MONE

HOW TO
RETIRE RICH
DON'T JUST ROLL THE DICE. FOLLOW OUR SMART MOVES
AT EVERY AGE TO BUILD A NEST EGG YOU CAN COUNT ON. »
BY JANE BENNETT CLARK AND SANDRA BLOCK
ILLUSTRATIONS BY VAULT 49

10/2012 KIPLINGER'S PERSONAL FINANCE

 MONEY// RETIREMENT
Time Is on Your Side
SMALL, STEADY CONTRIBUTIONS WILL GROW INTO A SIZABLE STASH.
ATTHIS STAGE OFYOUR LIFE, YOUR MOST
valuahle asset isn't youthful vigor or
a full head of hair. It's time. Because
you're decades from retirement,
contributions to a 401(k) or other
retirement plan will have years to
compound and grow. Even a modest
contribution now will pack a much
greater wallop than a significantly
larger contribution when you're in
your forties and fifties.
If you start socking away $200 a
month in a retirement account from
the moment you land your first full-
time job at age 22, within ten years
you'll have a stash of more than
$37,000, assuming your investments
grow 8% a year. In 20 years, you'll
have more than $122,000, and
by the time you reach age 67,
your nest egg will be worth
$1.2 million.
Stuart Ritter, a certi-
fied financial planner
for T. Rowe Price,
recommends in-
vesting 15% of
your salary
toward
retirement. That may
seem like an un-
reachable goal for young
people with other demands on
their paycheck. If you're pulling in
$30,000 a year, for example, that's
$375 a month. But with tax breaks
associated with employer-sponsored
retirement plans, plus a possible em-
ployer match, you can reduce your ac-
KIPLINGER'S PERSONAL FINANCE 10/2012
tual out-of-pocket contribution.
Even a smaller contribution
will give you a serious
head start on saving, so
you'll have a bigger
stash that can
grow for dec-
ades—plus
more wig-
gle room » Fund a Roth IRA if you
to deal don't have a 401(l<). Many
small employers don't
have the money or man-
power to offer a 401(k) plan
at all, let alone one with a
company match. That means
with the you have to create and manage
competing your own retirement plan.
demands on For most young workers, the best
your paycheck choice is a Roth IRA, Sarenski says.
later on. Contributions aren't tax-deductible,
but you can withdraw them anytime
» Enroll in the 401(k). Most tax-free. And as long as you wait until
major companies that of- you're 591/2 to take withdrawals, earn-
fer 401(k) plans match a per- ings are tax-free, too. (Funding a Roth
centage of your contributions. is a good idea even if you are contrib-
Typically, these matches range uting to an employer's 401(k) plan;
from 25% to 100% of your contri- read on to find out more.)
bution, up to 6% of You can invest up to
your salary. Even if $5,000 in a Roth in 2012.
the match is at the low
jFVOU That doesn't mean you
end, that's an immedi-
AGES2V35 need $5,000-or even
ate 25% return on your $l,000-to get started.
investment, says Ted Some mutual funds
Sarenski, a certified and brokers, including
public accountant in Schwab, will waive min-
Syracuse, N.Y. "You're imum investment re-
not going to get that kind quirements if you sign
of return anywhere else." up for an automatic
In addition, the money investment program.
that you contribute to
your 401(k) is excluded from taxable » Pay off student loans-in good time.
income. Once you take the tax break Don't pay off federal student loans
into account, a 6% contribution "only more quickly than necessary, Ritter
feels like 4%," says Sheryl Garrett, says. The interest rate—between 3.4%
president of Garrett Planning and 6.8% for loans issued after 2006—
Network. is fixed and relatively low compared
with the rates many borrowers get on
private student loans, and up to $2,500
of the interest is tax-deductible.
» Resist cashing out a 401(k). When you
leave a job, you have several options
for your 401(k) plan. You can leave it
with your former employer, roll it
into an IRA, roll it into your new em-
Keep Your Eyes on the Prize
A NEW HOUSE OR FAMILY MAY COMPETE FOR YOUR RETIREMENT SAVINGS.
