This article is by staff writer William Cowie.

Retirement, that magic day you’ve had in your sights for decades, is finally coming into view. You may be in your 40s or 50s, and the big day may be next month or in a few years. Whatever your age and whenever the day, the time is coming for the big question:

What do you do now?

What to do in retirement?

I faced that question a few years ago, and I remember it well. My first reaction was terror. This is so final — you can’t turn back the clock and you don’t get any do-overs. (How many times I wished for just one!) All my bad decisions had grown up around me (or not grown, to be more accurate). Now, I was faced with two pretty large questions:

  • What income will I live from?
  • What will I do with my time?

What will you do in retirement?

You might think the first of those two questions would have been my main retirement focus; but in hindsight, the second is even bigger. It’s that age-old question: What are you going to do when you grow up?

Many people never give much thought to that question as they furiously run the rat race, focused on making payments, raising kids, keeping up with various Joneses, and generally “making it.”

Step back for a moment, though, and try to imagine what will happen. The first day is just like every Sunday. You wake up with no alarm, and do whatever you consider is fun to do. You don’t have to get dressed and rush off to work. After a week or two, though, it begins to sink is: This is different — it’s Sunday every day for you now.

How will you fill your retirement days when the novelty wears off?

It’s easy for many to dismiss what has become the Leisure World image: fuddy duddies in plaid pants and white belts riding their golf carts around the course, while the wives gossip and play bridge with the other members of the blue-rinse set.

But, what will you do that’s different? You can gallivant across the globe like J.D. Roth, but the reality is that most of us are probably not going to retire with that much money or that much of an adventurous spirit. I’ve asked many people in their 30s and 40s what they will do once they retire — and you’d be amazed how often I get a blank, deer-in-the-headlight look back in response. It’s a lot like Art Linkletter asking those little kids what they’d do if they were president. (One little girl famously said she’d order husbands to kiss their wives a hundred times a day.)

Most of us simply don’t know how we will pass the time in retirement. It took me a few years after I stopped commuting for a paycheck to figure out what I really want to do. What I looked forward to on weekends wasn’t enough to engage me for 16 hours a day. (Oh, that’s right, when you retire, you have 16 hours a day to fill, not just eight.) A couple we know from California simply stay at home and putter around. He recently confessed that they bought his wife a new car, but after three years it only has 3,000 miles on the odometer. (This is in Orange County, California, where public transportation is non-existent, so those are pure stay-at-home miles.)

There are many people who want to retire early, without defining what they want to do when they retire. They end up simply getting another job because it’s all they know.

So, the first thing you need to spend some brain time on is to figure out what you want to do when you no longer have to grind out a living. For me it was writing — something I had no clue I’d ever want to do until my mom idly remarked that my sister is so gifted with writing, what a pity nobody else in the family caught that gene. Ha! Sibling rivalry being what it is, I took up the challenge; now I’m the writer, and she’s still figuring out who she wants to be when she grows up.

But this is Get Rich Slowly, not Get Old Slowly, so let’s talk about the money for a second.

Structuring what you live from

No, this is not the standard lecture that you better start saving because old age creeps up on you faster than Speedy Gonzales; that’s a topic all to itself.

If you’ve been smart and availed yourself of 401(k) or similar retirement plans wherever you worked, and you changed jobs along the way, you may have accumulated a motley collection of retirement accounts: 401(k), Roth IRA and regular IRA.

Now the question is: What should you do with that assortment of nest eggs? Should you consolidate and simplify your budding financial empire in preparation for your freedom years?

Short answer: Yes.

Why?

The human mind has a hard time keeping up with complexity: Restaurants with complex menus lose customers. Are you on top of all your multiple accounts right now? Probably not. It’ll be much easier if you just had two or three.

How do you consolidate?

For starters, get out of all your 401(k) plans and roll over the money to an IRA account. You may not be able to do that with your current employer, but you’re allowed to do that with inactive 401(k) plans.

Why roll over to an IRA? Two reasons:

1. Returns: The standard most mutual funds aim for is the S&P 500 average (around 8 to 9 percent per year, depending on which dates you pick). Now, that being an average, you would expect half of all mutual funds to beat that, wouldn’t you?

