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CNN Live Saturday
"Dollar Sign": Retirement Planning
Aired February 07, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDERICKA WHITFIELD, CNN ANCHOR: If you're old enough to work experts say you're old enough to start stashing away money for life after work. Today on DOLLAR $IGNS, retirement planning. Joining us from our New York bureau is Jack Otter, senior editor at "SmartMoney" magazine; and from Minneapolis Certified Public Accountant Paul Grangaard, author of "The Grangaard Strategy" and "Plan Right for Retirement With The Grangaard Strategy".
Good to see both of you, gentlemen.
PAUL GRANGAARD, AUTHOR, "THE GRANGAARD STRATEGY": Great to be here.
JACK OTTER, SENIOR EDITOR, "SMARTMONEY": Great to be here, Fredricka.
WHITFIELD: All right. We're saying that you need to start planning for retirement as soon as you are in the workforce. And if you're in your early 20s, it sure is hard looking that far ahead.
Why, Jack -- or why don't you suggest on how do you even get into the right mental, you know, place in order to start planning.
OTTER: Well, I think the first step is to realize the power of compounding, how much better off you're going to be when you retire if you start now at age 22, say, than if you waited. And the quick great example is, I think if a guy starts saving at 22 and stops at 35, doesn't put another penny away for retirement, he'll actually have more money at age 65 than somebody who waited until he was 35 and saved right up until retirement. And that's just because your money's growing for you.
WHITFIELD: Paul, what are we talking about? As simple as just opening up a savings account? Or if you're in your 20s you need to start thinking about 401(k)s, or perhaps even IRAs, CDs, et cetera?
PAUL GRANGAARD, CERT. PUBLIC ACCOUNTANT: Well, I think it's important that kids when they get their first job really understand the value of retirement plans that are being offered by most corporations these days.
Most of them not only offer people the chance to put their money away on a tax deferred basis, but as often as not they also offer matching contributions and other options like that that really assess the saver in giving enough to accumulate the kind of nest egg that they're going to need when they get to retirement. WHITFIELD: Jack, how do you even determine how much you need to put away? Isn't that always the tricky part of knowing whether it should be 5 percent, 10 percent, 20 percent of your salary?
OTTER: Well, it is difficult. There's no surefire way. If I knew what the returns of the stock and bond market were going to be for the next 30 years I'd be in a pretty good position here.
But as a general rule, there was a reference to the 401(k) match. If you can start at age 22 putting 10 percent of your salary into your 401(k), and getting that company match for a total of 13 percent, if you invest it wisely, you're in pretty good shape.
To be more specific, you can go to calculators in the next issue of "SmartMoney" coming out in march, we'll have a worksheet, where you can answer a lot of questions, assumptions about how much money you want to have when you retire. And Paul's book probably has similar things. So you can get a better handle on it.
WHITFIELD: OK. And, Jack, we did a graphic, some examples on how folks can start to plan ahead and think about how much to save.
Here's an example, number one: If you're 22 years old and you're making $25,000 a year, with no pension or retirement plan, you need to set aside $339 a month to retire at 66 on $42,000 a year? Does that sound reasonable?
OTTER: Well, yes. I actually ran those numbers myself, and they were extremely conservative. I predicted a 7 percent rate of return. I think everyone's hoping for a little bit better than that over that longtime period. And I also said that you had zero other income. Your parents leave you nothing. You're not saving anything else in any other accounts. And that's not realistic. Most people will have other small sources of income. But that gives you a sense of what its going to take.
WHITFIELD: I was going to say what may not really seem realistic, Paul let me bring you in on this, is if you're 22 and our on a limited income already it's difficult to try and make rent let alone try to plan for retirement 30 years, 40 years down the line?
GRANGAARD: Sure. But it's not nearly as difficult as it's going to be when you're 45 and you haven't started yet. I think that's kind of the point that Jack alluded to when he was talking about compounding.
You need to understand that you've got to give up a little something early on to take care of yourself later. And that the longer you wait, the bigger the challenge is going to be.
The last thing you want to have happen to you is get to age 45 or 50 and be looking at a target of X hundreds of thousands of dollars and you haven't gotten started yet. And now time is no longer on your side. And you don't have the power of compounding.
