Figuring Out the “Where” Of Retirement

Planning for retirement involves asking – and answering – a number of important questions. When are you going to retire? How are you going to save money for your post-career life? What investment vehicles (IRAs, 401Ks, money markets) will you use to insure the optimal amount of savings? Certainly, there are plenty of questions to ask and factors to consider whenever retirement comes to mind.

But while you’re busy answering the whens, hows, and whats of retirement planning, make sure not to forget an important but oft-overlooked question: the “where.” Specifically, where do you envision retiring when the time comes? You don’t need to have concrete and detailed plans, but it’s important to have a good conception of your retirement location when planning savings and spending during your work life.

The first step in addressing the “where” is to determine whether you plan to stay in your current home, move elsewhere (i.e. to a condo or smaller residence) in your local area, or move to another region of the country or the world altogether. Most people choose to stay in their local area out of contentment, familiarity, and family ties. If this sounds like a situation that you may find yourself in, you then want to determine whether you stay in your home or try to downsize your residence. My wife and I could never imagine leaving our home once our mortgage is finally paid off. Others, however, want to seek out a smaller living space or a more vibrant neighborhood once their careers are over and their children are grown. And still others, of course, will choose to move across the country in search of warmer weather and a more retiree-friendly lifestyle.

So what’s the value of figuring this all out now? While it’s always good to plan ahead from a logistical perspective, the real benefit of location planning is much more real: it allows you to answer the “how” question and determine exactly how much money you’ll need for retirement. The general consensus is that a retiree will need 70 to 80 percent of their annual income in order to retire comfortably. Use this number as your starting point. Then, factor in the “where.” If you plan to stay in your current home, expenses will generally be lower and you can bump down your estimate to as low as 60 percent. You may also be able to save less if you plan to move to a college town or to a rural area where the cost of living is lower. On the other hand, a move to a condo downtown or to a highrise in San Diego will likely push you to the 80 percent level and beyond. This isn’t simply the result of housing costs; it also reflects higher entertainment and meal expenses, two areas where retiree spending falls on all parts of the spectrum.

All this is to say that location matters when retirement is concerned, and that you can best plan and prepare by considering location sooner rather than later. You may find that your location allows you to save less than you originally thought. Or you may need to save more or retire later in order to live comfortably in your desired location. Either way, it’s good to ask the “where” of saving now so that you can enjoy the “where” of retirement later.

This is a guest post.

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Drum Roll Please…What Was The Paycheck Like?

Last week I wrote about how I was curious what the first paycheck of the year would look like in light of the fact that things changed, primarily on the health care cost (unfortunately, there was no salary increase involved *sigh*).

To recap, we changed the plan option and also reduced our FSA contribution level, both as a result of the fact that we are not planning on having a baby, which was why costs were higher in 2011, and hopefully not having any other unplanned major medical expenses.  I wanted to see what the net effect would be on the paycheck and the results are in.

It basically resulted in around a 2% net increase in pay.

Which is sort of what I was expecting.

Not very exciting.

Unfortunately, what we’re spending it on is as equally un-exciting.  We’re really not spending it.

I haven’t bumped up my retirement contribution level in over three years, since we haven’t had any raises in that long.  This doubly hurts because the company used to match, but cut that out at the same time they froze salaries.  Especially in light of Sam’s recent article on where people should be in terms of retirement savings (note: we’re not close to Sam’s numbers), I wanted to increase our contribution.

So I did.  From ten to eleven percent.  This eats up about 70% of the ‘extra’ money.

The rest I want to use as a backup savings to our FSA card, in the event we go over for any reason, that we have money to back this up if we run out of dollars before the end of the year.

So, while I was excited to see what the paycheck would be, in the end it turned out pretty much on spot what I had expected, and the results are kind of a yawner, unless you are excited by extra savings and retirement contributions.

Which I guess I am and hopefully a few readers are too 🙂

What changes have you seen in your first paychecks of the year?

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With 401(k) Rollovers, It’s Not The Amount That Matters

When I started my first job out of college, it didn’t pay a lot of money.  I kept expenses low by splitting an apartment, driving my five year old car, and generally living the cheap, bachelor lifestyle.  As such, I was still able to contribute a few bucks to my 401(k) plan.

When I say ‘a few bucks’, I literally mean a few bucks.

Not only was retirement the last thing on my mind, but I wasn’t making enough to really be able to contribute a great deal.  The little bit I did contribute grew to a couple of hundred dollars.

I stayed at that first job for almost two years, at which point I realized it was time to start making more money.  So, I took a job that offered an almost 50% increase.

After a few months, I got a check in the mail from my old employer.  I guess I had received a letter or two telling me that I could roll my 401(k) over into my new employers plan or an IRA, but I didn’t do anything about it, so they sent me a check.

I had already started contributing to my new employer’s 401(k) plan, and it was actually a decent amount given the raise.  But, at the end of the year, the person that does our families taxes called and asked what had happened to the balance of the original 401(k).  I told him I had just taken the money, but that it wasn’t a big deal because it was only a couple of hundred dollars.

He wrote me back advising that I never do that again.  The lesson became clear when I read that it wasn’t so much the amount, it was the practice.

By taking the cash, I potentially established a precedent in my mind of saying two things:

  1. That a small amount of money is OK to take off the table when it comes to retirement planning
  2. Saving for retirement can wait until later.

The problem, as it became clearer to me in the subsequent years was as follows:

  1. The definition of ‘a small amount of money’ will change over time.  When I left that first job for the higher paying job, I got a 50% bump in salary and I thought I was flying high.  Yet, that amount is still less than half of what I make today.  At any point, the salary and what we define as ‘a lot of money’ will change. Thus, in the end, the balance in our retirement fund doesn’t really matter.
  2. The earlier the better when it comes to saving for retirement.  I don’t feel that much different as a person than I did when I made that choice, yet fifteen years had passed.  If I had continued to kick the can down the line, I would always be promising myself to save later, but who knows when that would have started?

I learned my lesson and I’ve never failed to roll over my 401(k) since, even though it’s transferred nearly half a dozen times.

As a young 23 year old, I couldn’t understand what was ‘the big deal’ about a couple of hundred dollar retirement account.

As a 37 year old, I can now say:

I get it.

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Does The Savings Rate Include Retirement Savings?

I’ve always been curious on what the personal savings rate actually includes.

The personal savings rate has been a newsmaker for the last couple of years.  Before the recession, we were actually saving in the negative territory, with the difference largely fueled by taking loans against (phantom) home equity.

Now, we’ve returned to a positive savings rate, which is good except for when economists complain that spending is necessary to fuel the economy (I’ll save that paradox for another day).

When I look at what our savings rate is, the short answer is:

I have no clue.

Usually answers to questions like that are pretty straightforward if you know how to search Google. When I did a Google search, some answers said yes, some said no, some said it all depends.

If our 401(k) contributions are to be counted, we are well above double digit savings rate.  If not, then we’re well below that.  I’m personally comfortable with this, but as to whether the government statistics would say so, who knows?

Does anybody have a definitive answer after wading through all the rhetoric on whether retirement savings are considered part of the savings rate?  Does it even matter?

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