January 2006

Dear Clients and Friends:

Following are financial hints for having more in retirement.  We stole some of these ideas and authored others.  They are all important.

1. Save early and often starting today.  Your investment portfolio will need to be between 17 and 25 times the amount you spend in your first year of retirement.  The amount you spend is net of retirement income such as pensions and social security. However, the amount spent does include income taxes.  So, if your investments are all in a tax-deferred account like a 401k, you will need more because withdrawals from the account are taxable.

2. Don’t forsake the stock market.  Stocks are likely to offer your best chance for long-term growth.  Be sure you either get educated and very involved in managing your investments or are adequately diversified.  Investment real estate is also a good candidate for long-term growth, but unlike stocks, real estate has not had a recent decline in prices.  The current values may be too high.

3. Buy low and sell high is the goal, but it is rarely achieved.  The problem is that we buy when the news is good and sell when it is bad.  Take the emotion and guess work out of these decisions by periodically rebalancing your portfolio.  In other words, sell what has gone up and buy what has gone down.

4. Maximize what your employer will save for you.  If your employer has a salary deferral plan (401k or 403b) with a matching provision, be sure to defer enough to get the entire match.  This really is free money.

5. Follow the money. Get a handle on what you spend each month, plug leaks in your budget and divert savings to your retirement fund.  What is a leak?  How about a latté a day?  Even if you forsake the scone, that would be over $600 per year.

6. Take advantage of tax-free savings such as IRAs & 401k’s.  Over two decades, you’ll pile up almost $200,000 (assuming a 6% annual return and maximum contributions).  In a Roth, it’s all tax-free in retirement. 

7. Catch up on your savings.  If you are at least 50 years old, take advantage of “catch up” rules that let you stash even more in 401(k)s and IRAs.

8. Back to the future. You are likely to spend 25% of your life in retirement, so dedicate 25% of all raises and bonuses to your retirement fund.  That is 25% of those amounts before tax.  You still have to pay tax during retirement.

9. Don’t let benefits slip through your fingers. Check your annual social security benefit statement for accuracy of past earnings. Past earnings are the basis for the benefits calculations.  You can get a copy by calling 800-772-1213 or on line at www.sa.gov. 

10. Protect your money. Empty nester? Consider trading excess life insurance for a long-term care policy to protect your nest egg from nursing home bills.  Yes, you are certain to die, but unfortunately you are also likely to need long-term care.

11. Rehearse for retirement. One year to go? That would be a good time to try and live within your retirement budget. If you can’t do it then, you may not be able to do it in retirement.

12. Profit from your profits. Use tax-free profit from the sale of your home to feather your nest egg or consider a reverse mortgage to draw a steady stream of cash from your house.

13.  Leverage can be a good strategy in business and in purchasing investments.  Leverage is never a good strategy in buying personal use assets like furniture or timeshares. The less debt you incur, the more personal use assets you will buy over your lifetime.  Avoid using credit cars and other short-term debt. Save up and pay cash.

14.  Pay cash for cars?  Yes, and you will buy less expensive cars.  Cars are nothing but pure expense, the less you spend on them the more you have for retirement or to buy other toys.

15.  Pay cash for your house?  Well, maybe not, but try to pretend that you are.  The goal would be to buy a less expensive house than you can afford, instead of buying a more expensive house than you can afford.

16.  Let the kids pay for part of their own college through student loans.  You can always help them pay off the loans if you end up with more than you need in retirement. The alternative is not having enough in retirement and your kids are free of debt.  Choices, choices.

Please call us if you have any questions about these hints or any other tax, financial, accounting, or business issues.