I think the key thing is to figure out as early as possible how much will I need to accumulate to retire with the lifestyle that I want. And then what do I need to do to get there? And that's the challenge.
And people need to start doing the planning. Because you have to start with the planning, figure out, sort of get a vision of what you want life to be like when you get to retirement, and then look back and say what do I need to do to get there? If you start when you're 20 it's a heck of a lot easier than starting when you're 40.
WHITFIELD: We know that sometimes in your 20s, 20-year-olds or 20 something-year-olds don't think they'll ever get old. Maybe by the time you reach 30, it starts to sink in. OK, I am getting older. So, we've got another example.
If you're 35, making $60,000 a year, that $42,000 very similar to the $42,000 we talked about for the 22-year-old, will be 70 percent of your current income and you need to be saving $650 a month to have that much to retire on.
Jack?
OTTER: Well, the key there is to show that if you wait until you're 35, it's going to be a lot more that you're going to need to stash away. And one thing, if these numbers seem really daunting to the 22-year-old out there who's making say $30,000 or $25,000, then I would say, just stash $25 a week away.
After taxes, the difference in your paycheck is only going to be about $17. Just get in the habit. Going on automatic pilot. When you realize that's really not that painful, then boost your amount you're putting in, say, next year.
WHITFIELD: All right, Jack and Paul. Stick around. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Welcome back to DOLLAR $IGNS. Whatever your age, if you haven't started saving for retirement now is the time, and the younger the better. For advice on how to do it, "SmartMoney" magazine Senior Editor Jack Otter is with us from New York, and CPA Paul Grangaard, author of "The Grangaard Strategy" is joining us from Minneapolis.
All right, guys. We've got a caller from Rochester, New York. Kim is on the line.
Kim, what's your question?
CALLER: Yes, I have $30,000 saved for retirement currently. And I'd like to retire early, like 50, if possible. I'm wondering how much should I save per year to accomplish that?
WHITFIELD: Jack?
OTTER: Well, how old is Kim? CALLER: I'm 31.
OTTER: OK, 31. I think that's a tough row to hoe, but go for it.
But I wouldn't assure yourself that you're going to be able to retire at 50. That's 20 years, 19 years. And you know, these days you should be planning to live 'til 90. Actuarial tables say the life span is pretty good for us. I'm about your age.
So I'd be -- gosh I'd say you'd need to put away at least $1,000 a month to realistically be able to retire at 50 and even then it would be tough.
WHITFIELD: Paul, has she done pretty good to have saved $30,000?
GRANGAARD: Yeah, I think anybody who saved $30,000 by the time they're 31 years old has probably done fairly well. That's a lot of money to accumulate on an after-tax basis.
And what I think you need to do, Kim, and you really have to start here, you've got to ask yourself, you've kind of got to put yourself in your future, and ask yourself what kind of lifestyle do you want in retirement?
If you don't expect a significant lifestyle during retirement you may be on the road there with less than Jack is talking about. It could be that you need more than what Jack is talking about, if you have higher expectations. So what you really have to do is you can't answer the question until you say where am I trying to get to?
You know, the old adage, if you don't know where you're going, any road will get you there. And you really have to ask yourself, where do I want to be? And then look back and say what do I have to do to get myself there? And that's going to dictate how much you need to save.
And you're going to have to make some other assumptions about where you invest, what you expect to earn on those investments and some other things. But you have to start with the goal first.
WHITFIELD: All right, thanks Kim.
OTTER: Paul --
WHITFIELD: Oh, I'm sorry, Jack.
OTTER: I was just going to say, Paul is exactly right. And I kind of took a number out of the sky there without knowing all the assumptions that Kim's making. And I would refer her to one of the many retirement calculators online. Smartmoney.com has one. But there are plenty of others, as well. And that will get you thinking about the things you need to think about in order to make this decision.
WHITFIELD: OK. And Kevin from Quincy, Massachusetts, has this e-mail question. He says, "If I'm 40 now, could you provide a rough estimate of how much money I'll need to retire if I want to retire at 70."
Of course, we don't know what the income is. Paul do you want to take a stab at maybe just a regular, conservative lifestyle, not over the top?
GRANGAARD: You know what I can do? I can give him kind of what I think of as sort of my quick and dirty answer to that question. He can calculate it for himself fairly simply. And this uses some fairly conservative investment assumptions.