AT LAST, YOU'VE GOTTEN YOUR CAREER
on course and are ready for your
next big moves—perhaps starting a
family and buying a home. Before
you get too far down that road,
map out a long-term plan, says
Jim Oliver, a certified finan-
cial planner in San Anto-
nio, Tex. "Most people live
the lifestyle they want
without putting away
enough to meet the
goals they want later
on. It's like having
a budget for a trip
and not allocat-
ing it. Before
the trip is
over, they
run out of
money."
n Pre-
pare for
contingen-
cies. If you
haven't done so
already, fuel an
emergency fund
with enough to cover at
least six months' worth of
basic expenses. That cushion can
prevent you from raiding your
ployer's plan (if your employer per-
mits such rollovers) or ask your for-
mer employer to cut you a check.
You may be tempted to choose the
last option, but in most cases, that's a
bad idea. Your employer will withhold
20% of the amount withdrawn to
cover income taxes. And because
you're under 591/2, you'll also have
retirement accounts after a layoff or
keep you from borrowing your way
out of a crisis. "Debt is the number-
one problem that sabotages most cou-
ples," says Deborah Fox, of Fox Finan-
cial Planning Network, in San Diego.
Before you have children, contrib-
ute as much as you can
to your 401(k), but don't
neglect the Roth IRA,
says Barry Korb, of
Lighthouse Financial
Planning. "It's cost-
ing you in taxes now,
but down the road,
that money is tax-
free. Do it while
you can afford it."
Keep contribut-
ing at least 15% of
your gross income toward retire-
ment savings, says Nicholas Yrizarry,
of Wealth Management Group, in
Laguna Beach, Cal. Once the kids ar-
rive, you'll likely have to pull back if
one spouse leaves the workforce
or to pay for child-care
to pay a 10% early-withdrawal penalty
on the entire amount. Plus, you're jet-
tisoning any growth you've earned,
which sends you back to square one
PREPARE YOUR
when you start saving again. Workers
who cash out their 401(k) plans re-
duce their retirement income by up to
67%, according to an analysis by the
PORTFOLIO for THE
Employee Benefit Research Institute.
OPPORTUNITIES
AHEAD.
costs. Either way, "the reality is you
can't do 15% of gross income because
it's not there anymore."
» Siphon off cash for a down payment. Invest in a low-cost T. Rowe Price
Sacrosanct as retirement accounts
may be, some financial planners con- fund that outperformed the S&P 500.
sider them fair game for a down
payment on a first
home. To justify this $25,000
strategy, you need to $22,084
have enough time be-
fore retirement to re- $20,000 $19,340
$18,427
plenish the accounts. If $16,813
you're 45 or older, don't $15,000
even consider the idea.
Also be strategic about
$10,000
which account you tap.
With a 401(k), for instance,
you'll incur taxes and a 10% $5,000
penalty on early withdraw- S&P 500 Blue Chip Growth Capital
Growth Stock Appreciation
als. But with an IRA, Uncle Sam Fund Fund Fund
waives the 10% penalty on a distribu-
tion of up to $10,000 for a first-time
home buyer—although you'll still owe How much $10,000 invested would be worth,
(based on the 10-year period ended 6/30/12)
TURN PAGE AND OPEN FLAP TO CONTINUE »
''Based on average annual total returns for the 1-, 5-, and 10-year periods ended 6/30/12: S&P 5001-year: 5.45%, 5-year:
0.22%, 10-year: 5.33%; Blue Chip Growth Fund 1-year: 7.01%, 5-year: 2.42%, 10-year: 6.30%; Capital Appreciation
Fund 1-year: 4.34%, 5-year: 3.49%, 10-year. 8.25%; and Growth Stock Fund 1-year: 6.58%, 5-year: 1.97%, 10-year:
6.82%. As of 12/31/11, the funds' expense ratios were 0.77% (Blue Chip Growth Fund), 0.73% (Capital Appreciation
Fund), and 0.70% (Growth Stock Fund).
Current performance may be higher or lower than the quoted past performance, which cannot guarantee future results.
10/2012 KIPLINGER'S PERSONAL FINANCE
 MONEY/. RETIREMENT

taxes on the withdrawal. If your
spouse is also a first-time home
buyer, you can each withdraw up
to $10,000 penalty-free. You can al-
ways withdraw your contributions
from a Roth tax- and penalty-free,
but if you're buying your first
home, you can take up to
$10,000 of earnings
tax-free, too, as long
as you've had the
account for at
least five
vears.
