. After the working years, there should be something called the Semi-Retirement or Post-Daily Grind or the Golden Working Years, during which you get to (a) do something you really enjoy doing, (b) do it as many hours as you wish, and (c) get paid good money for doing it.

In the Internet age, I believe this is going to be possible for many of us,– and it will definitely be possible for you if you start planning on it now. It doesn’t matter if you are 55 or 35, there is a way to shift the course of what you are doing now toward some rewarding activity that meets all your needs:– intellectual, physical, emotional, and financial.

The trick is to do work that you love. And it may be that the work you are doing now isn’t lovable. A  Rutgers University study found that 70% of those asked would be OK with working into their “retirement years” if they could find some part-time work they could do outside of their current employment.

Work that’s enjoyable (probably something different from what you are doing now) and work that can be done part-time (20-30 hours a week). Does 't that sound like good “unretirement” work to you?

Let’s add two more qualifications:

* The work should be in a desirable location.

* It should enable you to associate with agreeable people.

That meets my three standards –to enjoy what you do, where you do it, and with whom you do it.  

If you can find work that meets those requirements and pays you a reasonable financial reward, you will probably be very happy to forget about retirement altogether,– at least for a while.

In future messages we will talk about how to go about finding such work. Right now, I'’d like you to think about it. What would you do if you could do anything? Where would you do it? What kind of working relationships would suit you best?

It may be that you will decide to become a free-lance copywriter. Or maybe you will work as an Internet artist, or a cyberspace interior decorator. Your love of horticulture may be transformed into a part-time source of income for you. Anything is possible.$

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If You Want to Retire in the Next Five Years, Do These 9 Things Now

Time for one last push to get you where you want to be

By the time you hit 60, you’ve hopefully built up a significant savings balance. But even if the number is big, you have to be careful about protecting what you’ve built, while still taking advantage of opportunities where you can find them. Here are some ideas to help you get the retirement you want:

Have a career Plan B. The last years of your career will be crucial savings years, but they can be perilous. On average, unemployed Americans 55 to 64 have been jobless for 11 months. So to help ensure you can work until your planned retirement date, lay the groundwork for a backup plan—whether it’s a short-term project, freelancing, or a business idea.

Downsize the house. As seen in the chart below, housing accounts for the largest share of spending in retirement. Swapping a $250,000 house for a $150,000 one puts cash in your pocket—and frees up $3,250 a year in taxes and upkeep, according to the Center for Retirement Research.

Want to retire early? Factor in better health. Ending your career well before you turn 65 requires extra preparation, for a pretty obvious reason: You have more years to fund. Another challenge, though, is that you’ll probably be in excellent health and active for more of that time. That’s also why you’d like to do it, of course, but it means that you are likely to spend more. Younger retirement-age people spend 36% more than those 75 and over, according to Census data. Plan for the extra spending with a more ambitious savings goal. Deciding whether to retire early now? Add a generous allowance for the cost of your travel plans and hobbies to your regular budget—theretirement-expenses worksheet at Vanguard.com is a helpful tool—and make sure it all still fits with a safe spending plan.

Take some profits. You spend a lifetime building wealth, yet success and failure can come down to a handful of years—those just prior to and after you stop collecting a paycheck. The odds say that given how long retirement is, you should keep the bulk of your portfolio in equities. Yet you don’t get to play out thousands of scenarios. you get only one try. Dial down equities to half or less as you near this danger zone. You can always take on more risk after, when the stakes are smaller.

Don’t eat the seed corn. Common advice for retirees is to withdraw 4% of savings in year one and then adjust for inflation. But due to low yields, says economist Wade Pfau, that’s too aggressive now. A 2.9% withdrawal gives you a 90% chance of a 50% stock/50% bond portfolio lasting 30 years. If that seems low, start higher, but protect your capital by spending less in bad market years. 

Put your assets in the right place. Once you’ve maxed out your IRAs and 401(k)s, use taxable accounts for the most tax-efficient investments in your mix. They include index and buy-and-hold equity funds that trade infrequently and generate few capital gains distributions.