I usually say that in order to figure out how much you need to accumulate for retirement, take your lifestyle during retirement, and this is the amount of income you think you're going to need every year during retirement, and divide it by 0.05.
And that's going to give you a fairly conservative estimate of how much you need to accumulate. And if you want to assume that you're going to do a little bit better in the investment markets during retirement, then take that same income expectation, divide it by 0.06. And that's going to give you a range that if you really know what you're doing during retirement.
And, by the way, managing money during retirement is a whole different ballgame than managing it before retirement. And if you know what you're doing post-retirement, you're going to need some amount of money kind of within that range.
WHITFIELD: All right. Kimberly from North Carolina is on the line with a question or a comment.
Kimberly, what's your question?
CALLER: Hi. Thank you for having me on today. I'm in a unique situation that I am a 35-year-old, 100 percent disabled American veteran. I have been paying medical bills for the last 10 years. And I do not have access to work and have a 401(k). And now that medical bills are under control now. How can I start saving or what do I need to get tapped into since I don't have, you know, a career, so to speak now?
WHITFIELD: Jack? I'll let you handle that one.
OTTER: Sure. I mean, I guess my first step would be to ask, do you have any source of income right now?
CALLER: Yes, I do, in the low $30s.
OTTER: Oh, super. OK, well, that's the right answer. What you need to do is run through some of these computations. The one that Paul just offered sounds interesting. Multiply what you think your retirement income ought to be by 0.05. And then your first step, once you get a number your first step is going to be to figure out where it goes.
Does your business offer you a 401(k), if not, look at a Roth IRA. The great thing about that is, while you won't get a tax deduction, you will enable your money to grow tax free, and there will be no taxes once you take it out.
Then the final question is, how do you invest that money? And then there's a lot of good mutual funds out there. And you're going to want to make sure you diversify. I can run through some mutual funds if Fredricka wants to allow me to?
WHITFIELD: Yeah, let's go through them real quick.
OTTER: Great. I think a great core fund is the Simple Vanguard, S&P 500 Index Fund. It tracks the major U.S. companies, all 500 of them, very low fees. Over the long term that should be a great fund.
Around that you're going to diversify with a bond fund. One we really like is the Fremont Bond Fund. There's no load. It's run by a guy named Bill Gross, who is very adept and nimble at tracking changes in the bond market, and it covers all aspects, from government bonds to corporate bonds to bonds that invest in real estate.
And then you're going to want some international exposure. There's something called the Oakmark International Fund, run by a fund manager named David Hero who is outstanding at picking stocks. Has a fabulous long-term record. And that's going to be a great start for you.
WHITFIELD: All right. Roger from Cheyenne, Wyoming e-mails this question saying"
"I think I have everything planned except medical insurance. What is one to do to prepare for that?" Paul?
GRANGAARD: Well, to prepare for medical insurance, I guess the best thing you can do is get a sense for what people are paying for medical insurance after they retire, or when they get older, to get a sense for what the expense might be.
And then ultimately, that's just going to be part of the budget that you're going to be planning on being able to support from your investments during retirement or whatever other income you might have. So really when it comes to health insurance there's a lot of things in retirement that can change relative to what was going on before you retired.
You might get to retirement and within five years have your home paid off. Therefore you can get by probably on less income during retirement, at least because of that one piece, once you don't have to make a mortgage payment.
On the other hand some things can come back in that you didn't have to pay before, such as medical insurance, maybe long-term care insurance. So it kind of comes down to, again, getting yourself out in your future and start thinking about which expenses would be additional, which ones would go away.
Coming up with kind of a reasonable amount you think you'll really need over time and then go through some of these calculations to figure out what the target is. And then come back and do as Jack suggested, and start figuring out which investments to invest in to accumulate to that amount in the time you have left.
WHITFIELD: All right, Paul and Jack, we're going to take a short break. We're continuing to take your e-mails and your calls. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Today on DOLLAR $IGNS we're learning how a little young money becomes a lot of old money. Our experts in retirement planning, Jack Otter, senior editor at "SmartMoney" magazine and CPA Paul Grangaard, author of "The Grangaard Strategy".
And April from Pennsylvania is on the phone, hopefully still with us, with a question.
