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Retirement Planning: Tips to Save for Retirement

Written by Kevin L. Matthews II

Planning for retirement and having a successful retirement remains one of the biggest financial concerns among Americans today. According to Prudential's 2016 Retirement Preparedness Survey, 49% of respondents cite saving for retirement as their number one financial concern, followed by not having enough money to maintain their lifestyle through retirement at 47%.

Figuring out your retirement options isn’t always easy though. You have to choose a retirement plan that works best for you, know how much you should be investing, select an investment strategy and periodically check your progress. This is likely why many individuals feel “stuck” due to the amount of decisions that need to be made and the potential effects of making a mistake. Three-fourths (74%) of pre-retirees agree that they should be doing more to prepare for retirement, but 40% say they do not know what to do.

Here are a few things you should know to get started and what you can do.

What is a retirement plan?

A retirement plan is a strategy for the accumulation, allocation and distribution of your assets at life and at death. For many, retirement planning simply comes down to how you save, how you invest and how you protect yourself once you’re withdrawing from your accounts.

There are several factors that will go into your retirement plan. Here are some of the most important factors that your financial planner will likely include:

How much money will you need in retirement?

Without this question, it is difficult to know how much money you should have saved and whether or not you’re on track for that goal. How much money you will need in retirement will vary depending on your current lifestyle and in what location you decide to retire. One popular way to find out how much money you will need is by using a retirement benchmark.

Remember, no benchmark is perfect. It is important to pay attention to the assumptions used in the model. JP Morgan Chase assumes an annual pre-retirement contribution of just 5%, but most financial planners would suggest saving closer to the 10 to 15% range.

Fidelity states: “Aim to save at least a total of 15% of your pretax income each year from age 25 to age 67. Together with other steps, it should help ensure that you have enough income to maintain your current lifestyle in retirement.” For some, 15% may seem like a lot, but it does include any matching contributions from your employer as well.

How are the funds allocated?

Looking back at Prudential’s retirement study findings, 71% of pre-retirees said they consider themselves to be prepared to make wise financial decisions, but nearly 2 out of 5 did not know how their assets were allocated or what products they were invested in.

Your retirement assets will usually fall into three main categories: stocks, bonds and cash. How you decide to divide your money between these three areas is called asset allocation and it is one of the most important factors in the investment portion of your financial plan.

The first step to determining the correct investment allocation is by taking a risk-tolerance questionnaire like this one from Vanguard. The questionnaire will give you an idea of how your assets should be allocated based on your goals, how you feel about risk and how much longer you plan on investing.

With these results, you and your financial planner will determine if there are any changes that need to be made, what you should be investing in and determine what type of investor you are: moderate, conservative, aggressive, etc.

You should generally check your investment allocation between one to four times per year or if your allocation surpasses a certain threshold; this is a process called rebalancing.

For example, if you intend on having a portfolio that is 50% stocks and 50% bonds, you may decide to rebalance once every year. This is called a time-only rebalancing strategy. You could also rebalance at the point in which the portfolio exceeds a predetermined level, known as a threshold-only strategy. For example, you would rebalance the portfolio if it exceeds 5% of the target.

Which accounts are you withdrawing from, in what order and how long will they last?

Where you withdraw your money in retirement matters. Generally speaking, most experts recommend pulling from your taxable and Roth accounts before pulling from pretax accounts, like your 401(k) and traditional IRA. Depending on your tax bracket, this should help with keeping your taxable income lower while allowing the pretax plans to continue growing.

After determining which account to withdraw from, your plan should include the amount you can withdraw and how long you can sustain taking out that amount. One typical rule of thumb is to live off of 4% of your total retirement savings. If you can live comfortably off of $40,000 per year in retirement, you would need about $1 million by the time you retire. Your retirement plan, however, should go well beyond the rule of thumb and determine a true withdrawal rate as your situation may be more specific than a general rule.

When are you taking Social Security? And when should you retire?

Your plan should also help determine the age at which you should begin taking Social Security and the age to retire. In most cases, you’ll want to delay taking Social Security as long as you can. Ideally, you should wait until age 70 when you can receive the maximum benefit. You can, however, begin taking Social Security benefits at age 62, but the amount you receive will be permanently reduced.

Types of retirement accounts

A retirement account is a type of investing account which allows the account holder to invest on a tax-advantaged basis. Each plan has a different set of rules around tax treatment, investment selection and withdrawals, just to name a few. The goals of your retirement plan is to save enough to retain your current lifestyle once your typical employment expires or you decide to leave. Below, we have categorized retirement accounts listed by the IRS for simplification.

