Comparing Income And Expenses
Now you will compare your income with your expenses
during retirement and see if they match up. This is the number you've
been working toward as you've investigated your assets and income, then
expenses, and finally, figured the effects of time on your money. By the
end of Chapter 4, you will discover whether you need to save more for
retirement and, if so, how much more...and you will learn how to grow
your savings over time.
people will have exactly the amount of money they will need in
retirement. Most will get a negative figure - a gap - when they do the
math. If this is your situation, this chapter can help you figure how
much more to save each month over the next 10 to 15 years until you
retire. After you come up with your totals, be sure to read on to
find out the difference a year can make and the five ways to close the
gap and boost your savings. Where will you find additional savings? Here are some suggestions for active workers and retirees alike.
You probably know by now the easiest way to watch
your nest egg grow is to make the maximum contribution to your workplace
savings plan through payroll deductions. If you are 50 or over, you will
have the chance to add even more to your savings through catch-up
contributions, ranging from $1,000 to $5,500, depending on the type of
retirement plan you have. And you are reducing your taxes. If there's no
retirement plan at work, you can add annual contributions to any IRA
accounts you have.
Most people haven't thought about how long their
savings will last in retirement or how much inflation will increase over
The Projections and Results Worksheet is where all your prior work comes together. Building on the clues uncovered in the earlier worksheets, this worksheet compares your anticipated income and expenses over the 30 years of your retirement. Making the comparison in dollars valued at the time of your retirement, this worksheet takes into account that while you will have a fixed monthly income, your expenses will increase due to inflation.
At the beginning of retirement, most people's monthly
income likely will exceed their expenses; but after a decade or so,
expenses begin to exceed the monthly income. Realizing this now will
allow you to save and invest any extra income in the early years of
retirement so that it will grow and can be used to cover increased
expenses later in retirement. Especially if you have a shortfall, the Projections and Expenses
Worksheet will allow you to see how much you may need to add to your
savings. When doing this comparison of your projected income and
expenses, keep in mind that the value of a dollar tomorrow is less than
a dollar today. The goal is to stay ahead of inflation. For example, a
dollar today is worth more than a dollar in 30 years if the rate of
return, say 5 percent, is greater than the inflation rate, say 3.5
percent. The worksheet addresses the impact of inflation by converting
your anticipated cash flows into a constant dollar value - at the time
of your retirement.
If the result is negative, don't worry. Just about
everyone will need to make up a shortfall in savings. Remember also,
that it is difficult to project inflation rates, especially for health
care, that far in the future. It is better, however, to have a rough
idea of where you stand than have no guesstimate at all.
The good news is that time is on your side. Remember the effect of interest compounding and how it can work to make your money grow in 10 years. Each year, as you set aside more money, the combination of savings and earnings will help close the gap. Return again to the worksheets and select the Projections and Results Worksheet. This worksheet lets you figure out how much you need to start to save today to make up the gap between projected income and expenses.
away that amount of money over the next 10 to 15 years, while getting a
rate of return you're comfortable with, should go a long way toward
matching up income and expenses over 30 years of retirement.
You don't have to save the
total amount of any gap between what you have and what you need. Each year
the amount you invest will grow, and the growth of your savings lessens
the amount you need to save.
Five Ways To Close The Gap
Where will you find additional savings? Here are some
suggestions for workers and retirees alike.
Number 1: Work your contributions at work
- Without exception, retirement
planners advise contributing the maximum to your retirement plan,
especially if your employer contributes too. If your contributions are
made by salary deduction, saving is easier to do and may seem almost
painless. And contributing more means postponing, or
"deferring," taxes until you withdraw the money at retirement.
Then you may be in a lower tax bracket.
Catch-up provisions for some retirement plans allow you
to contribute extra amounts if you're over 50. Information about 401(k)
catch-up contributions is available from your retirement plan
administrator or on the Internet. If your plan has a catch-up provision,
act on it now.
Number 2: Work longer, retire later - Staying
employed as long as possible benefits your retirement finances in several
ways. Having an income gives your retirement savings more time to grow. A
regular income could mean more regular savings. If you work for a company
that provides health insurance, you won't have to fully pay for a policy
You don't have to stay at your same job if there are
other opportunities. Maybe you want a new career, one that ties in to your
personal interests. Longer life spans and better health mean many older
people have the energy and enthusiasm employers are looking for, not to
mention the skills and experience. Many people find the social benefits of
working as important as the financial ones.