April?
CALLER: Hello.
WHITFIELD: Hi. What's your question?
CALLER: Hi, how are you? What advice do you have for those of us that are unemployed? This is the second time I've been unemployed in the past year. My husband was out of work for a year. He went back to work in August. He makes a stellar $10 an hour.
I think the advice that you're giving is great. And you know, prior to being unemployed I did follow all the information that you've been giving. But it's kind of unrealistic for those of us that are, you know, worrying about paying our mortgages, and, you know, just for everyday living expenses.
With so many people being unemployed, you know, how do they go about paying their bills and also saving for retirement?
WHITFIELD: Paul?
GRANGAARD: Well, it's a difficult challenge. And I think all you can do is deal with what's -- you know, deal with the closest problem. Clearly you've got to make the mortgage payment and the car payment and buy groceries. And if, during a period of unemployment, that doesn't leave enough left over to put something in an IRA, for example, this year, then you just have to skip a year.
You know, hopefully the unemployment is temporary. You know, we live in this world where having a job almost seems like a luxury sometimes. And being unemployed seems like it's a part of everybody's life at various times. There's so much in flux.
And I think you just kind of have to roll with it. And just try as hard as you can to leave the money that you've got socked away in tax deferred accounts already, do everything you can to protect that, so that you don't spend it. If you can just maintain the balances that you have and get by, you're probably doing very well and should probably give yourself a pat on the back. And just hope that when things turn around and you find another job, that you'll get back to it.
And that's really the reason why I always tell people, you need to do your retirement plan at least once a year, because you've got to be dealing with things in real time. And it may very well be that your plan next year has you saving a little bit more than your plan would have, had you still been working now. But if you miss a year's worth of saving and you've still got 25 or 30 years to catch up, maybe it costs you another $20 a month to make it up.
WHITFIELD: All right. Avis --
OTTER: I think that's right on track. I would just chime in to say one thing that should make April still feel a little bit better. If they are still paying a mortgage, they're building an asset that when they retire will probably be quite valuable. Let's hope they don't have to take a radical step like sell the house and move to something smaller or take out a reverse mortgage. But if they do they know they will have that large real estate asset there to draw on.
WHITFIELD: Avis from Washington State is on the phone with a question.
Avis?
CALLER: Yes. The question -- excuse me. The question is, why do you never address those of us over 40? I mean, like I have a certain amount, and I'm just thrilled that I have it.
But when I was younger, we didn't know to start saving. We didn't know about compounding. We didn't hear any of that. No one taught us. I'm thrilled that you're doing this for younger people now.
But for those of us who are older, like right now I find myself in several funds. Some do well, some don't. For three years I ate my heart out because they went down so far. There's got to be something that people who are over 40, a lot over 40, that they can get into that's safe.
WHITFIELD: OK, we're running out of time so let me ask you, Paul, if you could address that real quick. If you haven't saved and you're over 40, what do you do now?
GRANGAARD: Is it Avis?
WHITFIELD: Yes, that was Avis in Washington State.
GRANGAARD: Avis, I don't know how much you have accumulated so far. Sounds like you had some money in the market when we've had this painful two or three-year period. Actually, my first book was called "The Grangaard Strategy: Invest Right During Retirement". And it really addresses those issues. It doesn't necessarily say what a person should do if they haven't saved enough. What it does do is help you figure out how to maximize your income and lifestyle from the assets that you've already accumulated. And the book is completely about managing money during retirement.
More and more, you're finding more and more people talking about that, because the demographics are such that we're going to retire about 67 million people in the next 15 to 20 years. More and more people are addressing that. You ought to be able to go to the bookstore, find my book and probably a number of others now that will address that topic.
And I'm sure that Jack's magazine, "Smart Money" runs articles frequently. Because that is the biggest financial demographic we're facing right now. And there's more and more material out there.
WHITFIELD: Paul you get the last word because we're now out of time. This half hour went by very quickly, Jack and Paul. Thanks very much.
Paul Grangaard, CPA and author of "The Grangaard Strategy", and Jack Otter, senior editor at "SmartMoney" magazine.
Thanks very much, gentlemen.
GRANGAARD: Thank you.
WHITFIELD: That's all we have time for right now.