You can
usually bor-
row against
your 401(k), an
option not avail-
able with IRAs.
You are allowed to
borrow as much as
half your balance, up to
$50,000. for any reason.
You generally have to repay
a 401(k) loan within five years
or it's considered a taxable distri-
bution. But your employer may al-
low you as long as 15 years if you're
borrowing to buy a home. "If it
gets you into the home you want
and need," says Yrizarry, "it's an
effective use of your money."
Already own your home? Con-
sider refinancing your mortgage if
you haven't locked in the low rates
available now. You can put the
money you free up into savings.
n Set a goal for college savings. Talk
about a squeeze play. At the same
time that you're funding your own
retirement, you're also expected
to stretch to cover college bills.
But you could aim for, say, three
years at a public school or two
years at a private school and figure
on paying the rest out of current
income, or have your student kick
in summer earnings. To run the
scenarios, use the college-cost cal-
culator at Savingforcollege.com. To
meet 50% of the total cost of four
years at a public university, based
on the current average annual cost
($17,131) and a 6% inflation rate for
college costs, you'd need to save
$222 a month for 18 years, assum-
ing a 7% annual after-tax return on
your college
savings fund.
If you covered
half of only the tu-
ition bill, you'd need
to save $107 a month.
As for which account
to pump money into, your
best bet is usually a state-
sponsored 529 savings plan,
which lets your savings ac-
cumulate tax-free. If you use
the withdrawals for qualified
educational expenses, such as
tuition and fees, the earnings
can be withdrawn tax-free as
well. About two-thirds of the
states also offer a tax benefit for
contributing to a 529 plan. A Roth
IRA is also a good way to save for
college. Earnings can be with-
drawn penalty-free (but not tax-
free) before 591/2 if you use the
money for college expenses.
need to sock away 29% of your salary year or two longer before retirement
to catch up. (And if you put it off un-
til age 55, you'll need to save
43%, which won't
leave you much for \F YOU'RE
groceries or gas.) AGES 40-55
Uncle Sam gives the
procrastinators of
the world a powerful
incentive to save:
Once you're over 50,
\NVE5T:
you can contribute
significantly more to
your 401(k) plan than
your younger col-
leagues (see the next
section).
» Adjust the college plan. The same
time-and-money crunch applies to
college savings. Compare the differ-
ence between starting a college fund becomes dis-
when your child is a toddler and
when he or she is 13. Fifteen years
out, you would have had to save
$345 a month to cover 75% of
the cost of a public college
education, according to Saving
forcollege.com. At this stage-
say, five years out—you'll have
to save $646 a month, almost
twice as much.
Rather than regret the past,
recalibrate. If you're on track
for retirement but short of
\ your college goal, for in-
\ stance, you can always
redirect 1% or 2% of your
gross income from one
pot to the other for a few
years, says Greg Dos-
or boost the retirement allocation
after you're done paying
the college bills. "It's a
trade-off," he says.
Or consider borrow-
ing—judiciously. Parent
PLUS loans, sponsored
by the federal govern-
ment, carry a fixed
7.9% rate. PLUS loans
let you borrow up to
the cost of attendance,
minus any finan-
cial aid.
Thanks to their fixed
rate and consumer
protections, such
as forgiving the
loan if the stu-
dent dies or
abled, PLUS
loans are
generally
a better
bet than
private
student
loans.
Remem-
ber, how-
With a home-equity loan, you pay a
fixed rate (recent average: 6.4%) but
borrow the entire amount upfront.
With a line of credit, you pay a vari-
able rate (recent average: 5.1%) and
borrow as needed. With both, you
can generally deduct the interest on
amounts up to $100,000, no matter
how you use the money.
A lower rate and tax-deductible
interest may beat student loans.
The downside to this strategy is
key goal for many peo-
ple, which is to enter re-
tirement mortgage-free.
"After the kids are finished
with college, you are going \
to have to save like heck to
pay off the mortgage or, if you
can't do that, sell the house and
downsize when you retire," says
Yrizarry. Downsizing doesn't
have to be a bad thing, but it's
a decision you should make
before you borrow, not after.
n Talk turkey with your kids. No
matter how you plan to pay for
college, let your kids know what
you're prepared to do before you
make up a college wish list. Be

40-55
Maneuver to Stay on Track
IT'S A BALANCING ACT TO PAY FOR COLLEGE AND KEEP SAVING.
