ensure a comfortable life style for the years to come, especially
after you retire, you need a financial plan.
A financial plan includes your financial goals (e.g. have $2 million
at retirement, send your child to Harvard) and the way to achieve
How much do I need for retirement?
How much do you need at retirement? The answers depends on the
- Your life expectancy after retiring (how long you will
- Your expected life style at retirement
- The capital appreciation of your assets during your retirement
Generally speaking, for a couple who plan to retire around
65, they need about $2 million at retirement to live a comfortable
life for the next 15-20 years.
To get into specifics, please use the following calculator.
How can I save for retirement?
The early you get started, the better off you will be. Here is
- The power of compounding. If you invest $1000 a year for ten
years, starting at the age of 30, and assume that your investment
grows at a rate of 8% per year, by the time you are 65, your $10,000
investment has grown to about $107,000. But if you started at
age 40, everything else being equal, you will end up having about
- The tax-efficient IRA contributions are on a yearly basis. If
you has missed the deadline for a certain year, you have missed
By the time you retire, you may have the following to live on:
- IRA accounts. This includes traditional IRA (contributions are
tax deductible and the account grows tax-deferred) and/or Roth-IRA
(contributions are NOT tax-deductible but the account grows tax-free).
You may be eligible to open such an account even when you are
a student! Check out the IRA rules in the financial
- Employer-sponsored 401k (or 403b for university professors etc.)
account. Contributions to such an account is tax-free and the
account grows tax-deferred. Furthermore, most employers match
a part of your contribution to the account.
- Employer-sponsored pension plan, also called defined benefits
plan (the 401k plan is also called defined contribution plan).
- Social Security, if you are lucky. But don't count on it!
- Personal assets, including your real restate, your investment,
and perhaps your life insurance (to benefit your spouse etc.).
All the above can be invested in the three things:
- Individual stocks or stock mutual funds.
Historically this has returned 7-10% annually. But it is the most
risky of the three.
- Bonds or bond mutual funds. Historical
annual return is 5-7%.
- Bank CDs or money money accounts/mutual funds. Average return
is around 4-5% annually.
Here is the suggested allocation of your assets:
- All ages: keep an emergency cash reserve large enough to cover
your regular expenses for six months.
- Ages 20-29: Invest all the rest of your available funds in
a diversified portfolio of stocks (e.g. an index stock mutual
- Ages 30-39: 90 percent stocks, 10 percent bonds.
- Ages 40-49: 80 percent stocks, 20 percent bonds.
- Ages 50-55: 70 percent stocks, 30 percent bonds.
- Ages 56-64: 60 percent stocks, 40 percent bonds.
- Ages 65 and above: 50 percent stocks, 50 percent bonds, assuming
you will be drawing income from a pension and Social Security.
How much do I need for child education?
||Today (year 2000), the out-of-pocket charges for
a private, four-year college can exceed $100,000. Even with
very moderate inflation of 4% a year, in 18 year, the number
will more than double.
How can I save for child education?
You can save in your own name, and then given it to your child
for college education. The nice thing about his option is that you
have control of the money.
Or you can establish the following types of accounts in your child's
name. This option has tax advantages. The bad part is that once
your child is a grown-up, you lose control of the money. Also having
too much money under your child's name is a barrier for getting
- Education Saving Account (formerly known as education IRA). Starting in 2002, each year a total of $2000
can be contributed to each child. Like the case for a Roth-IRA,
you don't get a tax-break for the contribution. But the money
- UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers
to Minors Act). You can transfer cash, stocks, mutual funds, etc.
to your child under UGMA. Under UTMA, you can also transfer real
estate, paintings, patents, etc., besides what you can do with
UGMA. For a child under the age of 14, an UGMA investment account
pays no federal tax for the first $700 investment income, and
15% tax rate on their investment income between $701 and $1400.
Investment income above $1400 is taxed at the parents' rates.
Children 14 and over pay taxes at standard tax rate.
- State education programs. Some states offer programs that allow
your to pay today's tuition and get future education. Be sure
to check the restrictions such as you can only use it toward college
education in that particular state. A new program called 529 plan
is offered by some states. It's like traditional IRA in that it
grows tax-deferred. But you need to study the investment options
and the restrictions on withdrawal or using the fund for other
- Join the Upromise program, which allows you to invest rebates
from your everyday spendings to your children's education accounts.