END
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Aired February 7, 2004 - 16:30 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
FREDERICKA WHITFIELD, CNN ANCHOR: If you're old enough to work experts say you're old enough to start stashing away money for life after work. Today on DOLLAR $IGNS, retirement planning. Joining us from our New York bureau is Jack Otter, senior editor at "SmartMoney" magazine; and from Minneapolis Certified Public Accountant Paul Grangaard, author of "The Grangaard Strategy" and "Plan Right for Retirement With The Grangaard Strategy".
Good to see both of you, gentlemen.
PAUL GRANGAARD, AUTHOR, "THE GRANGAARD STRATEGY": Great to be here.
JACK OTTER, SENIOR EDITOR, "SMARTMONEY": Great to be here, Fredricka.
WHITFIELD: All right. We're saying that you need to start planning for retirement as soon as you are in the workforce. And if you're in your early 20s, it sure is hard looking that far ahead.
Why, Jack -- or why don't you suggest on how do you even get into the right mental, you know, place in order to start planning.
OTTER: Well, I think the first step is to realize the power of compounding, how much better off you're going to be when you retire if you start now at age 22, say, than if you waited. And the quick great example is, I think if a guy starts saving at 22 and stops at 35, doesn't put another penny away for retirement, he'll actually have more money at age 65 than somebody who waited until he was 35 and saved right up until retirement. And that's just because your money's growing for you.
WHITFIELD: Paul, what are we talking about? As simple as just opening up a savings account? Or if you're in your 20s you need to start thinking about 401(k)s, or perhaps even IRAs, CDs, et cetera?
PAUL GRANGAARD, CERT. PUBLIC ACCOUNTANT: Well, I think it's important that kids when they get their first job really understand the value of retirement plans that are being offered by most corporations these days.
Most of them not only offer people the chance to put their money away on a tax deferred basis, but as often as not they also offer matching contributions and other options like that that really assess the saver in giving enough to accumulate the kind of nest egg that they're going to need when they get to retirement. WHITFIELD: Jack, how do you even determine how much you need to put away? Isn't that always the tricky part of knowing whether it should be 5 percent, 10 percent, 20 percent of your salary?
OTTER: Well, it is difficult. There's no surefire way. If I knew what the returns of the stock and bond market were going to be for the next 30 years I'd be in a pretty good position here.
But as a general rule, there was a reference to the 401(k) match. If you can start at age 22 putting 10 percent of your salary into your 401(k), and getting that company match for a total of 13 percent, if you invest it wisely, you're in pretty good shape.
To be more specific, you can go to calculators in the next issue of "SmartMoney" coming out in march, we'll have a worksheet, where you can answer a lot of questions, assumptions about how much money you want to have when you retire. And Paul's book probably has similar things. So you can get a better handle on it.
WHITFIELD: OK. And, Jack, we did a graphic, some examples on how folks can start to plan ahead and think about how much to save.
Here's an example, number one: If you're 22 years old and you're making $25,000 a year, with no pension or retirement plan, you need to set aside $339 a month to retire at 66 on $42,000 a year? Does that sound reasonable?
OTTER: Well, yes. I actually ran those numbers myself, and they were extremely conservative. I predicted a 7 percent rate of return. I think everyone's hoping for a little bit better than that over that longtime period. And I also said that you had zero other income. Your parents leave you nothing. You're not saving anything else in any other accounts. And that's not realistic. Most people will have other small sources of income. But that gives you a sense of what its going to take.
WHITFIELD: I was going to say what may not really seem realistic, Paul let me bring you in on this, is if you're 22 and our on a limited income already it's difficult to try and make rent let alone try to plan for retirement 30 years, 40 years down the line?
GRANGAARD: Sure. But it's not nearly as difficult as it's going to be when you're 45 and you haven't started yet. I think that's kind of the point that Jack alluded to when he was talking about compounding.
You need to understand that you've got to give up a little something early on to take care of yourself later. And that the longer you wait, the bigger the challenge is going to be.
The last thing you want to have happen to you is get to age 45 or 50 and be looking at a target of X hundreds of thousands of dollars and you haven't gotten started yet. And now time is no longer on your side. And you don't have the power of compounding.
I think the key thing is to figure out as early as possible how much will I need to accumulate to retire with the lifestyle that I want. And then what do I need to do to get there? And that's the challenge.