BY NOW, YOU'VE PROBABLY AMASSED
a decent sum in your retirement
accounts and another hefty sum in
the college fund. You haven't? Join
the club. A survey conducted in
2009 by Edward Jones, the finan-
cial services firm, showed that 20%
of respondents ages 45 to 54 had
saved nothing at all for either re-
tirement or college. A recent survey
showed that 62% of respondents
had never heard of a 529 savings
plan, much less contributed to one.
Here's the penalty for procrasti-
mann, a principal at
Edward Jones. Recog-
nize that you might
have to work a
ever, that
borrowing on
behalf of your
student can
jeopardize your
own financial se-
nating on both those fronts: If you curity in retire-
had started saving for retirement in ment. If the gap is a
your twenties, you would have had chasm, not a crevice,
to carve out 13% of your salary ev- find a cheaper school.
ery year to replace your income in Another way to get cash
retirement, according to an analysis for college is to borrow
by T. Rowe Price. Now, at 45, you'll against the equity in your home.
clear that "if the net price after fi-
nancial aid doesn't end up at your
number, it has to go off the list,"
says Fox. Without that conversation,
you'll be hard-pressed to say no
when the acceptance letter from
Vassar comes. "College is not just
a financial decision," says Fox.
"There's a whole emotional side.
You have to have the guidelines
established before you get to that
point." (See "7 Pitfalls to Avoid When
Paying for College," on page 52.)

KIPLINGER'S PERSONAL FINANCE


» Invest what's left. If you're among
those wlio have college covered
(or don't have college costs to con-
tend with) and you save the max
in your retirement accounts each
year, you may be looking for ways
to invest excess income. One option
is to add tax-free municipal bonds to
your fixed-income allocation, says
50-66
Focus on the Finish Line
IT'S TiME TO GET SERIOUS ABOUT SAVING, AND MAYBE CUTTii\G cÜSTS.
AT THIS POINT, RETIREMENT ISN'T A FAR-
off goal you'll worry about someday
when you're ready for your second
hip replacement. Unless you plan to
work until you drop, retirement is
staring you in the face.
That means it's time to get deadly
serious about saving, especially if
you haven't saved enough. And
that's true for most people: Nearly
a third of Americans age 55 and
older have saved less than
$10,000 for retirement, accord-
ing to the Employee Benefit
Research Institute. Only 22%
have saved $250,000 or more.
With any luck, though,
these are still your prime
, earning years, and some
of your major expenses-
such as a down payment on
a home and college tui-
tion—are behind you.
"With our clients, the
last ten years that they
u ork is when they
save the most
Yrizarry. Despite recent reports,
most state and local governments
have shown resilience in the face
of budget cuts (see "Cities Under
Siege," on page 21).
Or take advantage of low interest
rates and bottoming housing values
to invest in real estate, Yrizarry
suggests. If your student is heading
money," says Mark Bass, a certified
financial planner in Lubbock, Tex.
To make sure you're on track, don't
hesitate to seek help from a financial
planner or use the many resources
available on the Internet.
» Take advantage of catch-up contribu-
tions. Once you're 50 or over, you can
contribute thousands more to your
401(k) plan than your younger col-
leagues. For 2012, you can contribute
an additional $5,500 over the annual
limit of S17.000, for a total of S22,5OO.
Any employer contribution on top of
that is gravy.
Don't stop there. You can also
make a $1,000 catch-up contribution
to an IRA, for a total contribution of
$6.000 in 2012. Unlike with a tradi-
tional IRA, you don't have to take an-
nual minimum withdrawals from a
Roth once you turn 701/2. There are,
however, income limits on Roth con-
tributions. You're eligible if your
modified adjusted gross income is
less than $125,000 ($183.000 if you're
married and file jointly).
off to college, you can accomplish
multiple goals (and take advantage
of a strong rental market) by buying
a condo near campus and letting
your kid and a few roommates live in
it. Later, you can rent the property to
other students or to alums during big
sports weekends, generating income
before and into your retirement.