Rethink your target. If you’re close to retirement but don’t like the look of your balance, take heart. Most retirement advice and online calculators assume you are going to spend the same amount, adjusted for inflation, each year after you stop working. In reality, spending tends to decrease as you move through retirement, according to David Blanchett of Morningstar Investment Management. When working out your retirement budget, make a distinction between fixed, essential costs and those you may have more flexibility with.

Maximize Social Security. What if you could earn 8% a year on your money risk-free, and all you’d have to do is be patient? Well, there is such a thing: Social Security. A person who would get $24,000 a year tapping his benefit at 62 can expect that sum to swell to $42,000 by waiting until 70. That looks even better when you consider that the payment lasts even if you live a long, long time.

Avoid taxes in retirement. There may be years when you fall into the 15% bracket ($74,900 taxable income for couples). Take advantage by selling your long-standing holdings with big gains. why? The long-term capital gains rate for those in the 15% bracket or below is 0%. That’s right: nada.

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10 Tips for Retirement Savings

Retirement just kind of happens. If we live long enough, we’ll eventually reach a point where we either leave our careers, opt for another, less intense work life, or finish working for a living altogether. There was a time when companies included pension plans in their compensation packages and employees could look forward to receiving a percentage of their salaries to live on for the rest of their lives. Social Security benefits used to be enough to offset the cost of living, so that a person could retire based on Social Security income alone. In the 21st century, neither of these hold true any longer.

Instead, it’s up to the individual to create a comfortable retirement for him or herself. Luckily, those who still look forward to retirement will have the longest post-retirement life spans, thanks to continued advances in health care. In other words, it’s a good idea to do as much as possible to ensure that you will have a secure and enjoyable retirement.

Learning precisely how to do that can be daunting. Speaking with a certified financial planner or advisor can certainly help, but there are steps you can also take to help create a bright future after your working life ends.

10.) Make a Plan for Retirement

Saving for retirement can be a bit difficult to figure out at first. If you need to get a handle on what you need to do to create a large nest egg, you need to begin with a plan. The U.S. Department of Labor recommends that you start by determining your net worth — the total value of your assets minus the value of your debts (things like the value of your house minus the value of what you still owe on your mortgage). You want this number to be positive, with your assets worth more than your debts. Don’t be disconcerted if that’s not the case. Even if you find your net worth is negative (as many people do), start there to figure out what you can do to make it positive.

First, determine what you’ll need to contribute to reach your retirement goal. You want a nest egg that can annually deliver between 70 to 90 percent of your pretax, pre-retirement salary. How much will you need to contribute to reach that goal? More importantly, how will you ensure those contributions are made?

Next, you need to create a budget of your recurring expenses and include your savings contributions as a monthly expense. A budget will also clearly show you where your money’s going and should also provide some insight into what debts should be dealt with first. Now that a plan’s in place, you’re going to need to change your mindset in order to stick to it.

9.) Get in the Saving Mindset

Saving up for years just so you can make 70 to 90 percent of your old salary annually when you retire sounds like a mind-boggling idea. How can you save that much while you’re still living your life before retirement? Fortunately­, there’s compound interest — small amounts of money contributed to a retirement savings account like a 401(k) or Roth IRA that can grow by leaps and bounds over the course of a few decades. Still, you have to plant a seed to grow a tree, and when it comes to saving for retirement, it can be difficult to have the discipline necessary to pay now in order to benefit later. This is where a savings mindset comes in.

Look at the budget you prepared as part of your plan. Is a significant portion of your monthly income being sent off to credit card companies? Then you need to become an attack dog, bent on aggressively paying off your credit card debt. One of the great ironies of saving well is that it often entails doing some serious spending, at least at the outset.

You should designate an amount of your pretax income to contribute to your retirement savings on a monthly or bi-weekly basis and have it taken out of your paycheck, just like your taxes. It’s easiest to save money when you don’t have it in your hands; you’re effectively taking the decision of whether to save that money out of your control.