And people need to start doing the planning. Because you have to start with the planning, figure out, sort of get a vision of what you want life to be like when you get to retirement, and then look back and say what do I need to do to get there? If you start when you're 20 it's a heck of a lot easier than starting when you're 40.
WHITFIELD: We know that sometimes in your 20s, 20-year-olds or 20 something-year-olds don't think they'll ever get old. Maybe by the time you reach 30, it starts to sink in. OK, I am getting older. So, we've got another example.
If you're 35, making $60,000 a year, that $42,000 very similar to the $42,000 we talked about for the 22-year-old, will be 70 percent of your current income and you need to be saving $650 a month to have that much to retire on.
Jack?
OTTER: Well, the key there is to show that if you wait until you're 35, it's going to be a lot more that you're going to need to stash away. And one thing, if these numbers seem really daunting to the 22-year-old out there who's making say $30,000 or $25,000, then I would say, just stash $25 a week away.
After taxes, the difference in your paycheck is only going to be about $17. Just get in the habit. Going on automatic pilot. When you realize that's really not that painful, then boost your amount you're putting in, say, next year.
WHITFIELD: All right, Jack and Paul. Stick around. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Welcome back to DOLLAR $IGNS. Whatever your age, if you haven't started saving for retirement now is the time, and the younger the better. For advice on how to do it, "SmartMoney" magazine Senior Editor Jack Otter is with us from New York, and CPA Paul Grangaard, author of "The Grangaard Strategy" is joining us from Minneapolis.
All right, guys. We've got a caller from Rochester, New York. Kim is on the line.
Kim, what's your question?
CALLER: Yes, I have $30,000 saved for retirement currently. And I'd like to retire early, like 50, if possible. I'm wondering how much should I save per year to accomplish that?
WHITFIELD: Jack?
OTTER: Well, how old is Kim? CALLER: I'm 31.
OTTER: OK, 31. I think that's a tough row to hoe, but go for it.
But I wouldn't assure yourself that you're going to be able to retire at 50. That's 20 years, 19 years. And you know, these days you should be planning to live 'til 90. Actuarial tables say the life span is pretty good for us. I'm about your age.
So I'd be -- gosh I'd say you'd need to put away at least $1,000 a month to realistically be able to retire at 50 and even then it would be tough.
WHITFIELD: Paul, has she done pretty good to have saved $30,000?
GRANGAARD: Yeah, I think anybody who saved $30,000 by the time they're 31 years old has probably done fairly well. That's a lot of money to accumulate on an after-tax basis.
And what I think you need to do, Kim, and you really have to start here, you've got to ask yourself, you've kind of got to put yourself in your future, and ask yourself what kind of lifestyle do you want in retirement?
If you don't expect a significant lifestyle during retirement you may be on the road there with less than Jack is talking about. It could be that you need more than what Jack is talking about, if you have higher expectations. So what you really have to do is you can't answer the question until you say where am I trying to get to?
You know, the old adage, if you don't know where you're going, any road will get you there. And you really have to ask yourself, where do I want to be? And then look back and say what do I have to do to get myself there? And that's going to dictate how much you need to save.
And you're going to have to make some other assumptions about where you invest, what you expect to earn on those investments and some other things. But you have to start with the goal first.
WHITFIELD: All right, thanks Kim.
OTTER: Paul --
WHITFIELD: Oh, I'm sorry, Jack.
OTTER: I was just going to say, Paul is exactly right. And I kind of took a number out of the sky there without knowing all the assumptions that Kim's making. And I would refer her to one of the many retirement calculators online. Smartmoney.com has one. But there are plenty of others, as well. And that will get you thinking about the things you need to think about in order to make this decision.
WHITFIELD: OK. And Kevin from Quincy, Massachusetts, has this e-mail question. He says, "If I'm 40 now, could you provide a rough estimate of how much money I'll need to retire if I want to retire at 70."
Of course, we don't know what the income is. Paul do you want to take a stab at maybe just a regular, conservative lifestyle, not over the top?
GRANGAARD: You know what I can do? I can give him kind of what I think of as sort of my quick and dirty answer to that question. He can calculate it for himself fairly simply. And this uses some fairly conservative investment assumptions.