You would be wrong. Fewer than 25 percent of all mutual funds beat the S&P 500… and it’s never the same bunch. Therefore, odds are your 401(k) funds underperform the S&P 500.

You can do better by rolling those over into a single IRA and investing it all into an S&P 500 index fund. Please note: I’m not saying an index fund is the best you can do, only that it’s one simple action likely to improve your returns.

2. Fees: Most 401(k) plans charge fees which eat away a significant portion of your earnings. Most plans are captive, meaning you, the employee, can’t choose just any mutual fund you want — you can only pick from the menu they offer you. And all of those mutual funds have a management fee.

Not only are you stuck with mutual funds which charge you a fee, but the 401(k) plan itself has plan administration fees. They may be hidden, but you’re always paying two layers of fees with 401(k) mutual funds. Both sets of fees eat away at your returns. The way they quote those fees makes it sound like they’re small, like 2 percent or something like that. Considering the return before fees (at best) will be something like 9 percent per year over the long haul, that 2 percent ends up being more than 20 percent of your earnings. To get a better idea of the magnitude of the fees, you need to divide the fee by the return. When you do that, they’re not so small anymore.

You can get a self-directed IRA account for free at most online brokerages, and you can pick any mutual fund you want. (You are not limited to your employer’s menu.)

But that’s not all. You can invest in any individual publicly traded stock you want, too. So, if you think Warren Buffett’s Berkshire can earn you more than that S&P 500 index fund (and it has for decades), you have the option to invest that way.

With your own self-directed IRA, then, you can significantly increase your earnings over those inactive 401(k) funds from previous jobs. Which brings up the next question:

Roth or regular IRA?

This decision is mostly driven by tax rates:

  • With a regular IRA you pay tax in retirement on what you draw.
  • With a Roth IRA you pay taxes now on what you put away.

(In both cases, the appreciation and income accumulate tax-free.)

As an example, if you’re really raking it in now and plan a fairly low-budget retirement, then a regular IRA makes more sense, because the deduction happens at a high tax rate, but the monthly draw will be taxed at a lower rate. On the other hand, if you’re scraping by now (and pay a low tax rate), you have nothing to lose by picking a Roth IRA. If you strike it rich, your income from that will be tax-free; and if it’s as middling as you make now, you haven’t lost much. (Editor’s note: Roth IRAs have income limits, so check with the IRS to be sure you’re eligible to contribute.)

Because the critical variable is your tax rate, now and in the unknowable future, it’s worth the money to pay an adviser to look at the variables of your personal situation and get some informed and professional advice.

General questions

What about diversification? Someone asked me if he should leave his multiple 401(k) plans in place to diversify away his risk.

In a word, no. There are many ways to diversify within a single IRA. What is more diversified than an S&P 500 index fund, for example? So you can have all your money in one place, easy to manage, while your investments are highly diversified.

What about real estate? Good question. Rental property doesn’t grow tax-free like an IRA or 401(k) fund, but it has the potential to be more lucrative. However, it’s not nearly as passive an investment. You have to get tenants, keep up with maintenance, and deal with late payers and those who destroy the property. It does have the advantage, though, of probably being much more inflation-proof than paper investments.

Retirement (however you view or define it) is as profound a life change as leaving home, marrying, or having kids. And it has as many opportunities to screw it up. Fortunately, though, you have more notice and more time to prepare.

The trick is to make use of that time. What are you doing?

This article is about Retirement

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This post is by staff writer Honey Smith.

I’ve spent the last 15 years of my life working at three universities, wearing many different hats during that time. As you can imagine, this means that I’ve developed an opinion or two when it comes to higher education! Based on what I’ve experienced (and what I’ve seen other people go through), one of the most difficult things for people is matching a degree program to their budget and overall career path. You want to find the right fit.

What is “fit” anyway?