Saving: A Little Goes A Long Way
To Consider Doing Without
Over 10 Years At A 5% Rate of Return With
All Earnings Reinvested
Weekly dinner for 2 @
Premium cable TV
Movie & popcorn for
2 @ $32 twice a month
Daily lottery ticket
Number 3: Cut expenses, big and little - Moving
to a region with lower housing and living costs or moving to a smaller
home can help narrow the savings gap. Another option is staying in your
community but downsizing to a smaller place like a condo or apartment. The
same factors that drove up the value of your current house, however, will
also have driven up overall housing costs, including real estate taxes.
Housing is a major part of everyone's budget so think carefully about
where you want to be and whether you can afford it. Keep in mind, however,
that moving includes its own financial expenses and means leaving friends
and your community.
Financial planners say that pre-retirement years are
the wrong time to take on large debts, including home equity loans and
credit card debt, with its high interest rates. Buying a new car, boat, or
vacation home is not wise if you need to save. Investing that $400 a month
(the average 5-year car loan payment) and getting a 5 percent return would
put more than $27,000 in your retirement account. Consider keeping your
old car or buying a used one.
Pre-retirement is also the wrong time to give or
"loan" large sums of money to your children and grandchildren.
Their earning power is usually far better than yours. Now is the time to
take care of your finances so you don't have to ask others to bear the
financial burden for your care later on.
Number 4: Social Security, now or later? -
The amount of your monthly Social Security benefit goes up the older you
are when you start receiving it. For example, a 61-year-old man earning
$60,000 in 2008 and eligible for his Social Security benefit at 62 would
receive an additional $1,152 a year by waiting 1 year, until he is 63, to
collect his benefits. On the other hand, retirees who are seriously ill,
who need the money immediately, or who feel comfortable investing their
monthly checks may choose not to wait.
In this example, the worker turning 62 in 2009 would have a full
retirement age under Social Security of 66. At full retirement, his
benefit will be $1,596. If, however, he starts to receive benefits at
age 62, his monthly benefit would be reduced to $1,124. By waiting until
age 70, his monthly benefit would be $2,207.
On average, early retirement will give you about
the same total Social Security benefits over your lifetime, but in smaller
amounts to take into account the longer period you will be receiving them.
If you delay retirement beyond the full Social Security
retirement age, you can earn retirement credits, increasing Social
Security by a certain percentage (depending on date of birth) until you
reach age 70.
Regardless of the age you start receiving Social
Security benefits, remember to sign up for Medicare at age 65.
Number 5: Put your money where the returns are
- Educate yourself about investing and consider paying a professional to
help you choose the right place for your money. Financial experts say too
many people keep too much money in the wrong kinds of accounts, for
example checking accounts, savings accounts and money market funds, which
typically have low interest or return rates. Review the discussion in
Chapter 2 about asset allocation and diversification of investments.
Adding $200 a month, or $2,400 a year over 10 years to
a starting retirement savings balance of $40,000 would more than double
your money, assuming a 5 percent rate of return and all earnings
Closing The Gap
$200/Month Additional Savings At 5% Per
Year Over 10 Years
Making Your Money Last
point of all the calculations you have done in this booklet is to make
sure your income will last a lifetime. If doing the worksheets has
uncovered a gap between your retirement income and expenses, you probably
will be changing some financial habits over the next 10 to 15 years.
The only part of your retirement mystery that remains is deciding how you
are going to make your retirement income last as long as you do. You will
need a strategy.
Solving your retirement mystery has revealed that more
saving (especially for medical costs), more investing, and less spending
will boost your confidence and your financial bottom line as you near the
end of your working life.
For now, you will probably need to focus on adding to
your nest egg and investing it wisely. Take into account that you will also
have income taxes to pay. Take the short tax quiz in this chapter to find
out about minimizing your taxes in retirement.
may also want to take a look at financial products and services that could
help build some financial security into your retirement. But first, a word
of caution. Because you're growing a nest egg, you may start hearing
from people offering their own strategies for managing your retirement
money. These people may be relatives and friends. You will also hear
from strangers in phone calls, letters, and emails. Some may offer to
double your money at no risk. Think long and hard about involving them in
your financial affairs, unless they're qualified financial professionals
and can be objective. Retirees are frequently targets for scams.
Don't give out any personal information to strangers. Don't be a courtesy
victim. Con artists will not hesitate to exploit your good manners. Save
courtesy for friends and family members, not potential swindlers!