I usually say that in order to figure out how much you need to accumulate for retirement, take your lifestyle during retirement, and this is the amount of income you think you're going to need every year during retirement, and divide it by 0.05.
And that's going to give you a fairly conservative estimate of how much you need to accumulate. And if you want to assume that you're going to do a little bit better in the investment markets during retirement, then take that same income expectation, divide it by 0.06. And that's going to give you a range that if you really know what you're doing during retirement.
And, by the way, managing money during retirement is a whole different ballgame than managing it before retirement. And if you know what you're doing post-retirement, you're going to need some amount of money kind of within that range.
WHITFIELD: All right. Kimberly from North Carolina is on the line with a question or a comment.
Kimberly, what's your question?
CALLER: Hi. Thank you for having me on today. I'm in a unique situation that I am a 35-year-old, 100 percent disabled American veteran. I have been paying medical bills for the last 10 years. And I do not have access to work and have a 401(k). And now that medical bills are under control now. How can I start saving or what do I need to get tapped into since I don't have, you know, a career, so to speak now?
WHITFIELD: Jack? I'll let you handle that one.
OTTER: Sure. I mean, I guess my first step would be to ask, do you have any source of income right now?
CALLER: Yes, I do, in the low $30s.
OTTER: Oh, super. OK, well, that's the right answer. What you need to do is run through some of these computations. The one that Paul just offered sounds interesting. Multiply what you think your retirement income ought to be by 0.05. And then your first step, once you get a number your first step is going to be to figure out where it goes.
Does your business offer you a 401(k), if not, look at a Roth IRA. The great thing about that is, while you won't get a tax deduction, you will enable your money to grow tax free, and there will be no taxes once you take it out.
Then the final question is, how do you invest that money? And then there's a lot of good mutual funds out there. And you're going to want to make sure you diversify. I can run through some mutual funds if Fredricka wants to allow me to?
WHITFIELD: Yeah, let's go through them real quick.
OTTER: Great. I think a great core fund is the Simple Vanguard, S&P 500 Index Fund. It tracks the major U.S. companies, all 500 of them, very low fees. Over the long term that should be a great fund.
Around that you're going to diversify with a bond fund. One we really like is the Fremont Bond Fund. There's no load. It's run by a guy named Bill Gross, who is very adept and nimble at tracking changes in the bond market, and it covers all aspects, from government bonds to corporate bonds to bonds that invest in real estate.
And then you're going to want some international exposure. There's something called the Oakmark International Fund, run by a fund manager named David Hero who is outstanding at picking stocks. Has a fabulous long-term record. And that's going to be a great start for you.
WHITFIELD: All right. Roger from Cheyenne, Wyoming e-mails this question saying"
"I think I have everything planned except medical insurance. What is one to do to prepare for that?" Paul?
GRANGAARD: Well, to prepare for medical insurance, I guess the best thing you can do is get a sense for what people are paying for medical insurance after they retire, or when they get older, to get a sense for what the expense might be.
And then ultimately, that's just going to be part of the budget that you're going to be planning on being able to support from your investments during retirement or whatever other income you might have. So really when it comes to health insurance there's a lot of things in retirement that can change relative to what was going on before you retired.
You might get to retirement and within five years have your home paid off. Therefore you can get by probably on less income during retirement, at least because of that one piece, once you don't have to make a mortgage payment.
On the other hand some things can come back in that you didn't have to pay before, such as medical insurance, maybe long-term care insurance. So it kind of comes down to, again, getting yourself out in your future and start thinking about which expenses would be additional, which ones would go away.
Coming up with kind of a reasonable amount you think you'll really need over time and then go through some of these calculations to figure out what the target is. And then come back and do as Jack suggested, and start figuring out which investments to invest in to accumulate to that amount in the time you have left.
WHITFIELD: All right, Paul and Jack, we're going to take a short break. We're continuing to take your e-mails and your calls. We'll be right back.
(COMMERCIAL BREAK)
WHITFIELD: Today on DOLLAR $IGNS we're learning how a little young money becomes a lot of old money. Our experts in retirement planning, Jack Otter, senior editor at "SmartMoney" magazine and CPA Paul Grangaard, author of "The Grangaard Strategy".