I don’t think finding a program that fits means finding your “true calling,” as they say. I’m not convinced, having seen firsthand how it can unravel, that the people who can only imagine one specific career for themselves are necessarily the lucky ones. What if your chosen profession doesn’t pay well? What if you have to relocate to a place where the job market for that career is better but you don’t know anyone? What if the job requires more of your time than you’d like to give?

In my experience, the people who have a wide variety of interests, instead of a single, overriding passion, actually have a better chance of enjoying that ever elusive work-life balance we talk about so frequently. Post-secondary education isn’t just an investment in your career, it’s an investment in your ability to build the whole life that you want. As such, there are a number of things to consider when it comes to finding your fit.

Where would you like to live?

When I started my PhD, I knew that if I wanted to find a tenure-track position, I had to be open to moving anywhere. At the time, I was single and had just moved across the country by myself. However, by the time I defended my dissertation, I was dating the man I would eventually marry. Unfortunately, my hottest tenure-track job lead ended up being in a small town in the middle of nowhere where he could never find a job. I had become “geographically bound.” While I did find a job I loved, it ended up being a position that doesn’t fully utilize my degree. Tradeoff.

In many ways, I was lucky. I have seen dozens of students follow their passion only to discover — after completing their degree and amassing a ton of debt — that there was no demand for that knowledge in the place they KNEW they wanted to live. It’s definitely something to keep in mind when you are choosing a degree, certificate, or vocational program: Will you have to find a compromise between what you want to do and where you want to live? Thinking about these things sooner rather than later may save you some heartache — and some debt, if it redirects you to be more strategic about your goals and your budget.

How much time would you like to spend working?

I’ll admit it: I’m a Grey’s Anatomy junkie. However, as obsessed with the show as I am, I know that I could never be a surgeon. Yes, it’s a lucrative career, but 100-hour weeks just aren’t for me. A 40-hour workweek suits me perfectly! And fortunately, that’s exactly what I ended up with. And yet every day I see students make investments in careers like medicine or the law without having fully considered what that lifestyle entails.

For example, when Jake was daydreaming about making oodles of money as an attorney, he didn’t realize that it was going to mean staying at work until 10 p.m. or later every night. I appreciate the freedom that his schedule gives me to watch my Grey’s reruns without being judged! However, I know that he wishes he could afford to give up his six-figure salary for a career with a less demanding schedule, even if it wouldn’t be as lucrative.

What schedule works for you?

I have a perfect circadian rhythm. Even if I never look at a clock, I get tired at about 10:30 p.m. every night and wake up no later than 6:30 a.m. every morning — even on the weekends. Jake, on the other hand, suffers from a circadian rhythm disorder that is like permanent jet lag. Functioning on a normal schedule is misery for him, and he still believes his college job as a nighttime security guard was the best job he ever had.

If you are a night owl, then jobs with those hours or jobs you can do from home may work best for you. Some careers, like nursing, offer shift differentials for those who work at night, so you can actually make more money accommodating your body’s own rhythms. Other careers, like freelance writing, mean that you can complete the work in the evenings or on the weekends if that’s what works for you. Similarly, if you have personal goals that conflict with the 8-to-5 life (such as being a stay-at-home parent), then you may want to pursue an education that will prepare you for a career that offers the flexibility you need.

What you enjoy, what you’re good at, and what people will pay for

Apparently, I’m excellent at event planning. At least, that’s what my co-workers (who have spent the last six years migrating every possible event my way) tell me. However, if there’s one thing I absolutely detest and would prefer to avoid as much as possible, it’s event planning. In other words, what you enjoy and what you are good at aren’t necessarily the same thing.

What does that mean for picking something as a college major? First, it means that you shouldn’t major in something you absolutely detest just because you have a talent for it or because you think it will earn you a big pile of money. However, it also means that just because you enjoy something doesn’t mean that you’re good at it — or that people will necessarily pay for it. I became a creative writing major because I loved reading fiction. I learned that not only am I incapable of writing the type of book I enjoy reading, I am also unlikely to find a job reading the novels of my choice all day!

How much money you plan to spend on your education

How much are you prepared to spend pursuing your chosen major and career? Where will those funds will come from? Have you thought about scholarships? Given your likely salary once you start working, how much student loan debt should you responsibly take on? And how long might it take to pay off that debt?