Most common accounts

  • Individual Retirement Arrangements (IRAs)
  • 401(k) Plans
  • 403(b) Plans

Accounts for business owners/small business employees

  • SIMPLE IRA (Savings Incentive Match PLans for Employees)
  • SEP Plans (Simplified Employee Pension)
  • SARSEP Plans (Salary Reduction Simplified Employee Pension)

Other plans

  • Payroll Deduction IRAs
  • Profit-Sharing Plans
  • Defined Benefit Plans
  • Money Purchase Plans
  • Employee Stock Ownership Plans (ESOPs)
  • Governmental Plans
  • 457 Plans
  • 409A Nonqualified Deferred Compensation Plans

How to plan for retirement

Step 1: Don’t wait — start saving now

The sooner you save the better. In fact 42% of current retirees wish they had began saving earlier, Prudential found.

Step 2: Find out where you are and where you want to be

With the use of a financial planner or one of the benchmarks mentioned above, you will need to establish where you are right now financially and where you want to be when you retire. The bulk of your planning should guide you on what to do between those two points.

Step 3: Choose your investing strategy

Once you have determined what your starting point and destination are, you must decide what route you’re going to take to get there. Most risk-tolerance questionnaires will help you determine the asset allocation and from there, you can decide what investments are best.

Step 4: Monitor the plan

”Monitoring you plan makes sure you are on the right path but also provides motivation for you to keep up the actions that are going to help you reach your goal,” said Lauryn Williams, a College Funding and Student Loan Advisor (CFSLA).

Most people tend to focus on macroeconomic events, like a recession, that may adversely affect a retirement plan, but there are personal events that could change your plan significantly as well. Some of these events may include changes in your health, getting married or divorced and having children. Each of those factors can cause you to work longer or retire sooner than expected. Your retirement plan will need to be flexible and accommodate you as your life changes.

Omorosa   |     |   Comment #1
Retirement savings is all a crapshoot. My father worked 40 years, and dropped dead in his 60's. He only "retired" for 3 years.
DCGuy   |     |   Comment #65
This is why annuity marketers hope will happen to their customers. They will get a windfall if you drop dead quicker.
Jennifer   |     |   Comment #2
I simply adore planning. It's so much more interesting than actually "living". My last ex said i "live to plan".

This is a well written article. Full of all those complicated numbers like 401, 457, 403. I usually leave all of that stuff up to somebody else.
gregk   |     |   Comment #9
On the one hand you "live to plan" but on the other you "leave all of that stuff up to somebody else".

How adorable.
Jennifer   |     |   Comment #23
I'm so complicated :)

Not really. Actually my ex said I was pretty simple. I think he meant that in a good way.

Anyway, I really appreciate the article about retirement. I simply adore the idea of not working.
Thinker   |     |   Comment #3
All of the ideas for retirements above are nonsense, they all depend on the stock market and interest rates without discounting the inflation, fees and other expenses that half's the accumulated wealth.
Why the annuities are not mentioned above, is there a reason for it?
My grand parents and now my parents retired on annuity income and when they purchased their SPIA for life, with real-estate money they sold, they where paid back by the insurance company (get ready) almost 10 times more back than the amount invested and they still collect free money until their demise.
To me, that is the way to do it, not dependent on the stocks, not dependent on the interest rates, not dependent on fluctuations and the best part of all is, the states protect the invested money with insurance guarantee fund for the annuities and at the end, nobody has ever lost a penny from their annuities, well, since there inception (centuries ago).
Sthinker   |     |   Comment #6
The states DO NOT insure annuities. The states MERELY require insurance companies to pay into a guarantee association that's a private entity. It's not backed in any way by the state governments.

Also, most states have a cap on the "guarantee". Some of these caps are based on an individual level. So, you can't necessarily go out and buy a bunch of policies from separate carriers.

Due to the low interest rate environment of the last ten year, insurance companies are in a world of hurt right now. If this causes systemic failures in the industry, kiss your guarantee goodbye.
Thinker   |     |   Comment #8
Sthinker, comment#6, Please read these:
Most states actually have two funds, one for property and casualty lines and another for life and health. Annuity products are covered by the latter. The NAIC model suggests an annuity state guaranty limit of $250,000 in present value for fixed annuities and the guaranteed portion of variable annuities.
When an insurance company is having a liquidity problem, the state puts it into rehabilitation and tries to save it from becoming insolvent. If the insurance company fails from there, the state government will take it over and liquidate the assets to satisfy its obligations to policyholders.
If more money is needed after that, the state guaranty system kicks in.
Please follow this link to verify my true post:

and also here:
Sthinker   |     |   Comment #12
In California it's 80% of 250K (so, you're out 20% of the annuity's value).

In Texas, 250K, per individual - not per annuity.

If the previous regulations were based per annuity, this is a giant step backwards!

Here's the specifics for Texas.

