1. Running head: HOW TO PREPARE FOR RETIREMENT 1
How to Prepare for Retirement
Benjamin A. Manuel
Upper Iowa University
December 11, 2014

2. HOW TO PREPARE FOR RETIREMENT 2
Abstract
Retirement is a part of the American dream. Retirement is the reward for a lifetime of work.
Each person has their own vision of what retirement might be like. Many think of beaches and a
hammock. Others think of making up for lost time with family. Still others consider traveling
the world on planes and cruise ships. The problem with these ideas is that they are only dreams.
Some financial advisors say that you should have six months of pay set into a savings account
for emergencies. Many people, with this struggling economy, are hard pressed to pay their
regular bills, let alone put money into an emergency fund or long term savings. Given the right
information, it is much easier to set up a strategy that works. Understanding what is out there to
invest in and the costs of not saving early-on can be an excellent motivator in making the choice
to begin saving early and to avoid extravagant spending. Understanding where they need to get
can help them set up a framework where they can expect success.

3. HOW TO PREPARE FOR RETIREMENT 3
How to Prepare for Retirement
Just how easy is it to prepare for retirement? Not easy at all. Few people have the
disposable income required to begin preparing for retirement. To effectively prepare for
retirement, one has to start with a goal, a realistic budget that provides for the needs of the family
while paying off debt, and develop a long term strategy that safely maximizes the income
generated from the disciplined spending exercised while earning money.
Start With a Goal
When preparing for retirement, one has to have a goal. The first step in having a goal is
to understand what the average cost of living is in the United States. It is possible to plan for a
specific area during retirement, but things change. During a study performed by the U.S. Census
Bureau in 2010, Rochester (Monroe County), New York, was identified as the most average
place to live for Cost of Living Index. The next piece of information needed is the actual dollar
amount for this area. Dr. Amy K. Glasmeier and the Massachusetts Institute of Technology
(MIT) copyrighted a Living Wage Calculator in 2014. According to the Living Wage
Calculator, it costs a minimum of $28,161 per year to pay for the basic necessities for two adults.
Now that the amount has been established for a price per year, the next piece of information
needed is the amount of years one will need to prepare for. No one can know for certain how
long they will live. However, according to a U.S. Census Bureau study in 2012, average life
expectancy is on the rise at approximately seventy-five years. For a couple retiring at age sixty-
five, they will need ten years of living expenses. Erring on the side of caution, a good plan
would address retirement savings for twice that amount, or twenty years. The goal then becomes
$563,220.

4. HOW TO PREPARE FOR RETIREMENT 4
The Effect of Inflation. The Bureau of Labor Statistics identifies the Consumer Price Index as a
rate of inflation expressed as a loss of buying power. This rate of inflation is calculated by the
Bureau of Labor Statistics at three percent per year. Although this may seem like a small
amount, initially, over the long term, it makes a huge difference. Calculating for the effect of
inflation at three percent, the original amount of $563,220 becomes $1.4 million.
Realistic Budget
The purpose of a budget is to identify how much money is in each bank account, sources
of income, and expenditures. The median U.S. household income is $51,371, or $4,280.92 per
month (Noss, 2013). The median represents a number where half of the values are below that
number and half the number of values are above that number. As part of the same study, the
median household income in New York (which contains Monroe County) was $56,448 or $4704
per month. According to realtormag.org, the average U.S. home loan was $222,261. The
average mortgage payment was $1,061 per month for thirty year loans with a fixed interest rate
of four percent. The average car loan, according to Experian in a 2014 CNBC article, was
$27,430 for the third quarter in 2013. The car payment at four percent over five years is $505.17
per month. The calculation for groceries per month of $870 was obtained from articles in USA
today and NBC news. The lowest cost of health insurance for a family of four non-smokers is
around $550 per month. With all of these numbers, a budget begins to form. The amount of all
of these expenditures placed together, when considering two cars, is $3,491.34 per month. To
make things easier, calculate the remaining bills (water, electricity, auto fuel, auto insurance, life
insurance, phone, internet, television, and entertainment) at $1,000 per month for a new total of
$4,491.31 per month. Using the New York estimate of income, this leaves $212.66 per month to

