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J.K. Lasser's New Rules for Retirement and Tax

J.K. Lasser's New Rules for Retirement and Tax

by Paul Westbrook, Jk Lasser Institute (Other)


"Paul Westbrook is one of America’s wisest, most principled, and articulate financial advisers. This new book is the ultimate download of his wisdom and knowledge. It will help you plan better for, and live better in, the retirement you always dreamed of having."–Tyler Mathisen, Financial



"Paul Westbrook is one of America’s wisest, most principled, and articulate financial advisers. This new book is the ultimate download of his wisdom and knowledge. It will help you plan better for, and live better in, the retirement you always dreamed of having."–Tyler Mathisen, Financial Journalist

"J.K. Lasser’s New Rules for Retirement and Tax is the rare financial handbook that explains complex concepts in an accessible and engaging way. It’s a must read for anyone who hopes to retire someday."–Beth Kobliner, author of Get a Financial Life: Personal Finance in Your Twenties and Thirties

"Westbrook has given us more than a guidebook for retirement; he has given us a comprehensive way to understand our own plan for retirement." –Marshall Loeb, Senior Correspondent, CBS MarketWatch; former managing editor of Fortune and Money magazines

J.K. Lasser–Practical Guides for All Your Financial Needs
Please visit our Web site at www.jklasser.com

Editorial Reviews

Tyler Mathisen
Paul Westbrook is one of America's wisest, most principled, and articulate financial advisers. This new book is the ultimate download of his wisdom and knowledge. It will help you plan better for, and live better in, the retirement you always dreamed of having. —Financial Journalist
Beth Kobliner
J.K. Lasser's New Rules for Retirement and Tax is the rare financial handbook that explains complex concepts in an accessible and engaging way. It's a must read for anyone who hopes to retire someday.
Marshall Loeb
Westbrook has given us more than a guidebook for retirement; he has given us a comprehensive way to understand our own plan for retirement.

Product Details

Publication date:
J.K. Lasser Series , #11
Product dimensions:
6.32(w) x 9.37(h) x 0.63(d)

Read an Excerpt

Chapter 1

Chasing the Big R through Four Financial Steps

You can see it in the eyes of the 30-something GenX computer programmer absorbed in chat rooms seeking alternatives for crashed stock options. You can feel it in the heartbeat of the 40- or 50-something baby boomer marketing specialist who desperately hopes to quit the rat race. You can detect it in the worn face of the 60-something lawyer who can't wait to end the commute. Everyone wants it. Retirement.

The power of retirement is enormous. It has become our national pastime. Articles about it are everywhere. People discuss it over lunch, at barbecues, and at coffee machines. They click on the more than nine hundred Web sites that provide retirement calculators. People contemplate retirement in their quiet time after a frustrating workday. Retirement. I call it the Big R.

Many workers, however, feel like frustrated lab rats who can't find the end of the maze or gerbils who can't run fast enough on the revolving wheel. That our parents attained financial security by working and saving patiently year after year is too slow for the twenty-first century.

I was in an elevator with an armful of retirement seminar books when a young man, about 20, said, "Retirement, that's great." I asked him why he was interested in retirement at such a young age. "Oh, I intend to retire early." I asked him just how early. "Oh, probably not until about 35."

Why this obsession? On the surface, it's obvious: Retirement represents the ultimate—not working and having enough money to live comfortably. Or as retirees have been telling me for 20 years, "The time when I can do what I want, when I want, and how I want." That's compelling.

Yet, all this obsessing suggests that there is something deeper here: Perhaps people are chasing an ideal life more than actual "retirement." This idea is explored in Chapter 11. But for now, let's zero in on your number one question about retirement: "How can I get it?" This is the heart of the book.

A major problem with retirement articles and books is that they're either too simple or (and this is more common) too complicated. The simple version is blunt: "You'll need 75 percent of your income." This is not very helpful. In fact, it's just about useless without making other assumptions.

The overly complex version isn't much help either. It is what many mutual funds have waiting for you: twenty pages of interminable calculations. Just as Einstein, after unraveling endless mathematics, revealed that simple and profound conclusion E = MC2, you may successfully complete your retirement equation. After 20 pages, however, you are not only exhausted, you're still not sure whether you can retire. Your intuition warns that if just one of those numbers or calculations is wrong, your house of cards falls.

