This was an original post I did over at ChristianPF - you can check it out in its entirety there.

My wife and I recently built a new home and moved in a few months ago.  It feels good to be done with the process!

There are some good financial lessons to be learned from building a home.  If any of you have done it, you know what I’m talking about.

There’s a lot that goes into building and each step needs to be done in a certain order otherwise nothing will get accomplished!

The same can be said for our personal finances.  We need to have a good plan and make sure things get done correctly, otherwise we’ll be spinning our wheels.

So, here are some lessons learned from the building process and a blueprint for all of us to build our financial house:

Footings

Under every house is a foundation, and under most foundations are footings. Footings are extremely important because they are the basis on which the foundation is laid. 

Improper footings will not allow the foundation to withstand the give and take of the soil.So what are the footings in personal finance?

Giving

A heart of generosity and a willingness to let go of our own stuff to meet the needs of others is one of the footings on which we build our financial house. 

Why? Because God was so generous to us – therefore that characteristic should flow through us as well.

I know what some of you are thinking, “But I don’t have enough money to give” – well certainly there are other things you can give, like time.  But let me ask you – how much have you prayed about your giving?  Have you considered selling things you do have to help meet the needs of others? 

Giving is a critical footing that we must not simply ignore.

Proper Attitude

An attitude of stewardship - not ownership – should be a key footing as well. In other words, as stewards we should desire to make more money, get out of debt, and get our spending under control because we are handling God’s money – not ours.

When we realize that we are to be responsible managers for God’s currency and that our money is simply a conduit of grace, we can begin to have the proper motivation to get a handle on our money.

Foundation

The foundation is the next crucial piece to building a house.  The foundation for constructing a well-built financial house are things like cash flow, emergency funds and a commitment to getting rid of non-mortgage debt! 

Cash Flow

This is simply your income minus expenses. 

Why is this so important?  Because the secret to getting ahead financially is that there is no secret – spend less than you make.  Everything else hinges on this very point.

Emergency Funds

This also is extremely important because inevitably things come up.  Cars break down, roofs leak, furnaces go out.  So you must have the ability to pay for the emergencies without racking up credit card debt.

Framework

Framing is one of the exciting parts of building a house.  You finally get an idea of what the house will be like.  It’s also key because you need the proper beams in the right places to support the house.

Paying off  Non-Mortgage Debt

Credit cards, car loans and the like are mole hills in a garden.  Working hard at getting rid of those types of debts will help free you to give more, save more and invest for your future.

Insurance

Proper insurance coverage is your support beam for your financial house.  This includes reviewing and acquiring proper health, home/auto, disability and life insurance. 

Let’s take for example life insurance.  Unfortunately, there are a lot of misconceptions when purchasing these policies, so you need to make sure you ask the right questions before you buy life insurance.

Exterior Shell – Roof, Brick and Windows

Now this is where building really gets fun and the house begins to take on the character of what you were envisioning when you began the process.

In personal finance the exterior shell would be things like:

Saving for Retirement 

Funding your 401k plan, IRA or Roth IRA is a big step toward getting your financial house in order.  This is the fun part!  Seeing these accounts build up and realizing that you are saving toward a long-term goal is exciting.

Saving for Other Goals

This could be college savings for your kids, saving for a rental home or even your first house.  Having the ability to sock some cash away for these things is a great feeling.

Final Touches

Getting the drywall in and painted, the flooring and carpet in and making some final touches on the inside is when the house comes together and you’re just about ready to move in.

From a financial standpoint some of these final touches may include things like:

Tax Diversification 

This simply means utilizing your investment accounts from the best tax perspective so that you’re not left holding a huge tax time-bomb in retirement. 

You may want to consider shifting your savings around to help diversify yourself from a tax stand point.

Investment Strategies

At the beginning, it’s good to just get saving.  But as you progress and your account balances begin to grow, you may want to re-evaluate your portfolios to determine if you should employ more sophisticated investment strategies to help maximize your returns and minimize losses.

Something to Remember

Building a house is a process that takes time, effort and energy – and things don’t always go as planned.  Don’t get discouraged, and keep plugging away.  The end result will be well worth it!

 401ks have been around for years and have been an ever increasingly popular way to save money for retirement. 

More and more businesses run some type of deferred contribution plan and they are a great way to attract and retain key employees.

401ks are great from an employee standpoint because they are relatively quick to sign up for, fairly easy to pick funds in and once the initial set up has been done, your contributions are taken out of your paycheck automatically. 

It’s an easy way to save.

But, did you know that by contributing to your 401k you could be creating a giant time bomb?  Here’s a look at why:

What is a tax deferred account?

 A tax deferred account is simply an account that allows you to put in pre-tax contributions for retirement.  The money inside grows without having to pay taxes every single year – they are deferred until some time down the road.