5. HOW TO PREPARE FOR RETIREMENT 5
invest. This is a huge fact, because it shows that if a person is average, they are only breaking
even, and they will not succeed.
Making Decisions on a Budget. These numbers are representative of averages. Through
having prior knowledge and understanding of these facts, one can shop to live within their
means. They can buy a more inexpensive fuel efficient car. They can get a smaller home, and
explain to the family that these measures are required. Once making those money saving
decisions, one can use the money saved to start saving. While putting a small amount of the
money into an investment, the remaining money can be used to pay off any high interest loans or
credit debt. Through applying these money generating practices, there should be a good amount
of money left over each month.
Avoiding Interest. Paying interest is like taking a voluntary pay cut every month. So many
people are up to their ears in debt that has interest attached to it. Student loans, credit cards, and
loans to pay for a wedding are all examples of debt with interest attached. Anyone who is
serious about building wealth needs to pay off these debts first before continuing further. The
money saved on interest payments can be applied towards larger debts to head off unnecessary
interest payments. Consider taking some of that money that is not being invested and using it to
make principal payments on long term loans, such as the mortgage or vehicles. These are
strategies to generate income within a budget. However, generating real wealth means finding
investments that counter-act the loss of buying power from inflation.
Develop a Long Term Strategy
Developing a long term investment and savings strategy is the only way, short of winning
the lottery, to beat inflation. Short term market investments are volatile. However, the overall
stock market strength rises at an average of six percent or more when looking at the long term.

6. HOW TO PREPARE FOR RETIREMENT 6
Making long term investments turns the detrimental effect of three percent inflation one-hundred
eighty degrees around and results in an equally opposite effect of three percent growth per year
when compared to the Consumer Price Index. The key in this case is in starting to save and
invest early.
401K Plan. The IRS defines several financial terms. A 401K plan is a contribution plan where
an employee can make contributions from his or her paycheck either before or after-tax,
depending on the options offered in the plan. Some employers offer a 401K where they match
an amount of the contribution the employee elects to make up to a percentage limit of their
earnings. For instance, a company may decide to one-hundred percent price match a 401K up to
three percent of the employee’s earnings and an additional fifty percent price match up to five
percent of the employee’s earnings.
The Roth IRA. The Roth IRA is a very popular choice, because the investments are taxed at the
beginning. When the investor removes the funds after retirement age, and no longer working,
these are no longer taxed. IRAs are capped at a maximum contribution of $5,500 ($458.33 per
month) per individual per year. That individual must have earned $5,500 of taxable income for
the year in order to make the full contribution to the fund. Upon reaching age 50, the maximum
contribution limit is raised to $6,500 ($541.67 per month). The stock market is paying an
average of six percent on the dollar when money is invested over time.
Mutual Funds. Mutual funds pool the money from a large body of investors. This money is
then used to purchase a wide range of stocks and other investments. The strategy of the mutual
fund is to rely on the overall strength of the market rather than one company. Mutual funds are
low risk, easy to enter into accounts with the ability to invest in many different areas, like
pharmaceuticals, energy, and commercial products; a hit in one part of the portfolio is protected

7. HOW TO PREPARE FOR RETIREMENT 7
by the other parts of the portfolio. Mutual funds allow people with low monthly expendable
income to have access to the stock market. The load is a term used to express the money charged
as a management and processing fee. Once the load is paid once, it is done for the life of the
investment. When given the choice of when to pay the load on a mutual fund, pay it up front. It
is better to pay in today’s dollars than in tomorrow’s dollars. A sample load might be fifty
percent off of the first year’s contributions. An example of the effect of a mutual fund with a six
percent return on the market over the life of the investment looks like this: James opens a mutual
fund with his bank. James decides to place $100 per month into the account. In the first year,
$600 goes to pay the load of the fund; $600 goes into the account. At the end of the year, based
on the average six percent return, James has $636 invested in the mutual fund. Using the mutual
fund calculator on the American Funds website, one can put in the amount of money invested,
the interest rate of return, and the number of years invested. This calculator simplifies the
process of figuring out what this end number will be. The return on $100 per month, at a six
percent return, invested over thirty years is $98,500.13. The investor will have $36,100 over the
life of the investment. That is almost a three-hundred percent return on the investment.
Some keys to reinforce here are that by knowing the starting point, the end goal, and
having discipline in spending, that $212.66, grows over time. Now the reader can begin to see
that making tough decisions that save ten to twenty dollars in each of the items that monthly
payments are owed, begins to pay off. Suddenly, that ten dollars that was not a big deal, is not
quite so easy to dismiss. The U.S. Social Security Administration reports that seventy-seven
percent of the money set aside to subsidize retirement savings will be intact by the year 2033.
Most people assume that they will not be receiving any benefit from Social Security. This
amounts to approximately $1100 per month of income. When retiring at age 65, the retiree