Take on the outlook that the money you save for retirement doesn’t exist, except for in the future. In other words, stay out of your savings account.

8.) Take Advantage of Retirement Plans

It may seem like a no-brainer to take advantage of a program at work where your employer matches your retirement fund contributions, but not everyone sees it this way. In fact, about one-third of people who have a 401(k) plan available at work don’t contribute. You should consider doing so, especially when employers offer contribution matching programs. Under these programs, not contributing is like turnin­g down free money — with compound interest.

There are a number of types of retirement savings account plans that employers can offer. Among the most popular are the 401(k) plan and the IRA (individual retirement account). Both have their advantages (see Tip 6) and disadvantages, and are widely available at most mid-sized to large companies.

Those who work at small businesses have options as well, as do the self-employed. Check with your employer, a financial consultant or the federal government about various available retirement savings accounts. You might also consider contributing to more than one account. Diversification is an essential ingredient to saving a nest egg.

7.) Diversify, Diversify, Diversify

The saying, “Don’t put all of your eggs in one basket,” couldn’t apply more to saving for retirement. Financial advisors, investment bankers and economists will all tell you that the more diverse a portfolio, the safer it is. A person heavily involved in just one type of investment is more vulnerable to financial problems if the markets associated with that investment tank.

The most common diversification suggestion is to divide a portfolio among stocks (which can offer big pay-offs but can also be high risk) and bonds (Treasury bills that offer little to no risk, but pay out less than stocks). Depending on who you talk to, you’ll hear different percentages for splitting your portfolio between stocks and bonds. One good rule of thumb is to keep your bond percentage close to your age adjusting as life goes on; so if you’re 30, about 30 percent of your portfolio should be in bonds. By the time you retire, 60 to 70 percent of your portfolio should be in bonds.

Don’t stop with just stocks and bonds when diversifying your portfolio. Look for other ways to spread risk among your investments. Investing in largely unrelated sectors, like pharmaceuticals and telecommunications, is a good idea. You should also consider investing in economies throughout the world, rather than companies in just a handful of countries or a single region.

6.) Consider a Roth IRA

There’s long been a debate over which is preferable — a Roth IRA, where savings are taxed when they are contributed, or a 401(k), where contributions aren’t taxed until they’re removed, or until the account matures.

Both make sense, and the 401(k) usually wins because enough interest has accrued over the life of that account to offset (and then some) the taxes levied against it upon maturity.

Since the recession of 2008-09, however, the assumption that a 401(k) will always pay off has come into question. Also, with the unparalleled U.S. government intervention in the markets and in banks, it’s a pretty sure bet that younger workers who have just started to save for retirement will see much higher taxes to pay for that financial intervention by the time their 401(k)s mature.

These two factors make Roth IRAs worth considering. While paying taxes up front (and thus, having less to invest) might hurt now, it’s worth crunching the numbers once more. You might find you’ll lose less money in the long run.

5.) Manage Your Mortgage

If you own a home, you’ve got both a huge debt and a very valuable asset. You can use a home to your advantage as both. If you’re a young saver and own a home, it’s a good idea to keep an eye on interest rates. If they begin to fall, consider refinancing your mortgage to a lower rate. Using any extra money that formerly went to the recurring monthly expense of your higher mortgage payment can then go towards your retirement savings contributions. It’s a good idea to do the math first, however. Paying off mounting credit card debt will likely prove a better use for the extra income, since credit cards almost always have a higher rate than a home mortgage. If the opposite is true for you, refinancing your mortgage is definitely a good idea.

Avoid the temptation of taking out a second mortgage to consolidate your debt unless you trust your spending habits have been curtailed to fit a saving mentality and the cost of paying off your credit cards and other debt is more expensive than the additional mortgage payment each month.

Ultimately, the best thing you can do with your mortgage is to pay it off by the time retirement rolls around. The loss of a recurring monthly expense in the hundreds or thousands of dollars like a mortgage payment is an instant and substantial increase in income.