Institution type can play a huge factor when it comes to cost. Community colleges, the public four-year university system, private universities, online universities, and vocational colleges all operate at different price points. Strive to obtain the education you need (because education can be a want, too, as I well know) — and then make sure that it’s also at a price you can afford.

What would you say is most important for someone who is interested in “finding their fit” and making it work with their budget?


This article is by editor Linda Vergon.

Gina Bean wrote in about her friend’s credit situation. Her friend has a car loan with a $936 balance. She doesn’t have a credit card – because she only earns $21,000 a year and doesn’t want to go into debt. But she’s frustrated because she recently checked her credit score and it was 583. She recognizes that the late payment she made on the car loan would bring down her credit score, but she was surprised to learn that it was also lowered because she doesn’t have a credit card.

“… honestly, I have NO DESIRE to have a credit card!!! So any advice would be very much helpful. I am at a loss right now! Do you have any advice for people with bad or no credit scores and how to function in society? [Are there] any resources to address this topic?”

Last June, we asked the readers How do you monitor and improve your credit?, but we haven’t asked how you can function with bad credit or no credit. And while Gina’s friend’s credit will improve naturally over time (as long as she continues to make timely payments), she still has to make it to that point somehow because life comes at you whether you have credit or not.

One plan of action

  1. First and foremost, Gina’s friend needs to put an emergency fund together so she can handle what life throws at her. People find it easier to respond to an emergency if they have a credit card to fall back on; but since that’s not the case, she definitely needs to make an emergency fund her first priority.
  2. If she hasn’t already done so, her friend needs to scale back on her lifestyle wherever she can. Perhaps she can start tracking what she spends so she can get a real look at where her money goes. Another good move in this direction would be to create a budget – but in any event, the more discipline she can bring to her finances, the better.
  3. The discipline is important because she needs to start saving for the larger purchases she will need in the future. For example, we have no idea how reliable her car is; but it’s a sure bet that she will need to replace it somewhere down the road. If she can arrange her life so that she earns more than she spends, she can start to save money for bigger purchases like a car.
  4. If her friend’s credit was lowered because she has a limited credit history, she may want to rethink her decision to swear off credit cards in the future. She can search for a secured card that reports the activity to all three credit bureaus every month. That way, she can work to improve her credit without much temptation to go overboard.

Most people want good credit so they can purchase big-ticket items – on credit – without having to wait to save up for them. But Gina’s friend doesn’t seem to fit that description. I think she may have other reasons to be concerned about improving her credit, like reducing her insurance premium or not having to keep funds on deposit with her utility provider. She may even live in a state where her credit could factor into an employment situation. Whatever her reason, improving her credit score is a good goal to work toward. Meanwhile, she needs a way to navigate through life’s challenges.

Aside from continuing to make timely payments and not making any more purchases, what advice can you offer about how to function with bad credit or no credit?


Note: This article is from J.D. Roth, who founded Get Rich Slowly in 2006. J.D. recently launched the Get Rich Slowly course, a year-long guide on how to master your money. His non-financial writing lives at More Than Money.

Last weekend, Kim and I went out to breakfast. The only other table in the small restaurant was a party of four youngish women who were laughing and having a good time. They were having such a good time, in fact, that it was impossible not to overhear their conversation.

“My dad is such a cheapskate,” one of the women said. “Last week, I drove my parents to Salem. I had to stop for gas, so I just pulled into the first service station I saw. ‘Are you sure you want to buy gas here?’ Dad asked. ‘It’s more expensive than the place down the street.’ What a tightwad! He doesn’t get that my time is valuable too. I’m not going to drive three blocks just to save a few pennies.”

The other women laughed.

“My parents are like that too,” offered a second young woman. “The other day, my mom was giving me a hard time because my husband and I like to go out to eat. We invited them to join us at Andina but she said they’d pass unless we went someplace less expensive. Can you believe that? It’s not like my parents are poor. They’re millionaires!”

Again, the other women laughed.