» Dare to downsize. You may have
hoped to move to smaller digs as
soon as the kids were grown (and
the boomerangers departed). But
some homeowners who have seen
the value of their homes decline in
recent years are reluctant to sell until
the real estate market rebounds, says
Michael J. Nicolini, a certified finan-
cial planner in Elkhart, Ind. Even if
your home hasn't returned to its for-
mer value, moving to a smaller home
could save you thousands of dollars
a year in taxes, utility costs and
insurance. That's money you can
funnel into retirement savings.
» Consolidate your orphaned 401(k)
plans. You've probably changed
jobs several times, and you
may still have money in for-
mer employers' 4C)l(k) plans.
Lea\'ing money in a former
employer's 401(k) plan isn't
as bad as cashing it out.
But as you approach
retirement, it's a good
idea to consolidate
your sav-
ings in
one IRA
with a
low-cost
financial
institution.
You'll get a bet-
ter handle on
how much money
you have and
where it's invested.
You'll also have
more fund choices,
and you may pay
lower investment fees,
Nicolini says. Once you
start taking withdraw-
als, it will be easier to
take them from your IRA
than from a former em-
ployer's 401(k) plan.
» Consider long-term-care
insurance. A well-funded
retirement savings plan could
be decimated in a matter of
months if you end up in a nursing
home or require round-the-clock
home health care. Medicare doesn't
cover the cost of long-term care, and
Medicaid isn't available until you've
spent down most of your savings.
Long-term-care insurance could
prevent this from happening, but
make sure it fits your budget. You'll
have to pay premiums for many
years, and the cost of those premi-
ums could increase mightily as in-
surers are confronted witli the cost
of providing long-term care to mil-
lions of aging baby-boomers, says
Practiced living on a
lower income while working:
Go two steps forward.
Steve Robbins, a certified finan-
cial planner in St. Louis.
Bass says he typically starts talk-
ing to his clients about long-term-
care insurance when they're in
their early sixties. Instead of a pol-
icy that provides lifetime coverage
from the day you enter a nursing
home, he says, consider a policy
that will cover a specific period,
such as up to five years. (The aver-
age stay in a nursing home is two
and ahalf years.) Adding a waiting
period—for example, 90 to 120
days—will also lower your premi-
ums. Look for a policy with an in-
flation rider so your coverage will
keep pace with rising medical costs.
n Weigh your Social Security options.
You're eligible to file for Social
Security benefits when you turn
62, but if you do, your
monthly check will be
reduced for the rest of
your life. You may have
little choice if you are
out of work or in poor
health and need the
money to pay ex-
penses. But if you
have the where-
withal to work a
few more years or
have other sources
of income, delaying checks until
at least age 66 will increase your
monthly benefits by .^3% or more.
That's not the only way working
longer could boost your payouts.
Your benefits are based on your
highest 35 years of earnings. If
you're a highly paid employee,
working longer could displace some
of your lower-earning years.
Earlier this year, the Social Secu-
rity Administration introduced an
online tool that allows you to re-
view your earnings record and get
10/2012
an estimate of your benefits. You
should review this record annually,
because unreported or under-
reported earnings could reduce
your monthly payments. To get your
online statement, go to www.ssa
.gov/mystatement. (Also see "Don't
Gamble on Social Security," on page
56, for information on a tool that
helps you maximize your benefits.)
» Reassess what you'll spend in
retirement. Robbins recently met
with a couple who earn more than
$300,000 a year but who believed
they'd need only $50,000 a year to
live on when they stopped working.
The couple, like most boomers,
greatly underestimated how much
they'll spend when they retire.
While you may save on dry-clean-
ing and commuting costs, you'll still
need to pay for groceries,
utilities and gas.
If you refinanced
to take cash out of
your home, you
may still have mort-
gage payments. And
even after you're eli-
gible for Medicare,
you'll spend a lot of
money on health care
costs. Fidelity Invest-
ments estimates that
the average 65-year-old
couple will spend $240.000 on
health care in retirement.
Still convinced you can live on
less? Try living on your projected
retirement income while you're still
working. This exercise \\ ill force
you to cut back on spending, which
means you'll be able to save more.
And at this point in your life, saving
is one of the few things you can
control. "As we often tell our cli-
ents," says Bass, "a good saver will
beat a good investor every time." •
KIPLINGER'S PERSONAL FINANCE
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