The Four Financial Steps

So, let's strike a balance. Instead of using one unwieldy table or worksheet for everyone at any age, which makes it too complicated for everyone, I have broken planning down into four bite-sized financial steps and worksheets:

Step 1. If you're early in your career and retirement is a hazy far-off dream, you must concentrate on getting a solid savings and investment plan in place.

Step 2. If you're in mid-career, when you have to juggle many priorities besides retirement, you need help in creating a glide path to retirement.

Step 3. If you're at retirement's door, it is time to double-check your plan to make sure everything is in order.

Step 4. If you're already in retirement, the suggestions in this book can help you stay financially afloat.

How to Use This Book

You can approach this book from several directions. You can start at the specific financial chapter that applies to your situation. There are four choices:

Step 1. If you're in your 20s and 30s, start with Chapter 2.

Step 2. If you're in your 40s and 50s, read Chapter 6 first.

Step 3. If you're at the cusp of retirement, turn to Chapter 13.

Step 4. If you're in retirement, look at Chapter 15.

Or, you can start with a subject that focuses on one of your burning financial concerns, such as retirement on a shoestring (Chapter 12), investments (Chapter 3), help with the discipline of saving money or getting out of debt (Chapter 4), or the handling of IRA rollovers and other technical stuff (Chapter 14).

Or, you can simply turn to a chapter that offers a different slant on a subject you thought you knew, such as careers (Chapter 5), the future of Social Security (Chapter 8), life expectancy (Chapter 9), generations and why people retire (Chapter 11). Simply search for chapters that you'd like to explore.

If you want to reference tax information such as 401(k), 403(b), 457 plans, Keoghs, and IRAs, Chapter 4 reviews how much you can contribute; Chapter 5 reviews rollovers when you change jobs; Chapter 14 reviews distributions when you retire, including the new rules at 70 1/2 for benefit plans and IRAs; and Chapter 16 reviews distributions if you are a beneficiary.

If you want a touch of some heavy-duty technical stuff, the Honors Section is at the end of Chapter 2. You can, and probably will, ignore it. That's okay. It is there for those who want to delve deeper into such retirement concepts as how replacement ratios and future values are calculated and what the Monte Carlo technique tries to accomplish. It won't change your retirement planning, but it can give a better understanding of the technical issues of retirement.

Finally, those of you who want to find out how it all ends might just jump to the last chapter—Chapter 17, The Chase Is Over: How You Can Enjoy Retirement Once There.

Step by step, chapter by chapter, you'll be able to see your retirement plan emerge as your numbers and thoughts merge into a plan that makes sense to you.

The Stories of Liz and Harold
Retirement is not easy or automatic. Ask Liz and Harold.

Liz, 57, worked for a major corporation. During a retirement seminar, she volunteered that retirement scared her to death. She even hated the idea of it because she loved her work and most of her friends were at the company. She was single, without children, and her job was the central stabilizing aspect of her life. A few years later, when she was forced to retire, she had to go through the slow and difficult process of developing a personal life. How did she do it? Being forced to do something, because she was a naturally busy person, she gave in at first to simple everyday activities like calling friends already retired and family members to say hello. Then she heard that her library needed volunteers, so she signed up. A year or two later when I ran into her, I asked her if she was still missing the office. She looked surprised and laughed, "You know, I'd never thought I would say it, but now, I'll never go back."

Harold, 72, works for a prestigious department store in Westchester, just north of New York City. He is the most energetic salesperson in the store. "I've found myself again. I'd worked all my life as a middle manager in a company, got a good pension plus Social Security, and was happy the day I retired. But soon I began to feel that my life was becoming meaningless. I didn't want to volunteer at the hospital, couldn't find a hobby, and I just got in my wife's way at home. Now that I'm working again I feel like I did years ago—full of energy and life."

Retirement: The Most Complex of All Financial Objectives

Some money objectives are simple to calculate, although they may be difficult to attain. Buying a house requires a down payment, which is easy enough to determine. It's also easy to calculate the cost of four years of college. Saving enough to cover it, is another matter.