The limit of $250,000 is per individual. The bill is actually written to say what it does not cover. Sec. 463.204 (2)A says "A contractual obligation does not include...(2) an amount in excess of: (A) $250,000 in the present value under one or more annuity contracts issued with respect to a single life under individual annuity policies or group annuity policies;..."
Thinker   |     |   Comment #18
Sthinker #12, again, you are missing the point of annuities, they are designed for life time income, protected from any creditor (including IRS) and you can purchase as many as you like from as many different companies from as many different states.
Example OJ, he's been through civil and criminal trials all his life and anyone holding judgment against him is just that a piece of worthless paper, all the while he is collecting annuity payments since 1980's around $10K/mo non stop, even when in jail and will continue to do so until the day he lives, without worry if someone will take his retirement money away. Now, that is a solid investment for life, not 401k and the rest of the variants, anyone can snatch them from you at any time for any reason. Saving all your life is not a guaranty for future income stream out of the exotic savings numerated in this article.
Cheap Talk
Cheap Talk   |     |   Comment #13
Thinker, think a bit harder.

Yes, the guaranty system exists. What happens if the state mandated, yet privately managed, guarantor cannot pay the insured amount? Neither of the links you provide state the state itself becomes responsible.

Each state is different.

This is a big difference from NCUA / FDIC.
Thinker   |     |   Comment #16
Cheap Talk #13, Go to any state Insurance department and there you can see state statutes that exists for a mandatory payments to any annuity holder, with funds paid by the state treasury in case the private insurers failed. Furthermore, you can buy annuities as many as you like, from every state and for every SS# and have millions of insured funds.
You have to do more digging to educate yourself of how this is done, but every state vouches for your funds, no matter what happens to the annuity insurance or life companies.
By the way, lets say the particular state has 10 different life or annuity insurance companies registered to do business there, just buy annuity to the insurance limit per company and you are insured for a million or more and you can purchase annuities in any state of the nation and in theory you can insure a $ billion or more for free.
How I know this, I used to manage football team assets some times back and we advised the millionaires how to keep their money safe from IRS and the litigants. Just try to attach a lien on an annuity and see what happens to the court order in many states.
Cheap Talk
Cheap Talk   |     |   Comment #21
Thinker, you may be right, that some states guarantee insurance products directly, but I have not read that, anywhere except from you. Everything refers to the guaranty association only.

And, you are definitely wrong about buying from multiple insurance companies to increase coverage. In my and other states, the limit is for all annuities owned by an individual, not per insurance company. So, going to multiple insurance companies will not increase the amount of coverage.

And, yes, Florida for instance does appear to offer protection for annuities just as it does for houses. I prefer to avoid creditors altogether, and have a large umbrella policy just in case.

This is a good overview for people who are interested in guarantees.
Thinker   |     |   Comment #24
#21, you have to go to every state web site and find the chapter for annuities, they all have it, even Title and Chapter spelling in details how the annuity holder will be paid from the state treasury if need it.
Example for Delaware:
Cheap Talk
Cheap Talk   |     |   Comment #34
Thanks Thinker!

You linked to the wrong chapter of Delaware code. Chapter 42 actually covers the Delaware Insurance Guaranty Association.

And it confirms your prior error, only $300,000 in total claims, regardless of the number of policies purchased. § 4208 (a) (1)

I can't find anything in the code about the state guaranteeing the association. Can you please cite the section within Chapter 42? Thank you.
Cheap Talk
Cheap Talk   |     |   Comment #35
Oh and very important, the guarantee does not cover interest, at least from what I read, in most or all states. And it can take years to be repaid. So, a person could hold it for a decade and still only get the premium returned.
111   |     |   Comment #41
"Oh and very important, the guarantee does not cover interest,"... Well, let's be fair about this - neither do the FDIC nor the NCUA guarantees, at least as I read them. If I''m wrong on this specific point - please elucidate....?

Not that I like SPIAs - in this interest rate environment, they're a joke. But, let's be accurate about things.
Lrdx   |     |   Comment #45
Both FDIC and NCUA do cover incurred interest. They don't cover accrued, so you might be out of a month's interest for a normal savings account, or up to year for CDs with annual interest payments.. (plus no interest while you are waiting for your money to be paid out by the insurance)
Cheap Talk
Cheap Talk   |     |   Comment #46
Of course FDIC covers accrued interest, up to the date of failure.

Q: What is deposit insurance?

A: FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default, up to at least $250,000. For example, if a person had a CD account in her name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured, since principal plus interest did not exceed the $250,000 insurance limit for single ownership accounts.
Cheap Talk
Cheap Talk   |     |   Comment #47
MISCONCEPTION 5: The FDIC can take up to 99 years to pay insured deposits when a bank fails.

The Facts: The FDIC occasionally receives calls from depositors about this myth; it often comes from consumers who attended a financial seminar and heard that the FDIC can and will take up to 99 years to pay the depositor’s insured deposits after a bank is closed. This claim is false and entirely without merit.

The truth is that federal law requires the FDIC to pay deposit insurance "as soon as possible." For insured deposits — those within the deposit insurance limits — the FDIC almost always pays insured depositors within a few business days of a closing, usually the next business day. Payment is made either by providing each depositor a new account at another insured institution or by issuing a check to each depositor.