4.) Cut Investment Fees

John Bogle, the founder of the Vanguard investment firm (which holds more than $1 trillion in assets), points out that investment constitutes a $600 billion industry. That’s not in investment, that’s in fees alone. To paraphrase Bogle, no matter how the markets are doing, investment firms still make more than half a trillion dollars per year.

Cutting investment fees as much as possible is one sensible way of protecting a nest egg. What appear to be piddling amounts can wreak havoc over the life of a retirement account. For example, a one-time $10,000 investment that earns 8 percent annually over 25 years will have more than $16,000 (28 percent) less at maturity with a 1 percent annual fee levied against it than it would without the fee [source: NADART].

An investor will find it difficult to avoid all fees with a retirement account. It pays to look around though; some advisors charge fewer fees than others. For example, a good certified financial advisor will charge only an annual fee, usually 1 percent of the value of your portfolio. This means the advisor has ample incentive to build your wealth. Other advisors may charge transaction fees in addition to an annual fee. Familiarizing yourself with fees before signing on with an advisor can help you save money in the long run.

Be careful going overboard with ditching fees, however. Part of what you’re paying for in an advisor is expertise.

3.) Keep Working

This is likely to be the least popular tip, but it’s the most realistic one. Increasingly, the idea of checking out of the work force at age 65 is going the way of being able to retire on Social Security checks. The good news is, we’re generally staying healthier and more active longer, which means we also can work longer. It stinks, but it also gives your portfolio the chance to continue increasing in value for a few more years. Remember, compound interest really adds up over time.

A person entering retirement age has a few options available. One is to simply stay at the same workplace. You can also undertake a step-down method, either by decreasing the hours logged at work or by finding another, less demanding job. The downside to the step-down method is that it will likely result in less income. Having paid off your mortgage and other substantial recurring expenses and being willing to live a bit cheaply for a few years works well while you’re gradually decreasing your work load. If you’re willing to trade money for free time, it will pay off.

2.) Budget on the Back End

You’ve cut corners and saved for the last couple decades. You’ve been good about not touching your nest egg. You diversified your portfolio well and weathered some economic downturns. Now that you’ve reached the end of your work life, you’ve got a substantial treasure chest that’s all yours. Don’t blow it.

Create a budget you can stick to just before you retire. After years of creating new budgets as your net worth grew more and more positive, you should be a pro at making budgets by now. This is not to say that you have to look forward to living frugally for the rest of your life, just wisely. What is it you’ve always envisioned yourself doing when you retire? If it’s travel, then create a travel category as a monthly expense in your retirement budget. If it’s spending time with your family, then create a “spoil the grandkids” category.

You can still live your retirement years the way you like; sticking to a budget will help keep you from outliving your nest egg.

1.) Purchase Long-Term Care Insurance

It’s a pretty depressing thought, sure, but we’re all going to die one day. Unfortunately, none of us can say how and when we’ll die. That’s why it’s a good idea to purchase long-term care insurance. This specialized form of insurance covers the cost of health care that extends long beyond a typical hospital stay.

On the surface, buying long-term care insurance doesn’t seem to have much to do with saving for retirement. Remember, however, that smart saving also involves spending at times. With long-term care insurance, you’re actually buying a policy that protects your retirement savings. Having to spend your nest egg on long-term care — which can easily reach into the tens and even hundreds of thousands of dollars, depending on the quality and length of the care — is not what you’ve been saving up for throughout your career.$

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Forget Skipping Coffee, Here’s How to Really Save Money

You’re probably not saving enough for your retirement. If you’re young, you need to be putting away about 15 percent. If you’re older and haven’t been doing that, then you need to be saving even more to catch up. Maybe 20 percent. Maybe 25. Seriously, check out the calculator.

When presented with these facts, many people react not with alarm but with outrage. Americans don’t save enough because by and large they seem to believe it’s not possible to save that much money. And for genuinely poor families, that may be true. But the problem of under-saving is much more widespread than that. Most of the people who have told me that it was impossible to save 15 to 25 percent of their income were relatively successful professionals who could expect to earn an above-average income over the course of their careers.