Retirement is like constructing the Empire State building versus putting up a pup tent. How should you invest your 401(k) or other plans? How will the stock market do? How much should you be saving? Will you have pensions, and what annuity form should you take, or if offered, should you take a lump sum? Is Social Security really sound and should you take it at 62 or 65? How long will you live (which could be 30 or more years after you retire)? What will inflation do to your money over that time? Should you take out long-term care insurance?

How do you even start to deal with something as complex as retirement? Sit down, take a deep breath, and take it piece by piece. A good place to start is with the simple idea of a retirement envelope.

The Retirement Envelope

Retirement is a balancing act—your retirement expenses balanced by enough financial resources. That's all retirement requires: You must have enough money to afford your year-by-year living expenses. You knew that. Sometimes, though, you can get lost in the details of planning your retirement. A diagram called the retirement envelope provides this overview visually.

The envelope, like other planning diagrams that defines the parameters of a problem, defines the retirement problem. The horizontal line is your time line, moving from left to right, with R the point of retirement. This is age 55, 62, or whatever date you have tentatively chosen. Then, there are three critical parameters, or questions:

  1. What are your first year's retirement expenses? The vertical line directly above the R represents this. It's the amount of money needed for your first year in retirement. For your neighbor, it could be $32,000; for you, it may be $55,000. How to estimate this is explained in Chapter 6.

  2. How will your expenses increase with inflation during retirement? The upward sloping dotted line represents this. Should you estimate inflation at 2 percent? 5 percent? In Chapter 7, I talk about inflation for everyone, not just the boomers, and how to estimate it for your retirement.

  3. How many retirement years should you plan for? This is represented by the last vertical line which shows hypothetically how long you'll live. We don't know how long we'll actually live (and perhaps we wouldn't want to know even if we could), but you'll learn how to estimate it for your planning in Chapter 9.

Although this envelope is a generalized look at retirement, as you go through the book you'll be able to answer each of these questions for yourself and then can sketch your own envelope. It will help you visualize when you have enough resources through income streams (e.g., pensions and Social Security) and investments (e.g., 401(k)s, IRAs, and savings) to fill up your envelope. That's when you'll have enough to retire.

The History of Retirement in a Minute and a Half

Retirement began in 1940, when Ida Mae Fuller, a Vermont bookkeeper, became the first person to draw money from Social Security. Because retirement jumps so easily to mind, it's hard to think of it as a relatively new idea.

Before 1940, most people simply worked all their lives. Through our distant agrarian and mercantile past, the Industrial Revolution, and up through the Great Depression of the 1930s, retirement essentially did not exist. The Depression forced a significant change.

In 1935, Social Security was put into place as a response to a prolonged and devastating 25 percent level of unemployment. For the first time, older people were guaranteed a base, a modest guaranteed income, so they could retire and make room for younger people who needed to be employed. Ironically, when Ida received that first Social Security check, we were on the verge of World War II and the economy was finally starting to grow. But Social Security was firmly in place, and it created the practicality of universal retirement.

Then pensions followed. Before World War II, pensions had been a rarity. When wages were frozen during the war, companies created and increased benefits including some pensions to attract and hold employees. After the war, companies sensed that pensions could be a significant employment incentive and set actuaries to work designing them for nonunion as well as union workers. Returning military personnel appreciated the future security held out by their own individual pensions.

When people had some extra money from the booming postwar economy, they started to save. All the pieces were now in place. Social Security, pensions, and savings. It was even dubbed the three-legged retirement stool. Today, happily, 30 million Idas, or one-tenth of our country's citizens, are retired. By 2031 when my daughter will be 50, there will be over twice as many—70 million, or one-fifth of the U.S. population.

Why Are Pensions Disappearing?

But retirement, alas, doesn't stand still. Pensions, one of the pillars of retirement of the 1950s through the 1980s, have been performing an amazing shrinking act. In the late 1970s, at their peak of popularity, almost half of all workers had pensions. Now barely one in four has them. What happened?

First, as pensions became more popular, governmental regulations became more complex, and finally burdensome. Small- and medium-size companies found them too costly to maintain and discarded their plans. Second, to save money, large companies morphed their pensions into new scaled-down versions called cash balance plans. As many as one-third of large companies have already converted to these newer plans or are in the process of doing so.

For older workers, converting from pensions to cash balance plans usually means a frozen benefit with no additional pension credits. But, other than the recent furor at IBM, workers' protests have lacked support; more commonly, workers underestimate their pensions' worth.