The limited exceptions that may take longer to process primarily are deposits that both exceed $250,000 and are linked to trust documents, and accounts established by a third-party broker on behalf of other individuals. "The delay, if any, for a depositor to receive payment for insured funds is a function of the time it takes for the depositor or their broker to provide missing supplemental information that is needed for the FDIC to complete the insurance determination," Troup explained. "This is supplemental information that is not in the bank's records, and it may include affidavits from depositors and copies of trusts and death certificates. And if there is a delay in receiving insured funds, it is typically a matter of a few business days."
CuriousDave   |     |   Comment #61
Chances are that your parents and grandparents bought their SPIAs in a very different envoronment that what we have had for the last 10 years. Two of the main drivers of SPIAs are interest rates and mortality rates. In an environment of decreasing (and ultimately historically low) interest rates, insurers do not have the means to build up reserves fast enough to provide the kinds of annuity returns that were common before the last major financial crisis began. Insurers use mortality tables, based on statistics of mortality rates over a very long period, to determine for how long they will likely have to make regular annuity payments to SPIA annuitants. As a general rule, people who can afford to purchase SPIAs can be expected to live much longer than their ancestors, which means the regular annuity payments will stretch out for a longer period than before, so the insurers are forced to reduce payout rates significantly to make SPIAs a viable product to offer. So people looking to purchase SPIAs currently will need to accept very poor payout rates as a trade-off for the guarantees of regular fixed income payments.
BordersLanguageCulture   |     |   Comment #4
Good simple solid advice. Educate yourself and take action, the sooner the better.
"If you fail to plan, you plan to fail" a quote attributed to Benjamin Franklin and I think
quite fitting concerning retirement.
One last thing, If you think annuities are good for anyone other than the "Insurance Agent"
that sold it to you, You probably also believe that Time Shares are good too.
anonymous   |     |   Comment #5
Well written article with some solid advice. I especially appreciate that the article points out that everyone has their own risk tolerance (Vanguard questionnaire is good) instead of giving the typical age based risk tolerances.

One of the big unknowns for those of us not near retirement is how much money we should actually budget for. I have the suspicion that typical recommendations like "replace 90% of your pre-retirement income" etc. are all not very useful and set the bar so high that it makes people take on more risks than necessary or turn them away from trying to meet the goal altogether. First of all, the budget should be set based on expenses, not income level!

Those of you who are close to or in retirement, please relate your story on how much money you thought you'd need in retirement, and how much you actually need! Thanks!
Red Herring
Red Herring   |     |   Comment #10
First of, the whole concept of "risk tolerance" is a red herring. Your ability to absorb a catastrophic loss it what you should be considering. Who saw the last crash coming? Just a handful of people.

For example, when I was working if I blew 100K in the stock market I could recover that loss within a year. Now that I'm retired, it would basically take an eternity.

How much should you budget for retirement? I'd said every dime that you make over your living expenses that the government will allow you to put into your retirement accounts.

In the beginning this may not amount to much but as your income increases the trick is to avoid increasing your expenses to the extent that they wipe-out the income increase.

Most of my IT Consultant pals liked buying fancy houses, cars, boats and even airplanes. Even with 6 figure incomes, they still managed to spend more than they were making.

About the only expense that will disappear when you're retired is your mortgage. Everything else is going to stay pretty much the same. So you're right, budget based upon your expenses, not income.
OWWWW   |     |   Comment #14
"Most of my IT Consultant pals liked buying fancy houses, cars, boats and even airplanes. Even with 6 figure incomes, they still managed to spend more than they were making."

Thats the way you get the trophy wives, or because you HAVE a trophy wife or you KEEP a trophy wife.
Robb   |     |   Comment #22
Lose the trophy wife...lose half your money. Risk/reward...
Dunmovin   |     |   Comment #30
Robb...and no time to train a new one
Ann   |     |   Comment #29
"About the only expense that will disappear when you're retired is your mortgage."

If you own your residence and have paid it off by then. Unfortunately not everyone can count on that.

All good points otherwise, though!
Thinker   |     |   Comment #19
#5, you wrote:
"Those of you who are close to or in retirement, please relate your story on how much money you thought you'd need in retirement, and how much you actually need! Thanks!"
Retirement is not a planned event, there are so many variables involved that no one can plan ahead, reason, unexpected events, from illness to catastrophic family expenses to investment failures, therefore, the retirement should be based and adapted on the real money already staring to poor in the day you retire (if ever). That way, there will be no disappointments and depression. Planing is for the ego and to dream big, but in reality, it is the real money that flowed in the day you said: I will live on what I've got.
Sthinker   |     |   Comment #50
OK, you went from SPIA's to financial psycho-babble?
"Planing is for the ego."
I guess that woodworking could boost one's self-esteem.
Tax Savings
Tax Savings   |     |   Comment #7
The best way to plan for retirement is to get a great education, work your butt off and live on less than you earn...a lot less if you're smart. Max any and all 401k matches (match is free money). Invest in a low cost index fund (Buffet's single best piece of advice). By the time you get to retirement all the questions related to when to take SS, how much will I have, etc. etc. will be problems you easily solve. Earn, live wisely and save. Many generations successfully retired following these simple guidelines.
Bogie   |     |   Comment #11
That's the BEST retirement planning advice that can be given.