These people — the kind of people who are most likely to be reading this blog — absolutely could and should be saving more.

Americans today save a lot less than their parents and grandparents

In 2014, the average savings rate was 4.8 percent, far short of what the average American worker needs to enjoy a comfortable retirement.

Americans used to save a lot more. A generation ago, the savings rate was between 7 and 10 percent. Two generations ago, Americans saved 10 to 13 percent of their income.

And while some of this might reflect a rising cost of living, especially for education and medical care, it’s also a result of increased consumption. For example, the average American today has a house that’s 50 percent larger than the average house three decades ago.

There are probably people who live on a lot less than you do

America is a rich country, but our high incomes are not evenly distributed. In 2012, the richest 20 percent of households had incomes of at least $104,097. The poorest 20 percent made less than $20,600.

What this means is that unless you’re at the very bottom of the economic ladder, it’s easy to find examples of people living more frugally than you. A household that made 2012’s median income, $51,017, could save 20 percent of their income if they lived like a family at the 40th income percentile, $39,765. Similarly, a household whose income was at the 60th percentile, $64,582 could save more than 20 percent of their income if they lived like a family making the median income.

That’s not to say that it’s easy to cut expenses. Money makes our lives easier, which is why we like spending it. Cutting expenses is a painful process. But the fact that millions of people do it proves that it’s possible. And it’s important to remember that you face a tradeoff between a better quality of life now and a better quality of life later. If you don’t tighten your belt now, you might be forced to tighten it more dramatically when you reach retirement age.

Saving now is easier than saving later

When it comes to saving money, young workers have several advantages over older workers. One is rising incomes. Workers’ incomes tend to grow fastest early in their careers as they gain experience and seniority. Later in their career, they’re more likely to stay at the same (hopefully higher) income level.

This means that for many young workers, saving money may not require any actual belt-tightening. It just means not boosting their spending when they get raises. It means keeping a roommate for a few more years rather than getting your own place. It means keeping a 1-bedroom apartment instead of looking for a place with two bedrooms. It means continuing to patronize cheap bars and restaurants rather than moving upscale.

Even better, if you develop more frugal habits today, that can reduce the amount of income — and, therefore, savings — you need when you reach your retirement age. If you never upgrade from a Honda to a BMW during your working years, then you don’t have to worry about whether you’ll be able to afford a BMW in your golden years. So saving aggressively early in your career has a double benefit: it increases the amount of cash you have in the bank, while simultaneously reducing the amount you’ll feel like you need later.

Most importantly, thanks to the power of compounding interest, dollars you save early go a lot farther. If you follow sound investment principles, you can expect every $1 you save at age 25 to grow to between $4 and $10 (adjusted for inflation) by age 65. A dollar saved at 35 will grow three to five times by 65. So if saving an extra $1,000 this year is difficult, imagine how much worse off your 65-year-old self will be when he or she has to cut expenses by $5,000.

Focus on big-ticket items

Often, when people try to cut costs, they do it by reducing small, optional expenses — like making coffee at home instead of buying it from a coffee shop. But while trimming those kinds of expenses never hurts, it’s often more important to focus on expenses that people think of as the essentials — especially housing costs.

Obviously, everyone needs a place to live, so you’re not going to be able to eliminate housing costs altogether. But there are a lot of things you can do to reduce them. You can get a smaller apartment or get a roommate. You could move further out in the suburbs where you can get more housing for less money. And if your personal circumstances allow it, it’s worth considering moving in with parents to save money.

Housing costs account for such a large fraction of many peoples’ incomes — especially in big cities — that even modest reductions can free up a lot of cash.

Cars are another big-ticket item that may offer room for savings. Some people view a new, expensive car as a status symbol, but you can probably find a used car that will do the same job while saving you thousands of dollars.

Consider moving to a cheaper metropolitan area

If you live in a big metro area like New York or Chicago, it might be a struggle to find affordable housing even if you get a tiny apartment or move far out into the suburbs. In that case, it’s worth thinking hard about whether you really need to live in an expensive metropolitan area.