It's A Big Deal
"Having a strategy" may sound like retirement is a
battle or a complicated business opportunity. You may be thinking,
"What's the big deal? I'll just withdraw money when I need to pay
bills." Your parents may have done fine by simply cashing their
monthly Social Security and pension checks to live on. Their taxes most
likely were a lot simpler and a lot easier to do.
today's world, keep in mind that the money you have saved and invested
will be earning income until you withdraw it. Part of solving your
retirement mystery will be deciding how to handle your retirement money,
including continual investing, throughout your lifetime. Your tax
situation, both federal and state, may not be so clear. You need to plan a
withdrawal strategy so you pay less tax on money you take out of your
retirement account and continue to grow the money you leave in. A
qualified tax adviser can help here.
Getting Your Retirement Benefits
You may need to decide whether to take your pension or
your retirement plan benefit in a lump sum or in an annuity. You can find
out about your retirement plan payout options by reading your plan
documents. Or you can contact the plan administrator directly for
information about what your plan offers.
If you are in a traditional pension plan, your benefit
is paid in the form of an annuity - that is, through periodic payments,
typically monthly, for an extended period, usually your lifetime.
If you select an option that provides for a survivor benefit for your
spouse, note that your monthly benefit will be reduced. The survivor
benefit is typically 50 percent of the retiree's benefit, but some plans
provide for other options, such as 75 percent.
If you are in a defined contribution plan, such as a
401(k) plan, you do not automatically get your benefit as an annuity. Your
retirement benefit can be taken as a lump sum paid entirely at
the time of your retirement, or, as in some plans, through periodic
payments over a short period of time, such as 3 or 5 years. Your plan may
provide an annuity option or you may choose to buy an annuity with all or
part of your lump sum benefit. If you choose to take your benefit in a
lump sum, be sure to put it in a tax-deferred account, such as an IRA,
within 60 days to avoid paying high income taxes (the highest tax being 35
percent as of 2008) on the amount. You will then have to decide how to
invest what could be the most money you've ever accumulated and make sure
it lasts for the 30 years of your retirement.
you choose an annuity, make sure you realize the risks and rewards. An
annuity provides a steady stream of income that lasts throughout your
lifetime and can provide adjustments for inflation. This is helpful
especially in the early years of retirement when there may be the
temptation to spend the excess income instead of saving it to make sure it
is there in 20 to 30 years. Keep in mind that if you die sooner than
expected, however, the insurance company may keep the remaining balance
unless you have opted for a survivor benefit. That is why annuities are
usually not recommended for those with a shortened life span. Annuities
come in many varieties. If you are purchasing one, choose an insurance
company with a good credit rating and track record. Be sure you know what
you're buying - there are costs involved in ending the contract. The
more you learn upfront, the better.
You can also buy an annuity with money from other
assets such as an inheritance or the sale of your house. Like other
annuities, you will receive a monthly check for a defined period or for
life. The tax treatment of these payouts will be different, however.
Like any investment, review the terms of the annuity before you purchase
it. For example, will the amount paid vary based on investment returns or
is it fixed, what will you pay in related fees, etc.
Another way to make your money last is to obtain a
reverse mortgage - essentially a bank loan based on the amount of the
equity in your home. It can provide you with a monthly check, but at a
cost. You are spending down the value of your home. If you can keep your
house in good repair so the bank sees value in the loan, this is a way to
supplement your income and not have to leave your home. When you or your
heirs sell the house, however, the loan has to be repaid. Talk with the
bank about any taxes due on these payments, and make your family aware of
your reverse mortgage.
Also, remember long term care insurance can help you
plan for increased health care costs in your later years.
Withdrawals: Which Pot?
You probably have some personal savings included in
your retirement nest egg that you've already paid taxes on. A Roth IRA,
for example, is a good place to leave money you've invested for growth
because the withdrawals are not taxed. Retirement experts say you usually
should withdraw from this pot of money earlier in retirement when you may
be in a higher income tax bracket. Withdraw your taxable retirement plan
money (such as your 401(k) or other workplace savings plan) later, when
you have less taxable income and possibly higher deductions due to medical
Be aware, however, that the IRS requires you to start
withdrawing tax-deferred money from retirement accounts when you turn 70½
years of age. (This is a milestone on the Retirement Timeline at the
beginning of this booklet.) By doing so, you will avoid tax penalties.
These withdrawals are called "minimum required distributions,"
and the formula for determining the amount can be complicated. You may
want to consult a tax expert for help.
Can You Beat It?
As you're withdrawing money to pay your bills in
retirement, you should be trying to grow your remaining money to at least
keep up with inflation. Of course, it's better to beat inflation. Experts
say you need to continue investing and diversifying your assets throughout
your life. Keeping your money in accounts paying guaranteed interest rates
will keep it safe, but not from inflation. Inflation is a major threat to
your financial future, so make it a consideration in your investment
Going It Alone vs. Getting Help
With a lot of study and regular attention to changes in
tax laws, the economy, the stock market, and your money, you may be able
to come up with a strategy to minimize taxes and maximize income. There's
even software to help.