Living below one's means and saving some portion of your income, no matter what your income is, never grows old. Perhaps "out of style", but still tried and true !

I was taught that as a young teenager, EARNING money after school and WORKING summer jobs. Carried that philosophy all through my working life and am now living a comfortable retirement life style.
Thinker   |     |   Comment #20
#11 Bogie, good for you, I'm glad to see happy retired people, however, what you did then, does not apply today. The teenagers have no more paper routs, no more summer jobs, no more lawn cutting jobs and so on. How would a teenager go about to start savings?
The education system today teaches them to become leaches, unproductive, dependent and in between **** specious.
They will become not self sufficient and will be manipulated by the party that made them dependent throughout all of their lives.
Tax Savings
Tax Savings   |     |   Comment #25
I know a 11th grader with a lawn "maintenance" business. He owns a few mowers and trimmers and has one "employee" working for him. I asked him for a recommendation on string trimmers. He borrowed cash from his dad in 10th grade, started with a used mower and repaid the loan by the end of the summer. His friend noticed and is now his summer "employee".
deplorable 1
deplorable 1   |     |   Comment #27
@Thinker: Why doesn't that apply today? I started shoveling snow and raking leaves for money when I was a little kid. Then I had a landscaping business all the way through high school. You are telling me that a kid can't still work and save young today? Why not?
Thinker   |     |   Comment #33
#25 and #27, Have you ever asked a teen to do chores around the house or even the neighborhood, their mind is not to work but text, goof off, visit friends, stroll around the block, play games and they even need to be pushed to do their homework after spending hours and hours in front of the TV or computer or a cell phone.
They are being brainwashed in school to be arrogant, dependent, not self inspirational and all the negatives in life.
Are there any exceptions, of course there are, but majority are lazy leaches with indoctrinated minds to be passive and not inspirational on life itself. Most want to be served with food instead of cooking for themselves.
Tax Savings
Tax Savings   |     |   Comment #37
You're first mistake was asking.
Every negative outcome after that was inevitable.

Young people CRAVE leadership and external discipline. It's their job to **** up and it's the adult's job to ensure they don't destroy themselves in the process. The word NO is a word whose meaning my generation mastered early in life. I worked with young people for the past 40 years and there are kids today every bit as "good" as they ever were. Problem kids come from problem homes.
Tax Savings
Tax Savings   |     |   Comment #38
Your not you're
deplorable 1
deplorable 1   |     |   Comment #40
Good one Tax! You need to tell them to get their a$$ off the couch and go earn their own money. So many parents just give their kids a allowance for nothing. I didn't get a allowance as a kid. My parents told me that doing chores around the house was just part of living in a family and you don't get paid for that. So I had to go out and earn some money on my own. I sure didn't like it back then but now I'm grateful as it gave me the push I needed at the time. Parenting 101 something else not taught in school.
Sthinker   |     |   Comment #51
In California, forcing teens to cook is considered to be child abuse.
Mike11   |     |   Comment #15
Right on #7......couldn't agree more. Live below your means and save. Got to allocate some for fun too along the way for sure.
deplorable 1
deplorable 1   |     |   Comment #28
@Tax Savings: Or skip the education(and all the associated debt!) and start working, saving and investing young. Maybe a skilled trades job perhaps as there is a shortage of workers. College isn't for everyone and certainly wasn't for me. I retired while all those college kids were still looking for jobs to pay off their student loans. I see a lot of college grads waiting tables or tending bar. Maybe they got liberal arts degrees.
gregk   |     |   Comment #17
Most of these articles are no more than barely disguised "apologias" for the investment industry, and all the fat fees they stand to make if everyone will just "get with the program". They're typically based on a multitude of assumptions that are never really questioned, the foundational one being that all the economic and financial patterns they discern in the historical past are certain to endure indefinitely, almost as a law of nature, with no recognition of how unprecedentedly changed are many of the conditions we face moving forward ( an increasingly massive and unpayable debt together with unimaginably large unfunded liabilities for Social Security & Medicare entitlements, and the deleterious impacts of global warming, - whether human caused or not, - being two of the more inescapable. Be that as it may, markets and government aren't likely to function in just the tried and true ways of the past, upsetting all the canned strategies our retirement gurus would like us to subscribe to for their own benefit.
deplorable 1
deplorable 1   |     |   Comment #26
This article says to pull from a Roth IRA first? Why that money is 100% non taxable during withdrawal so why not let it keep growing and pull from that account last? I'm maxing out contributions to my taxable Roth IRA now while my taxes are low and I'll pull that cash out way down the road when I'm in a much higher tax bracket. Also what about actual savings not in the stock market? Working and saving young combined with many years of compound interest allowed me to retire when most folks were still paying off their college loans. These plans never seem to take into account the possible stock market losses so best not to keep all your retirement eggs in the stock market basket.
Ann   |     |   Comment #31
"Also what about actual savings not in the stock market?"