Housing costs are dramatically lower in other parts of the country. Philadelphia has many of the same amenities as other coastal cities but is dramatically cheaper than New York or Washington DC. And the Midwest and the Sun Belt have cities that are cheaper still. Minneapolis offers an appealing combination of high incomes and low housing costs. And if the cold weather doesn’t suit you, Southern cities like Dallas and Atlanta are equally affordable.

Of course, some people have careers that require them to live in a particular, expensive city. And it might be difficult to earn a comparable salary in a lower-cost area. But many people could move to a much less expensive city without taking a big pay cut. If you’re one of them, you could dramatically improve your standard of living.

It’s OK to save less if you’re building human capital

Most working adults should be saving 10 to 20 percent of their income each year. An important exception is young people who are accepting a dramatically lower income in the short run to prepare them for more lucrative or prestigious careers later on.

The most obvious example is people who are still in school. If you’re waiting tables to cover the costs of getting a college degree, or if you’re a graduate student with a $15,000-per-year stipend, it’s going to be hard to save money for retirement. In this case, it’s best to think of your education as a kind of savings in its own right — you’re acquiring a valuable credential that will allow you to earn, and save, a lot more money in the future.

A similar point applies to people who are just starting out in a highly competitive career, like acting, writing, or fashion. Almost everyone in these industries starts out working a low-paying day job like bartending, waiting tables, or answering phones until they’re able to get enough work to practice their passion full-time. Again, this is best thought of as a kind of investment: you’re developing a skill that — you hope — will later allow you to earn a good living in a career you’ll enjoy a lot more than bartending.

But it’s important to be realistic. At age 25, it might be reasonable to live paycheck-to-paycheck as you focus all your energy on breaking into an acting career. But if you’re still doing that at age 30, you need to start planning for the possibility that you’re never going to get your big break. You need to either get a more lucrative job or cut expenses enough to save 10 to 15 percent of your bartending income.

Tackle peer-pressure head-on

Pressure from peers can be a major force driving higher spending. If you go out to eat with a group of friends and one of them wants to order a bottle of wine, it’s awkward to be the one who objects to the added expense. But Megan McArdle has some good advice on dealing with this kind of situation:

Go to the mirror. Take a long, loving look at yourself. And then repeat after me: “I can’t afford it.” That is what you say to friends who suggest going out when you don’t really make enough money to even stay in. It’s what you say to yourself when you’re feeling bad and want a splurge. There is nothing shameful about making very little money, so there’s no reason you shouldn’t tell your friends that you’re on a tight budget.

McArdle was writing about people who were having trouble finding work, but this is good advice for anyone who is trying to keep their spending down. If your friends are worth keeping, they should be more than happy to work with you to find activities that fit in your budget. More importantly, some of your friends might feel the same way, and be grateful to you for speaking up.$

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3 Easy Ways to Save More for Retirement

Investing for retirement is difficult…

Keeping a constant eye on the markets, studying economics, staying on top of every trend without a misstep… that’s time-consuming and confusing.

Worse, the 401(k) system is broken: Lack of guidance, poor websites, and limited investment options make most individuals’ first foray into investing confusing.

But you can’t hide from it. No one is going to rescue your retirement for you.

The good news is it doesn’t have to be so tough. As you’ll see below, there are just three keys to understanding 401(k)s. Learn these and you will truly change the quality of life in your retirement…

Let’s get started…

There are only three things you need to think about to earn an extra six figures in your retirement plan…

1. Asset Allocation
2. Low Fees
3. Index Funds

Let’s quickly cover asset allocation…

Asset allocation means how you divvy up your capital among several categories of assets. By taking a broad view of the possible asset classes to hold, you can meet your retirement goals. Changes in the market get smoothed out by the diversified nature of the portfolio… leaving you to sleep well at night.

The key is doing it from the start and sticking to it.

First, you set aside some cash for emergencies… Then, start with a simple allocation: Decide between stocks and bonds. If you have a longer-term view and a high tolerance for risk, you might make your allocation 80% stocks and 20% bonds. If you are closer to retirement and don’t like volatile returns, you could do 70% bonds and 30% stocks.