“My parents are millionaires too,” chimed in a third woman, “but you’d never know it. They don’t spend their money. And they’re always getting on my case about the money I spend. I’m like, ‘It’s my money. Get over it.’”

Her friends nodded in agreement, and the conversation moved on. A while later, the waitress brought them their check.

“Oh crap,” the first woman said. “I didn’t bring the right credit card. This one’s maxed out.”

“I’ll cover you,” said one of her friends. “But I’ll need you to pay me back. I have just enough money to last me ’til payday.”

“How’s your new house?” asked one of the other women.

“It’s great,” she said. “We have so much room! I just wish we could afford to furnish it all right now.” Her comrades murmured in agreement.

“Wow!” Kim said after the women had left. “That was insane. You ought to write about that.”

“I will,” I said. “I will.”

Breaking taboo
It’s all too easy to condemn people like this as shallow and short-sighted. That they don’t get the connection between their spending habits and the fact that they’re struggling with money is obvious. It’s also obvious that they don’t understand that one of the reasons their parents are millionaires is precisely because they’re frugal. Being rich doesn’t mean you spend more on gas when you don’t have to or that you go out to eat in fancy restaurants all of the time. Rather, when you watch how much you spend on gas and you’re careful about which restaurants you choose, you tend to build wealth.

This stuff is obvious, even to a casual observer.

What’s more interesting to me is that that these young women had easy access to folks who are successful with money. Yet rather than pick their brains or learn from their behavior, they make fun of them! This is more common than it ought to be. In fact, most of the people I know who struggle with money have role models whom they could learn from — but don’t.

In some ways, I sympathize. I used to be one of these people. When I was deep in debt, I was surrounded by folks who had things figured out (including my wife!) but I never bothered to ask them what I was doing wrong. It was only once I hit rock bottom that I finally reached out for help.

Today, it’s different. Now I know that one of the best ways to improve my personal finances is to talk to others who have done what I want to do.

You see, it’s taboo in our culture to volunteer financial advice. It’s rare that a person will speak up to tell you what you’re doing wrong. And when they do, you probably resent it. It’s likely that your brother or your best friend is well aware of your weaknesses, but is unwilling to mention them for fear of offending you.

But if you take the initiative, if you ask your friends and family for financial advice, that taboo doesn’t apply.

The best $20 you’ll ever spend
If you want to know how to improve your finances, choose a financial role model and take them to lunch. Pick somebody you trust. Most of the time, these folks are obvious. They’re the ones who never complain about debt, the ones who’ve accumulated a lot of savings. (Sometimes they have a nice house and nice car, but not always.)

In some cases, these role models might be family members or close friends. If you feel comfortable asking these folks for advice, do it. But you might feel more at ease if you talk to somebody who’s merely an acquaintance: a neighbor, a colleague, a mentor. (In my case, I’ve learned a lot from my real millionaire next door.)

Invite your role model to lunch. Explain that you want to pick their brain about how they’ve managed to do so well with money. Tell them you want some advice.

Before you meet for lunch, prepare some specific questions. Do you want to know about investing? About increasing income? About cutting costs? Start the conversation by sharing your story — where you’ve come from and where you want to go. Be honest. Be realistic. If you’re in debt, say so. Next, ask the other person about their story. How did they achieve their financial success? Based on their experience, what would they do if they were in your shoes?

Take notes. If the other person offers advice, don’t take it personally. Listen with an open mind. Don’t get defensive. If there are extenuating circumstances, feel free to share them but don’t try to explain away every problem in your life. A lot of times, things that seem like external barriers to you are actually internal barriers.

At the end of the meeting, ask your role model if they have specific recommendations for your situation. Pay the bill, thank them, and go home to think about what you’ve learned.

Not just for beginners
This exercise isn’t just for people in debt. It’s also great for folks who are learning to invest, or for those who want to boost their income. When I thought I might like to get into rental properties, I invited a friend to dinner to ask him how he started investing in real estate. I’ve had dozens of readers take me to coffee so they could get my advice on their financial situation.

If you want advice about how you could improve your finances, ask your friends.


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