Especially major oversight for an article on a site focused on CDs and bank accounts! ;-)
???   |     |   Comment #32
He rambles Alot
Bozo   |     |   Comment #36
Ann (re comment #31), good point. Most financial planners assume the three asset categories noted in the post: stocks, bonds, and "cash". Cash is almost always a throw-away asset class, as if it never yields a dime, and is good only for reserve funds.

Some modest observations.

1. When deployed in a ladder of CDs, cash can offer a yield comparable to (or often exceeding) bond funds. Especially in a rising-rate environment.  

2. Unlike bonds or bond funds, FDIC/NCUA-insured cash has no default risk.

3. For retirees (such as me), having a bucket of cash means you don't have to sell stocks (or bond funds, for that matter) in a down market to satisfy your RMDs. As most retirees know, RMDs can be satisfied from one (or a combination of more than one) IRA account.

4. Stuff happens. Cash is really handy when the inevitable occurs.

To say the least, most financial planning blogs and articles I have read over the years give short shrift to cash and CDs. Ken's blog is an exception, which is why I suspect he has a loyal following, and is oft-quoted in the financial press on such issues.
Thinker   |     |   Comment #39
Bozo #36, Questions:
You are rich by everyday standard, you have money in all kinds of investments, you complain a lot if the posts are not done to your liking and now the question arises again, why do you want to save the money you will never succeed to spend while alive?
Is there a philosophical meaning to the saving matter, a greediness, a habit or there is something deeper that inspires you to save even more fully knowing that you do not need any more money?
Is there a goal that you want to achieve or you just want to prove a point to someone in your life?
111   |     |   Comment #42
"Thinker", hate to say it but your post is edging further and further from the somewhat solid financial realm towards the much more "slippery slope" philosophical - going, going,..., oops, gone.

As Neil Young sang so well in the 1972 "Harvest" album "It's such a fine line - I hate to see it go."
Thinker   |     |   Comment #44
111, #42, the questions was for Bozo not you. We do not need more devil advocates in this world than already are there. For your information, the money have magic power on some persons and some money habits edges on the philosophical level than actual value.
Please read the Bozo response #43, he is smart and you can learn something from him. The money has different meaning to different people and yes philosophical is one of them. If you do not need the money but you save them under all circumstances, they have philosophical (sentimental and spiritual) value, but not intrinsic.
Bozo   |     |   Comment #43
Thinker (re comment #39). Had to chuckle at what you intuit. Not to say your intuition is wrong; you make valid points.

As a retiree, my main concern is for my wife, as she will (at least actuarially) outlive me. I want her to have at least 2X in "safe and secure".

Observations: (1) Saving can become obsessive/compulsive (i.e., a disorder). Trust me, we're not in that category. (2) Grandchildren offer ample opportunities to splurge, which we do. (3) We are now able to give more to the Church and the local Hospice. (4) We have a family tradition of leaving more to the next generation than we received from the former.
Cheap Talk
Cheap Talk   |     |   Comment #48
CDs are not cash. They fall in the same category as bonds, fixed income term deposits.

Anyone who wants to educate themselves is making a mistake hanging out here. Try bogleheads.
Bozo   |     |   Comment #55
Cheap Talk (re comment #48). I would disagree that CDs are bonds. They are "bond-like", but hardly like bonds or bond funds.

1. Fixed-income, assuredly.

2. Interest-rate risk, not at all.

3. Default risk, NCUA/FDIC, non-existent.

As an aside, the Bogleheads Forum has historically been populated by folks who hate the conventional wisdom. Unless it's theirs.
Retired   |     |   Comment #56
You are correct...
Dumb Bozo et al
Dumb Bozo et al   |     |   Comment #57
Bozo, you are trying to fit CDs into one of three categories. Stocks, bonds or cash.

No, CDs are certainly not bonds. But, they are more like bonds than cash.

Get a first year accounting book. Look up the definition of cash and cash equivalents.
Bozo   |     |   Comment #62
Re comment #57. Depends on your definition of "cash". If one defines "cash" as a demand deposit,(i.e., a checking or passbook account) then, sure, a CD is closer to a bond than cash. It gets murkier when one moves up the food chain to high-yield savings* (often considered cash), no EWP IRA CDs (think PenFed for folks with IRA CDs who are age 59 1/2 or over), totally-liquid MMAs yielding 1.5%+ (VMMXX), etc.

As noted below in comment #60, perhaps it is time to abandon the three categories entirely.