Consider the case of an executive named Jeanne. She came to me for help in evaluating the worth of her traditional pension plan. She was considering a job opportunity outside her company. The potential job wasn't an opportunity to die for, but she was exploring her options. She was 52 years old and had been with her company for 25 years. Her question was: What would be the financial impact if she left before she was entitled to her age 55 pension?

She was in a sensitive job and didn't want to publicize her job exploration, so she asked me, instead of her benefits department, to calculate her pension. In three years, she would be able to retire with an annual pension of $42,000. (Age 55 is often a magic number for pensions.) Leaving her company before then would cut her age 55 pension one-third to $28,000. If she stayed, she would have critical medical insurance coverage for the rest of her life as well as her more lucrative pension. She didn't have trouble understanding my advice. I recommended that she think seriously of staying because of the significant financial loss she would incur. This was also dependent on her feeling confident that her job would not be eliminated during the next three years. Jeanne decided to stay at her company, delaying her search for a new job.

But for younger corporate workers, cash balance plans are just fine. As with 401(k) plans, cash balance plans allow workers to see how much they have in the plan, their "balance," which they could take if they left the firm. Although the balances only grow by a modest fixed amount each year, the company makes all the contributions, so it's found money.

Then, too, this points out one of the differences inherent between generations. You can hear it from an old-timer, just turning 65, reminiscing about having worked 40 years with the same company and complaining that he is the last of a breed: "No one wants to work for the same company anymore." Indeed, few, if any, younger workers will ever want to think in those terms. But cash balance plans are portable, ideal for younger workers who think in terms of an astounding 10 to 12 different jobs before they retire. Traditional pensions have virtually no meaning here.

The concept of generations, a useful if imprecise concept, has given me the ability to better understand other changes occurring in retirement, besides pensions. It explains how a spectrum of birth years lodged in a particular historical time creates certain values and expectations affecting attitudes about money and retirement. People of different ages do have different ideas. In fact, retirement itself is tailored to each generation, a concept that is explored in Chapter 11.

A Definition of Retirement

I have often talked to people who have left a long-term job, or received a pension, but continue to work. When they tell me they are "retired," I ask them how they can be retired if they are still working. They are always at a loss in answering me. This is common with those in the armed services, police, and fire departments. They often retire after 20 years with a pension, even when the amount is not enough to fully retire from employment. They say they are retired, but they are still working. One man at a seminar told me he was retiring for the third time.

So, what is retirement? Here is my definition of retirement: when you don't have to work, because you have enough money for the rest of your life.

Why is this definition important? Because it defines retirement as that point at which you reach financial independence. You are then free to work or not. You can volunteer at the hospital, pursue a hobby, spend time with your grandchildren, or continue to work.

This independence is the essence of today's retirement. It translates into the ability to determine what you want to do. And that makes all the difference in today's world.

On to the Chase

In the spirit of David Letterman, here are the top 10 reasons for the Chase:

  1. In the world of work, you have nothing else to prove.
  2. You don't like your boss.
  3. You don't like your job.
  4. The commute is getting to you.
  5. You want to stop and smell the roses.
  6. Retirement is a fad and you want in.
  7. All your friends are retired.
  8. You want to play hooky on all Mondays and Fridays.
  9. All of the above.

And the number one reason?

  1. You want to collect your reward.

Where is the best place to begin your chase? Start with the financial chapter that is most applicable to you: Chapter 2, 6, 13, or 15 (or even Chapter 12, which explains how to retire on a shoestring). Then, explore the other chapters to put your finances in the context of a total retirement plan. Chapter by chapter, step by step, your retirement plan will emerge.

I promise to avoid technical jargon wherever possible and to provide simplified, accurate tables that can assist you in assembling your plan.

So, let's join the chase.

Meet the Author

PAUL WESTBROOK, CFP, is the President of Westbrook Financial Advisors in Ridgewood, New Jersey. He manages his own financial and retirement planning firm, where he counsels individuals and conducts seminars for corporations. Westbrook was formerly the national director of the Financial and Retirement Planning Practice for Buck Consultants, the international benefits firm. His previous books include Word Smart for Business, Math Smart for Business, and Business Companion.

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