8. HOW TO PREPARE FOR RETIREMENT 8
becomes eligible for Medicare. Both of these benefits are paid into each month, over the course
of their career, by all working Americans and their employers. While these two benefits are
helpful, one must contribute to different investments if they expect to live comfortably.
To effectively prepare for retirement, one has to start with a goal, a realistic budget that
provides for the needs of the family while paying off debt, and develop a long term strategy that
safely maximizes the income generated from the disciplined spending exercised while earning
money. There is some help available; Social Security, and Medicare. However, people have to
begin making their own retirement strategies and acting on those plans as soon as possible.
Retirement is not an individual decision. Not preparing for retirement affects everyone.

9. HOW TO PREPARE FOR RETIREMENT 9
References
Blue Cross Blue Shield of Oklahoma, (2014, November 25). Retrieved November 25, 2014,
from
https://retailweb.hcsc.net/retailshoppingcart/OK/public_census?source=OKGGOG4350
Bureau of Labor Statistics, (2014, October). Retrieved December 11, 2014, from
http://www.bls.gov/cpi/cpid1410.pdf
Glasmeier, A. (2014). Poverty in America, Living Wage Calculator. Retrieved November 25,
2014, from http://livingwage.mit.edu/
Hanlon, S. (2014, April 24). Why the average investor's investment return is so low. Retrieved
December 11, 2014, from http://www.forbes.com/sites/advisor/2014/04/24/why-the-
average-investors-investment-return-is-so-low/
Hellmich, N. (2013, May 1). Cost of feeding a family of four: $146 to $289 a week. Retrieved
December 11, 2014, from http://www.usatoday.com/story/news/nation/2013/05/01/grocery-
costs-for-family/2104165/
Helman, R., Greenwald & Associates, Adams, N., Copeland, C., Ph.D., & Vanderhei, J. Ph.D.,
(2014, March). The 2014 Retirement Confidence Survey: Confidence Rebounds – for Those
With Retirement Plans. Retrieved November 20, 2014, from
http://www.ebri.org/pdf/briefspdf/ebri_ib_397_mar14.rcs.pdf
LeBeau, P. (2014, March 4). Americans Borrowing Record Amount to Buy Cars. Retrieved
December 11, 2014, from http://www.cnbc.com/id/101461972#

10. HOW TO PREPARE FOR RETIREMENT 10
Moore, J., &Mitchell, O. (1997, October). Projected Retirement Wealth and Savings Adequacy
in the Health and Retirement Study. Retrieved November 20, 2014, from
http://www.nber.org/papers/w6240
Noss, A. (2013, September 1). Household Income, 2013. Retrieved December 11, 2014, from
http://www.census.gov/content/dam/Census/library/publications/2014/acs/acsbr13-02.pdf
Retirement Calculator. (2014, January 1). Retrieved January 1, 2014, from
https://www.americanfunds.com/individual/planning/tools/retirement-planning-
calculator.htm
Social Security Benefits. (2014). Retrieved November 25, 2014, from http://www.ssa.gov/
US Census Bureau, Cost of Living Index, (2012)
http://www.census.gov/compendia/statab/cats/prices/consumer_price_indexes_cost_of_living
_index.html
---Life Expectancy, (2012)
http://www.census.gov/compendia/statab/cats/births_deaths_marriages_divorces/life_expecta
ncy.html
U.S. Department of the Treasury, Internal Revenue Service (2014, February). Retrieved
November 20, 2014, from http://www.irs.gov/Retirement-Plans/Roth-IRAs
--- 401K plan, Roth IRA, and Mutual Fund Internal Revenue Service (2014, February).
Retrieved November 20, 2014, from http://www.irs.gov/Retirement-Plans/Plan-Participant,-
Employee/Definitions

11. HOW TO PREPARE FOR RETIREMENT 11
What does an average home owner pay on a home mortgage? (2012, January 3). Retrieved
December 11, 2014, from http://realtormag.realtor.org/daily-news/2012/01/03/what-does-
average-home-owner-pay-mortgage