There's another road too. You can hire someone to
develop your strategy and manage your money for you. Especially during the
later years of your retirement, you may want to seek the help of a
professional, when you may have less interest, energy, and ability to keep
your strategy on target.
Good financial professionals, and the companies they work for
and with, are required by law to be clear and open about their fees and
charges and whether they are paid by commissions or for the sales of
financial products, such as annuities and mutual funds. Be sure to ask
questions, get references, and avoid anyone who guarantees performance on
returns. This way you can make an informed decision. After all, it is your
money you are putting in their hands. For more information, see the Resources section.
Taxes & Retirement - True Or False?
Income taxes go away when you're retired. True or False?
False. Remember all that pretax money you contributed
to your retirement plan? When you withdraw it at retirement, you pay
Social Security benefits are not sheltered from taxes.
True or False?
True. A portion of your Social Security benefits is included in your taxable income if, for example, in 2008, you have taxable
income and Social Security benefits of more than $25,000 for a single
person and $32,000 for a couple.
There are no tax consequences if you don't start to
withdraw your pretax savings at age 70½? True or False?
False. There is a 50 percent tax penalty on amounts
that the IRS requires to be taken out after age 70½ and that are not
withdrawn when required. In tax terms these are called "minimum required
Few Words About Scams
As you plan your retirement, don't let fear,
desperation, or the need to catch up financially push you into any hasty
investment decisions. In all legitimate investments, higher returns are
accompanied by higher risks - risks you may well not want to take as you
near retirement. Be wary of anyone who claims they can sell you a product
that offers great reward without great risk - a sure sign of a scam.
Here are a few points to keep in mind when you make any financial
Recognize that anyone can claim to be a "financial
consultant” or "investment counselor.” That person may not have the
special training, expertise, or credentials necessary to back up the
claim, however. Ask about licensing and professional designations and
check them out with securities regulators and any trade groups in which
they claim membership.
Understand your investments and never be afraid to ask
questions. Good financial professionals are never pushy, and they never
dismiss your concerns.
Don't let embarrassment or fear keep you from
reporting suspected investment fraud or abuse. Contact the securities
agency in your state as soon as you suspect a problem or believe you have
been dealt with unfairly.
Never judge a person's integrity by how they sound or
how they appear. The most successful con artists sound extremely
professional and have the ability to make even the flimsiest investment
seem as safe as putting money in the bank.
Monitor your investments. Ask tough questions and
insist on speedy and satisfactory answers. Make sure you get regular
written and oral reports. Look for signs of excessive or unauthorized
trading of your funds when you receive statements, and do not be swayed by
assurances that this kind of practice is routine.
Above all, become an informed investor. In investing,
as in life, if it sounds too good to be true it probably is.
Now that you have reviewed the rewards and pitfalls of
investing, you are ready for a review of all the clues you've tracked to
solve the mystery of your retirement. Reading it will reinforce what
you've learned and will help you to take action. You'll also find several
resources to turn to for more information. Take advantage of them.
Tracking Down Help For Retirement
Like a black and white TV, retirement used to have high
contrast and few choices: One day you were working and the next day you
weren't. One day you lived on a paycheck and the next day on pension and
Social Security checks. Your income was fixed and retirement was no
You have the power to put some color, maybe even gold,
in your retirement. It mostly means putting into action a plan to close
the income-expense gap and manage your money smartly now and during your
You won't be alone. In the next 25 years, one in five
Americans will be over 65. That's a lot of people today who need to work
on a clear and realistic retirement plan during the next 10 to 15 years.
Make sure you're one of them so your retirement wishes come true.
In the following list, you will find ways to discover
more clues about retiring gradually and maybe working longer, paying
attention to your assets and income, saving and investing, planning for
increased expenses, including medical costs, and developing a withdrawal
strategy. The information available on the Web sites listed is rich in
detail and wide in scope. But remember to protect your privacy by not
giving out personal information such as your Social Security number,
telephone, or address, unless you know whom you're dealing with.
In fact, helping American workers succeed in a new kind
of retirement has become the focus for a number of government agencies and
organizations. Businesses selling products and services like annuities,
long-term care insurance, and income management services are another
source of information. To reach all these sources, use the Internet, your
telephone, and the public library.
Periodically look back over the worksheets you have done
and fill them out again as your finances change. Chart your progress
through the next 10 to 15 years until retirement and beyond. Get time
on your side and get going.