And April from Pennsylvania is on the phone, hopefully still with us, with a question.
April?
CALLER: Hello.
WHITFIELD: Hi. What's your question?
CALLER: Hi, how are you? What advice do you have for those of us that are unemployed? This is the second time I've been unemployed in the past year. My husband was out of work for a year. He went back to work in August. He makes a stellar $10 an hour.
I think the advice that you're giving is great. And you know, prior to being unemployed I did follow all the information that you've been giving. But it's kind of unrealistic for those of us that are, you know, worrying about paying our mortgages, and, you know, just for everyday living expenses.
With so many people being unemployed, you know, how do they go about paying their bills and also saving for retirement?
WHITFIELD: Paul?
GRANGAARD: Well, it's a difficult challenge. And I think all you can do is deal with what's -- you know, deal with the closest problem. Clearly you've got to make the mortgage payment and the car payment and buy groceries. And if, during a period of unemployment, that doesn't leave enough left over to put something in an IRA, for example, this year, then you just have to skip a year.
You know, hopefully the unemployment is temporary. You know, we live in this world where having a job almost seems like a luxury sometimes. And being unemployed seems like it's a part of everybody's life at various times. There's so much in flux.
And I think you just kind of have to roll with it. And just try as hard as you can to leave the money that you've got socked away in tax deferred accounts already, do everything you can to protect that, so that you don't spend it. If you can just maintain the balances that you have and get by, you're probably doing very well and should probably give yourself a pat on the back. And just hope that when things turn around and you find another job, that you'll get back to it.
And that's really the reason why I always tell people, you need to do your retirement plan at least once a year, because you've got to be dealing with things in real time. And it may very well be that your plan next year has you saving a little bit more than your plan would have, had you still been working now. But if you miss a year's worth of saving and you've still got 25 or 30 years to catch up, maybe it costs you another $20 a month to make it up.
WHITFIELD: All right. Avis --
OTTER: I think that's right on track. I would just chime in to say one thing that should make April still feel a little bit better. If they are still paying a mortgage, they're building an asset that when they retire will probably be quite valuable. Let's hope they don't have to take a radical step like sell the house and move to something smaller or take out a reverse mortgage. But if they do they know they will have that large real estate asset there to draw on.
WHITFIELD: Avis from Washington State is on the phone with a question.
Avis?
CALLER: Yes. The question -- excuse me. The question is, why do you never address those of us over 40? I mean, like I have a certain amount, and I'm just thrilled that I have it.
But when I was younger, we didn't know to start saving. We didn't know about compounding. We didn't hear any of that. No one taught us. I'm thrilled that you're doing this for younger people now.
But for those of us who are older, like right now I find myself in several funds. Some do well, some don't. For three years I ate my heart out because they went down so far. There's got to be something that people who are over 40, a lot over 40, that they can get into that's safe.
WHITFIELD: OK, we're running out of time so let me ask you, Paul, if you could address that real quick. If you haven't saved and you're over 40, what do you do now?
GRANGAARD: Is it Avis?
WHITFIELD: Yes, that was Avis in Washington State.
GRANGAARD: Avis, I don't know how much you have accumulated so far. Sounds like you had some money in the market when we've had this painful two or three-year period. Actually, my first book was called "The Grangaard Strategy: Invest Right During Retirement". And it really addresses those issues. It doesn't necessarily say what a person should do if they haven't saved enough. What it does do is help you figure out how to maximize your income and lifestyle from the assets that you've already accumulated. And the book is completely about managing money during retirement.
More and more, you're finding more and more people talking about that, because the demographics are such that we're going to retire about 67 million people in the next 15 to 20 years. More and more people are addressing that. You ought to be able to go to the bookstore, find my book and probably a number of others now that will address that topic.
And I'm sure that Jack's magazine, "Smart Money" runs articles frequently. Because that is the biggest financial demographic we're facing right now. And there's more and more material out there.
WHITFIELD: Paul you get the last word because we're now out of time. This half hour went by very quickly, Jack and Paul. Thanks very much.
Paul Grangaard, CPA and author of "The Grangaard Strategy", and Jack Otter, senior editor at "SmartMoney" magazine.
Thanks very much, gentlemen.
GRANGAARD: Thank you.
WHITFIELD: That's all we have time for right now.
END
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