Things like 401ks and IRAs and for small business owners – Simple IRAs and SEP IRAs are examples of tax-deferred accounts.

What is a retirement time bomb?

A retirement time bomb is when you put all or most of your retirement savings into these tax-defferred accounts like 401ks and Traditional IRAs.

When you get into retirement and start withdrawing your money, you have to pay taxes on every single dollar you pull out!

At what rate?

It depends, but the money you pull out is taxed as ordinary income, which means for those of you who think your taxes will go down in retirement – you might be in for a big surprise when all of that money is taxed as though you earned it!

For those of you who have socked away a lot of money into tax-deferred accounts for retirement – these have become a ticking time bomb waiting to explode! 

And Uncle Sam is licking his chops!

What should you do about it?

1. Figure out how much you need for retirement
2. Re-evaluate your accounts – determine if you are properly balanced from a tax perspective
3. Consider other options – look at accounts like Roth IRAs to detemine if it’s right for you.
4. Make a plan to diversify from a tax perspective – figure out how muchyou can get into a tax-free bucket and start shifting money either through contributions or Roth Conversions.

What about you?

Are you holding a retirement time bomb?  What have you done to diversify yourself from a tax standpoint?

Remember as a kid how excited you were for your birthday to come?  It couldn’t arrive fast enough!  Presents, cake and everyone making a big deal of you was great! 

You probably couldn’t wait to turn 13 and finally become a teenager.  Then maybe you looked forward to 16 so you could get your license.  18 to vote.  At 21 you could legally drink and 25 got you a discount on your auto insurance. 

After that, you may have spent the rest of your time wishing you were 25 again.

It’s in our nature to look forward to milestones.  After all, they are a rite of passage and a big achievement.

Did you know you’ve got some retirement milestones to look forward to?

Being unaware of these milestones will cost you money!

Milestone #1 – Age 50

In 2002, the government changed the rules on contributions to retirement plans and IRA’s.  They allowed a “catch-up” provision for older individuals.  If you are age 50 or older, you may now contribute an extra $1,000 to your IRA’s and an additional $5,500 to your 401k’s in 2009. 

This is a great deal for those looking to sock some extra cash away for retirement!

Milestone #2 – Age 55

Age 55 is a big deal for those looking to retire early for the simple fact that if you retire or separate from service the year you turn 55 or after, you are allowed to take 401k distributions without getting whacked with a 10% penalty! 

Let me say that again…NO PENALTY for early retirement distributions.  This is known as the “Age 55 Exception”. 

Get this – if you roll your money to an IRA, the deal is off the table.  That’s right, you must leave it in the 401k, but you are allowed to take out as much as you want, whenever you want.

Milestone #3 – Age 59 1/2

I doubt most of you celebrate Half Birthdays, but this is one you’ll want to throw a party for!

This is the traditional age in which you can withdraw your retirement money without fear of Uncle Sam hitting you over the head with a 10% penalty for pre-mature distributions.

Milestone #4 – Age 62

62 is a big age as well for the simply because you can now qualify for Social Security benefits.  It doesn’t mean you have to take them or even that you should take them, but you at least have the option available to you.  Don’t forget it will be a reduced benefit, but a benefit nonetheless.

Milestone #5 – Age 65

At this age you are now qualified to take Medicare, which is social insurance including two main parts.  Part A covers hopsitalization and Part B acts as your medical insurance. 

If at this point you are not receiving Social Security benefits then you need to apply for Medicare and will want to do that three months before you turn 65.

Milestone #6 – Age 66-67

If you were born between 1943 and 1954 then your full retirement age (FRA), or the age in which you can collect 100% of your entitled Social Security benefits is age 66. 

For those born in 1955 you have to wait an additional two months.  The government adds two more months to the waiting period for each year until 1960 (i.e. if you were born in 1958, your FRA is age 66 and 6 months). 

If you were born in 1960 or beyond your FRA is age 67. 

I hear a lot of people tell me “I can’t retire until 67″.  What they usually mean is they can’t collect full Social Security benefits until age 67.  You can retire whenever you want, you just won’t get your full benefits until then.

Milestone #7 – Age 70 1/2

Here is another one of those Half Birthdays, however, this one doesn’t justify much celebration.

In the year you turn 70 1/2 good ol’ Uncle Sam says you MUST start pulling money out of your IRA’s or 401k’s. 

What? Surely that’s a typo right?  Sorry to bear bad news, but you MUST start pulling money out of your retirement plans. 

In effect, Uncle Sam says to you, “Great job saving that big chunk of money in your 401k and deferring the taxes for all these years, we love you, now it’s time to pay the Piper, which is why we love you even more at this age!”

What do I mean by MUST?  Well, if you want to try to get around pulling money out and paying taxes on it, just realize that you will be subject to a 50% penalty on your distribution!!  Ouch!