This Booklet Is Presented By
U.S. Department of Labor
Employee Benefits Security Administration
200 Constitution Avenue, NW
Washington, DC 20210
Toll-free publication request line: 1.866.444.EBSA (3272)
American Securities Administrators Association, Inc.
750 First Street, NE, Suite 1140
Washington, DC 20002
475 North Martingale Road, #600
Schaumburg, IL 60173
We also thank AARP for its valuable contributions to this booklet. The following Web sites, booklets, pamphlets, and
other references are available from the organizations above and others
that focus on retirement and savings issues.
Retirement Savings Calculators
Institute For A Secure Retirement (WISER)
Retirement Planning And General Retirement Issues
From The Employee Benefits Security Administration
Filing A Claim For Your Retirement Benefits
Savings Fitness: A Guide to Your
Money and Your Financial Future
Top 10 Ways to
Prepare for Retirement
Women and Retirement Savings
What You Should Know About Your
Request copies by calling 1.866.444.EBSA (3272)
Security Administration Web site has online resources to help
calculate your retirement benefits and to learn about survivor benefits
and Medicare. Two publications you may want to view or order: Understanding the Benefits and What
Every Woman Should Know.
offers a wealth of information, including a fact sheet on reverse mortgages and a section on Money and Work. You can order Money Matters: Your Guide for Financial Security by telephone 1.888.OUR.AARP (1.888.687.2277).
For those employees who may have worked for a company
with a traditional defined benefit (DB) pension, the Pension
Benefit Guaranty Corporation can assist in locating any money still in
your account. Those with DB plans will also find these two publications
Guaranteed Pension and Finding
a Lost Pension, Tel. 1.800.400.7242.
Browse the Web site of the National
Endowment for Financial Education for a wealth of pre-retirement information.
Saving And Investing
In addition to consumer fact sheets and studies, the Consumer
Federation of America's Web site offers a free savings brochure, 6
Steps to Six-Figure Savings, Tel. 202.387.6121.
The Securities and Exchange Commission Web site offers a menu of online Investor
Information topics for consumer reference. View Invest
Wisely: An Introduction to Mutual Funds and dozens of other titles.
is a Web site sponsored by the Financial Literacy and Education
Commission, U.S. Department of the Treasury, and has among its offerings
the My Money Tool Kit. You can order
a copy online.
The Internal Revenue Service's Individual
Retirement Arrangements is one of several guides to retirement plans
that the agency offers.
The Federal Citizen Information Center Web site is your portal to government
information, from car insurance to retirement savings. You can also view or order
a free copy of the Consumer Information Catalog at this site.
A recent addition to the Internet, sponsored by the
American Institute of Certified Public Accountants is 360
Degrees of Financial Literacy. The Web pages view finances throughout
life - from childhood, to college, career, and retirement and estate
American Securities Administrators Association's site alerts
readers to the latest money scams and to any disciplinary rulings against
individual financial advisers. The Web site also includes a section on
investor education, including this publication: Protecting
Your Finances: How to Avoid Investment Frauds and Scams.
Financial Planner Board of Standards Web site lets you look up a
certified financial planner near you. The organization also distributes a
Planning Resource Kit. Tel. 1.888.237.6275.
Association of Personal Financial Advisors is an organization of fee-only comprehensive financial professionals. The Web site also includes
retirement planning information. Tel. 1.800.366.2732.
The Actuarial Foundation's Web site, view the following publications: Seven Life-Defining Financial Decisions Making
Your Money Last for a Lifetime: Why You Need to Know About Annuities and Don't Run with Your Retirement Money.
The Society of Actuaries Web site (see News and Publications) links to informative articles in the group's
Trade Commission's site includes over two dozen fact sheets and
brochures warning consumers about scam investments. View Reverse
Mortgages: Get the Facts before Cashing in On Your Home's Equity
Topics from money to housing are included at the Administration
on Aging Elders and Families site.
The Centers for Medicare and Medicaid Services and the Medicare sites of the U.S. Department of Health and Human Services are your first and most
reliable resource for information on Medicare. They include information on
billing, appeals, long-term care, and links to information on Medigap
policies and the new prescription
drug program. Start with these four publications: Medicare
and You Choosing
a Medigap Policy: A Guide to Health Insurance for People with Medicare Your Guide to Medicare Prescription Drug Coverage Retiree Prescription Drug Coverage & The New Medicare
Prescription Drug Coverage.
The Social Security Administration also has information on the Medicare
Prescription Drug Program.
booklet has been developed by the U.S. Department of Labor, Employee
Benefits Security Administration, and its partners. This booklet constitutes a small entity compliance guide for purposes of the Small
Business Regulatory Enforcement Act of 1996.