## A Few Basic Rules

### To Get Where You Want to Go

**Rule 1: Save! **It’s simple. You’ll have more tomorrow if you save more today.

** Rule 2: Pay Off High-Interest Debt. **You’ll have LOTS more tomorrow if you do.

**Rule 3: Use that 401(k). **The best way to save for retirement is in a 401(k). It’s automatic, saves on taxes, and your employer match is “free money.”

**Rule 4: Have a Plan. **Know where you want to be in 10 years. Make a plan to get there.

**Rule 5: Keep Saving. **If you reach a goal or pay off a debt, use the money “freed up” to reach another goal or pay off another debt.

## Make a Plan

## Tools You Could Use

### To Refine Your Plan & Get It Done

**Want a more personalized plan?** If so, here are some useful tools:

**Figure Out a Retirement Plan (if Under 50)****Figure Out How Moving Could Change Your Finances****Figure Out Your Reserve for Unemployment****How to Pay Down Debt****Figure Out Should You Refinance?****Figure Out How to Pay Down Credit Card Debt****Learn About 401(k)s and IRAs****Learn About Mutual Funds**

**Do you need to spend less and save more? **If so, to get you on your way use:

**Figure Out Where to Cut Spending****Figure Out a Budget in 3 Minutes Budget****How to Manage Everyday Spending**

## Under the Covers

### How We Make Projections & Our Disclaimer

**All amounts are in today’s dollars.**

**Rates of Return & Interest Rates**

- Reserves and savings for a down payment are held in bank savings accounts with interest equal to the rate of inflation.
- Educational savings are in a 529 Plan, where investment earnings are not taxed, and are invested in half in stock and half in bond mutual funds.
- Retirement savings are held in a tax-advantaged 401(k), where contributions are deductible and the investment earnings are not taxed, and are invested in a Target Date Fund suited to your age. (For workers under 50, that means a large share is invested in stocks).
- Stock funds assumed to earn 6.3% and bond funds 2.2% above inflation and fees, their long-term historical average.

- We use 2000-2009 returns as the “market tanks” returns, with stock funds losing 3.7% and bond funds earning 4.3% above inflation and fees.

- The interest rates, unless changed in Advance, are:
- 12% on high-interest rate debt, such as standard credit card debt.
- 7% on moderate interest-rate debt, such as student loans.
- 4% on low-interest rate debt, assumed to be mortgage debt, where the interest is tax deductible.

**Retirement Savings Needed in 10 Years to be “On-Track”**

- We first estimate the income you’ll need to maintain your standard of living in retirement, assumed to be 75% of pre-retirement income, or the income you’ll have in your 50s.
- We assume your income rises relative to national average wages in line with the “wage scale” developed by the Social Security Administration and that national average wages rise 0.5% a year.
- We estimate your Social Security benefit for retirement when the primary earner is age 65, and assume a 10% cut in benefits to help close the program’s long-term financing shortfall.
- We assume you draw the rest of your retirement income from savings, and draw out 4% of your savings as income. So if you need 30% of pre-retirement income from savings, you’ll need 7½ times that income in savings when you retire.
- We then the estimate the savings you’ll have at retirement from what you’ve already saved. The rest must be provided by what you’ll save going forward.
- We then estimate the % of income you must save to hit that target.
- You’ll need to save less than indicated if you get a more generous employer match or if you’ll get a pension, retire later than 65, or downsize when you do.
- You’ll also need to save less than indicated if you’ll “save more tomorrow” – say by using money freed up by paying of debts or meeting other saving objectives.

**When You Hit a Savings Goal or Pay-off a Debt**

- Money “freed up” shifts to other objectives and debts in the following order,

- First to near-term priorities: 1) Reserve. 2) High-Interest Debt. 3) Down Payment. 4) Moderate-Interest Debt.
- Then to long-term goals: 5) Retirement. 6) Kid’s Education. 7) Low-Interest Debt.
- Inflation assumed to be 3% a year. As debt and debt payments don’t rise in dollar terms, they take less of your earnings over time. The money “freed up” is used for other objectives and debts according to the priorities listed above.
- Saving for Retirement and for your Kid’s Education stops when your savings, earning the assumed rates of return, are sufficient to hit your 10-year target.

**Totals **

- “Total Saving and Debt Payments” is after-tax, with
- Retirement saving assumed to be tax-deductible contributions to a traditional 401(k) or IRA.
- “Low-interest debt” assumed to be mortgage debt, with tax-deductible interest making up half the payment.
- Your marginal tax rate – the tax you pay on an additional dollar of income – assumed to be 15%, unless you indicate otherwise in Advanced.
- “Total Savings” ignores the fact that retirement savings and educational savings are not exactly comparable to other savings, as investment earnings are not taxed but withdrawals are.

**DISCLAIMER:** The information provided on the *SquaredAway* website is for educational purposes only. It is not intended to provide personal financial advice.