This is known as RMD or Required Minimum Distributions.  There is a special formula based on life expectancy that the IRS uses to determine your RMD.  See these worksheets at the IRS website for more info.

One last note on the 70 1/2 rule.  This only applies to your pre-tax retirement accounts.  In other words, money that you have not previously paid taxes on.  So, your Roth IRAs (which consist of after-tax money) do not apply when discussing RMDs. 

So What.

Now that you know about these important milestones what should you do about it? 

If you are unsure how much you need for retirement and are trying to decide where to save more money you may want to keep the 70 1/2 rule in the back of your mind.

Regardless of age, it makes sense for you to look into whether a Roth IRA is right for you.  You might be able to contribute to them OR you might be able to convert existing pre-tax money to a Roth IRA.

If you are 50 or older that’s easy – you should be socking away as much as you can for your retirement.

If you want to retire early you might be able to take advantage of the age 55 exception and early Social Security Benefits.

Knowledge is key to making the right decisions when it comes to retirement.  Don’t let your birthdays come and go without taking advantage of opportunities that exist for your retirement.

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“I’d like to retire in 10 years”, Jack said as he sipped his coffee.  “How much do you think I’ll need?”

“It depends” I responded. 

“Well, I read that people these days need at least a million or two to retire comfortably.  Is that right?” Asked Jack as he set his coffee on the desk and leaned forward nervously. 

“Not necessarily.”  I responded.  Jack sat back and sipped his coffee again.  “You know, it really depends on a lot of variables Jack.”

“Like what?”

“Well, for example, what do you plan on doing in retirement?  Do you want to travel the world, play golf every day and buy a lake house?”  I asked.

“I would like to play golf a few times a week and take a nice vacation once or twice a year.  Other than that I live a pretty simple life.”

“OK, that’s a good start, tell me a little more.  Do you owe anything on your mortgage or have any other liabilities?” I asked.

“Yes.  I still owe on my mortgage and I have a home equity loan that I took out to help pay for the kids college tuition” Jack responded. 

“We also have some credit card debt, probably about average for most people right?” Jack asked looking for some reassurance.

“Yeah, a lot of people have those things, but that will have an impact on you.  Have you saved anything for retirement or will you be getting a pension from work?” I asked.

“Yes, I have a 401k  I’ve been saving into for quite a few years and a couple of small Roth IRAs.  Plus I will get a pension from work.” Jack replied.  “But don’t I need 70 or 80 percent of my income in order to retire?  I’m not sure my pension and social security will be enough”

“There are no hard and fast rules Jack” I answered. “Every situation is different.”

“Well, how much will I need to retire then?”

Although the above conversation is fictional, it represents a fairly typical dialogue that I have on a regular basis.  Most people want to know a set dollar amount saved or percentage of income needed for retirement. 

Unfortunately, it’s just not that simple.  Here are some things to consider when determining how much you’ll need for retirement. 

 Income & Assets

Take stock of your income.  Will you be receiving Social Security or a pension?  Will you be working part-time, doing consulting work or turning your hobby into a business in retirement?

Have you saved into your 401k or built up other assets that can be used for retirement.  According to a recent study by AARP, a safe withdrawal rate (or percentage you can safely withdraw from your principal without running out) is four percent. 

Most people don’t pull out a steady percentage, but typically will do an “as needed” approach.  According to the study, If you have $500,000 saved up, you can safely withdraw $20,000 annually and not tap the principal. 

Expenses & Liabilities

Income and assets are very important, but to me these are the bigger items to look at.  Take inventory of your expenses and liabilities.  Will you need to buy your own health insurance or will you protect against a possible need for assisted living or a chronic illness?  

Do you plan on traveling the U.S., buying that golf membership or spending money on a vacation home?  These things will obviously dictate how much income you need? 

Do you still owe on your mortgage and credit cards, or are you debt free?  If you have no debt and a fairly simple lifestyle you will be able to retire on much less than if you want to travel the world and you already have all kinds of liabilities.

Short Answer and Simple Calculation

The short answer to the question, “How much money do I need to retire?” is “It depends”.  Because every person and situation is different there are just no hard and fast rules to help determine what’s appropriate. 

The simplest way to calculate how much you need is to add up all your sources of income and subtract out your planned expenses in retirement.  If there is a shortage, you will need your savings to supplement. 

If the amount needed is greater than four percent, then you probably need to save more or push back your retirement date.  If that amount is less than four percent then you have done a good job of minimizing expenses and maximizing your income and assets and your retirement picture looks much better.

Consider these general guidelines as a starting point.  Every situation is different and unique.  If you want to delve more  in depth into this question of how much is needed, there are many great retirement calculators on the web that will also take inflation and your rates of return on your savings into consideration. 

Bottom Line

Save more, spend less, get rid of debt and live a fairly simple lifestyle and you will be headed down the right path.