*Indeed, some have argued that any account which restricts withdrawals in any form creates a mini-ladder of bonds. At a certain point, this verges on angels dancing on the head of a pin.
DOA   |     |   Comment #49
As always, Bozo has the right point of view. I wish there were a lot more Thinkers like him.
anonymous   |     |   Comment #59
I'd have to say that I agree that within investing jargon, CDs don't fit the typical definition of "cash." Cash are usually assets that are available for investment on short notice. You could argue that CDs fall into that category because of the EWP feature. But you could also argue that the EWP is similar to the risk of a bond losing value when interest rates rise. CDs do have interest rate risk. The CD's value does not fluctuate, but if rates rise there is an opportunity cost that the CD will earn less than a newer CD. (That is precisely also the reason why bond prices fluctuate. If a bond is held to maturity, the full investment is returned. But the opportunity for higher rates may have been lost when holding to maturity.)
Bozo   |     |   Comment #60
Anonymous (re comment #59), the reason I would characterize CDs as "bond-like" (as opposed to being bonds per se) is their fixed-income nature. While CDs may have EWPs, those EWPs do not spike when interest rates do. NAVs on bonds and bond funds most certainly fall in such cases, sometimes dramatically. In a rising-rate environment, bond funds seldom out-perform the garden-variety 5-yr CD ladder. While individual bonds, if held to maturity, perform better, few individual investors can afford the credit or default risk. So, as against individual bonds or bond funds, in a rising rate environment, I'd give a tip of the cap to CD ladders.

Perhaps we should abandon the classic "stocks, bonds, cash" asset allocations and acknowledge that asset classes are much more diverse these days. For example, go to the Vanguard snapshot (or any snapshot, for that matter) and where will your CD ladders land? Under bonds, or under cash?

This is more than merely an academic issue for retirees in a rising-rate environment. For example, if an "age appropriate" risk tolerance is 40% equities/60% bonds, is that 60% comprised of (a) bond funds, (b) individual bonds, (c) CDs, or (d) a combination of (a), (b) and (c). If (d), how does the retiree decide what to do?  I sure wish I knew. As a retiree myself, I'm hedging my bets by being in bond funds, CD ladders, high-yield savings, and demand deposits. No individual bonds, however.
anonymous   |     |   Comment #63
Bozo, thanks for the detailed description and analysis. I think we're in agreement that CDs are not "bonds" per se (although bonds and CDs often share similar features and objectives) but are part of a larger category of fixed-income investments.

Also agree that "60% bonds" is a much too simplified advice. For example, some short-term bonds or ultrashort-term bond funds will behave more similar to cash than most bonds.

In my case, my fixed income is spread between something like: high-yield savings, reward checking, CD ladders; short-term, mid-term, long-term bond funds; government, investment-grade, and junk bond funds; floating rate funds; and U.S. savings bonds. So yes, the "60% bonds" can be as complicated (or actually probably more complicated) to allocate than the stock allocation.
Bozo   |     |   Comment #64
Anonymous (re comment #63), what gripes me (and this goes all the way back to the Trinity Study on SWRs) is the sloppy academic research on fixed-income. From the Trinity Study (40% bonds; yes but 40% in what?) to Vanguard's ignoring the impact of rising interest rates on VBTLX and SWRs. Fixed-income has never been a main focus of academic or for-profit research. Point being, you can't get a graduate degree in CDs. You might write a column or two for, but that's about it.
anonymous   |     |   Comment #67
Bozo (re comment #64), the 40% is probably assumed to be well diversified among fixed income ... VBTLX probably comes pretty close to that as a single-fund choice.

I think VBTLX, as a bond index fund, follows the AGG index (aggregate bond index) so there's not much that Vanguard can do to influence the fund's performance when rates rise. The AGG's performance is currently "distorted" due to the heavy issuance of Treasuries in recent years, so the Treasury component is now very high in the index. Treasuries are more sensitive to interest rate changes than corporate bonds, so any index fund using the AGG is currently not performing so well. (On the bright side, if and when the economy tanks, Treasury funds do best.)

As an alternative to consider, Vanguard does offer a nice selection of actively managed bond funds at low cost, some of which have a much higher corporate bond component than VBTLX. Or, you could also consider something like a "bank loan fund" which tends to do well when interest rates go up (e.g. FFRHX) ... these are probably best described as junk money market funds.
Bozo   |     |   Comment #68
Anonymous (re comment #67): Both my wife and I hold VBTLX in tax-deferred. In a rising-rate environment, the word "patience" comes to mind. However, as Keynes noted, "in the long-term we are all dead."

The question (which has never been addressed to my satisfaction): in a rising-rate environment, does holding an intermediate-term bond fund in an "age-appropriate" allocation (say, 60% for a retiree) act as a help or a hindrance? Were I to suggest a worthy thesis topic for a PhD candidate in economics, well, you get my drift.
Bozo   |     |   Comment #69
Further to my comment # 68, the YTD return on VBTLX is (drumroll) -2.2%. Should this negative return continue, I might assume it would impact retirees' SWRs, at least for retirees who hold age-appropriate allocations in intermediate-term bond funds

Now, turn it around. Assume that retiree has his fixed-income tilted to CD ladders. While rates have been in the doldrums over the past few years, an average 5-yr CD ladder probably sports a 2%+ yield. And the trend is upward.

