401k Rollover Answers

I just finished a great retirement planning book called The Number, by Lee Eisenberg. It came out in 2006, but it holds up well. In light of the financial crisis we’re experiencing now, it seems downright prescient. In it, the author spends a lot of time musing about how much you should put into retirement savings. The number in the title translates into  how big your nest egg should be. And how big it should be depends on a lot of factors.

It depends on your lifestyle, on the market, on interest rates, on inflation and on and on. The uncontrollable factors abound, so you do what you can to mitigate the known factors while you save for retirement. I’ll cut right to the chase. According to the best financial minds that Eisenberg interviewed for his book, you need at least a million dollars invested to live a modest but comfortable retirement. A million dollars, with 4% siphoned off every year after age 70, will last — should last — your lifetime. Four percent of a million is $40,000 a year. Can you live on that?

There are things you need to do to in preparation for retirement. Keep your monthly expenses stable and knowable. That is the first thing; pay off your consumer credit! Live below your means! In this way you will have a handle on how much you will need to live. Any good financial planner would first want to see expenses for a full year before they sat down to hammer out a plan for you. You can do the same by getting that monthly expense number nailed down and then use an online retirement planning calculator to figure out the rest.

Some of the calculators use a higher withdrawal percentage than 4%. I like the 4% because it helps hedge against using principle too quickly. As we’ve seen the market can go up and down quickly and 4% withdrawal will allow your money to grow in good years and shrink wisely in bad years. Many people I know over estimate how well the market will do in the next few years. They are literally banking on a sharp recovery for the stock market and I don’t think that will happen. I could be wrong, but I am not going to risk eating off food stamps. I would rather plan for a long and simple life. A long and not so simple life in retirement can be had for 3-5 million invested. What you want to do will tell you how much to save.

The number one retirement tool is a 401k account. Most people underfund their 401k account. The average worker contribution is 6%. It should be 10%, with another 10-15% in a Roth IRA. As with anything, you have to pay attention to your money. Where is it going every month and how well is it growing where it is. Don’t forget that you can move the percentages around and as you age, you should change the mix of investments to some less risky funds. The 401k rollover option is very important. No matter your age it is important to have all of your money working for you in tandem.

Follow these simple precepts and your worries about how much to save for retirement will fade away. In its place you will have clear goals and a plan for achieving them. Welcome to the rest of your life!