Most of us fall somewhere in between those extremes. When starting off, I suggest using an “in the middle of the fairway” asset-allocation plan: 60% stocks and 40% bonds. It ensures you harness the proven wealth-building power of stocks… while also using the conservative, income-producing power of bonds.

The point is to combine assets, like stocks and bonds, that are not perfectly correlated (meaning their price movements are not closely related to each other). Blending them in a portfolio smoothes out your total returns.

As you get closer to retirement, you can adjust your allocation to match your risk tolerance. For example, you can use the “60/40” asset allocation while you are in your 40s, 50s, and 60s… and then start increasing your allocation more to bonds when you reach your 70s.

Once you are comfortable with that basic stock-bond allocation, you can start to get more complex, dividing your categories among, say, domestic and international stocks. Or you can divide your bond allocation among corporate, federal, and municipal bonds. You can also add a small allocation to precious metals, or what I call “chaos hedges.”

That’s Step 1. With allocation, we’ve protected your portfolio from deep swings and ensured you’ll have money until the end. Now, let’s get into the nitty-gritty of fixing your 401(k)…

Hidden fees pervade the financial industry…

The fees on fund investments are even worse. The fees always look small to the untrained eye. A mutual fund can easily charge 2%-3% of assets without looking too expensive.

When the percentages are that small, it can seem like it’s not worth your time to fret over fees. But that’s completely wrong.

Remember, these aren’t one-time fees. It’s a 2% hit every year. Over time, that 2% adds up substantially. And it’s particularly egregious considering you can find funds with fees as low as 1%, or even 0.25%.

Even more troubling, each year you pay a fee, you lose decades of compounding that would grow on top of that money.

The results add up…

Consider an investor who saves $5,000 a year, earns 8% in returns on investments, and pays a 2% annual fee. Over 40 years, he amasses $786,000.

If he cut that fee to 1%, he would finish with $1,045,000.

Think of how hard you work to save $5,000 every year for 40 years. It’s not easy. No matter how much you earn, life gets expensive. Over all that time, you set aside $200,000.

But here’s the catch, you can earn an additional $259,000… by just spending five minutes controlling the fees on your funds.

That’s easy money.

And you can do even better than that. You should be able to get your fees to less than 1% if your plan has reasonable options.

Skeptics might wonder… When we switch to cheaper funds, aren’t we going to get worse performance? Don’t bargain prices mean bad funds?

Nope. The truth is the exact opposite…

The cheapest funds in the game are index funds.

Index funds don’t have a Wall Street trader behind them, trying to outcompete everyone else and beat the market. (The majority of the smart guys fail.) Rather, index funds follow simple rules designed to help them track the overall performance of a particular asset class, like U.S. stocks or Treasury bonds.

Most “actively managed” funds (those with a manager trying to pick the best stocks) underperform the market year after year. In fact, 96% of actively managed mutual funds fail to beat the market over a sustained period.

That means you don’t have a 50-50 chance of picking a “good” fund or a “bad” fund… It hardly even matters which one you pick. The vast majority are bad and won’t beat the market.

On the other hand, index funds don’t need to pay superstar managers or an army of analysts. Ironically, they keep costs extremely low and provide better performance.

Investors are finally catching on. The index fund industry is growing. According to the Investment Company Institute Fact Book, the percentage of stock assets held in index funds has grown from only 9.4% in 2000 to 20.2% in 2014. Over the last seven years, more than $1 trillion have flowed into index funds. Vanguard’s Bond Index Fund recently surpassed PIMCO’s Total Return Fund as the largest bond fund in the world.

It’s likely your plan offers a few mutual funds that track an index.

By following these three simple steps, you can fix your 401(k) and boost your lifetime returns by hundreds of thousands of dollars… in just a few minutes.

So take the time to review your retirement plan today… It will be the easiest money you make in your entire life.

Here’s to our health, wealth, and a great retirement.

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