So, were one to calculate a SWR for a retiree, would 40% equities/ 60% bond funds generate a demonstrably different result than an asset allocation of 40% equities/ 60% 5-yr CD ladders. I suspect the answer is in the affirmative.
anonymous   |     |   Comment #71
Bozo (re comment #69), I think there are two differences that make the "60% bond funds" and "60% 5-yr CD ladders" versions difficult to compare:
1. Bond funds will typically have a higher yield because of credit risk from holding corporate bonds. Since CD ladders don't have credit risk, they can only be compared to something like Treasury funds or Agency funds.
2. A 5 year CD ladder will have a duration of approx. 2.5 years (because the CDs will mature between 0 and 5 years) so should probably be compared to a short-term bond fund.

Looking at the Vanguard funds, the short-term treasury fund has a YTM of 2.3% and the short-term investment grade fund has a YTM of 2.8% (both have a duration of 2-3 years). I'm thinking that a 5-year CD ladder will perform similarly to these funds over time.

I read that with bond funds, it's best to select funds with a duration similar to one's time horizon for withdrawing the money. VBTLX has a 6 year duration. So one strategy might be to keep the money you plan to withdraw in the next 5 years in a CD ladder or a short-term bond fund and the rest in 40% equity/60% intermediate-term bond funds. (This kind of "different pots for long and short money in retirement" is not my idea, rather something I read in a finance magazine recently. If I remember correctly, I think they even showed that it would not significantly affect the SWR to keep the money you need sooner in a less risky fund.)
anonymous   |     |   Comment #70
Bozo (re comment #68), I read an article last year that claimed that intermediate-term bond funds are typically doing best over a rising interest rate cycle, because of the naturally higher yield compared to short-term bond funds (further out on the yield curve), the lower price sensitivity compared to long-term bond funds, and because the fund will start returning more income after the initial dip in value as lower-interest bonds that mature are replaced with higher-interest bonds.

But the article did not give much actual data on this, and I agree with you there is an information vacuum on these topics ... especially the part you point out, how it affects retiree's SWRs.
Bozo   |     |   Comment #52
Answer to question 1:
Because I am married.
Answer to question 2:
Because I am married.
Answer to question 3:
Because I am married.
deplorable 1
deplorable 1   |     |   Comment #53
I can't speak for Bozo but I plan on leaving an inheritance for my wife & kid so no need to spend it all. To me I think it is more greedy to actually try and spend every dime before you die and thereby leaving nothing for your heirs. This is why I am against the inheritance or death tax as it encourages the latter. Saving and living a frugal life has become a habit for me over time but as far as habits go I can think of much worse habits to have. I think many of us who save do it more for the security of our families rather than for ourselves.
Retired   |     |   Comment #54
Nursing home, home health care, disability adaptations and a host of other aging expenses often deplete resources at rates many are not prepared for. Unless you have guaranteed recurring annual income (pension, SS, investments) to cover these costs you will deplete your savings. As Medicaid demands increase you can be sure they will tighten the look back provisions. In this regard, I care only about myself and my wife...heirs can have what's left.
Bogie   |     |   Comment #58
I'm with you, 100% on that.

I also think the government should increase the "look back" years. Running out of money is one thing, but too many people are giving away their assets to family members just before they reach their declining years and then stick the rest of us taxpayers with the bill for their long time care.
DCGuy   |     |   Comment #66
Declaring bankruptcy because of medical debt is becoming the most common reason for people.
Samantha   |     |   Comment #72
I think it’s important to focus on the last ten years of your career because this is critical in shaping your life after retirement. You need to focus on implementing strategies that can guarantee to give you a more comfortable retirement such as making catch-up contributions, having a backup career plan, including long term care in your retirement plan, deciding where you want to live during retirement and by testing your retirement savings.

You can find details of this retirement for dummies guide here:
Bogie   |     |   Comment #73
Retirement planning should begin long before the last ten years of anyone's career. Focusing on the last ten years is most important to make changes while trying to catch-up if you didn't start planning and saving early enough. Then it becomes almost panic time for some people.
Retired   |     |   Comment #74
I cautioned someone eager to retire to try living for one year on the income they would receive during retirement. They refused. They retired. Within two months (after regular bills kept showing up) they sought out part time work to "make ends meet". One or two additional years of employment would have increased their pension and SS income and reduced their annual insurance premiums as they approached Medicare age. The most humorous comment I ever heard from a soon-to-be-retired couple (with good paying jobs) was, "we know we'll have to work part time during retirement." Two more years of work would have guaranteed them freedom they may never experience.
Plan your retirement, work your plan.
Retired   |     |   Comment #75
Those were two different retirement scenarios with pretty much the same problems. No detailed operating budget, no forward projection (fixed income versus increasing expenses) and no idea about the true costs associated with Medicare and supplementary insurance.

A good friend, after 32 years of maxing his 401K and frugal living, retired. I told him people would hate him. He said no way. He went to a family reunion. He said he was retiring. Jealous family members with big trucks and big houses said that was impossible. One got downright hostile. I told him again people would hate him. He agreed. He retired at 57.

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