Retirement is the primary reason we save for the future. It\u2019s the single largest financial concern for most investors. But most Americans are not on target for the retirement they envision. A 2010 Employee Benefit Research Institute study found that about half of workers have less than $25,000 saved for retirement. Just over half have not even thought about what they\u2019ll need. Many don\u2019t prepare because it\u2019s a complicated process. But Americans are living longer and receiving less from pensions and government programs. That\u2019s why it\u2019s ever more critical to plan smarter.\r\n\r\nWhether you are in the middle of your career, or well past your working years, this guide details four steps to achieve a more satisfying retirement.\r\n\r\n\tGet Organized & Set Goals\r\n\tFormulate a Savings & Withdrawal Strategy\r\n\tInvest Wisely\r\n\tBe Prepared & Stay on Target\r\n\r\nStep 1 \u2013 Get Organized & Set Goals\r\nGet Organized\r\n\r\nBe strategic. You can\u2019t plan for the future if you don\u2019t know where you currently stand.\r\n\r\nIt starts with spending. Develop a budget and track your expenses. It is critical you have a handle on cash flow\u2014it will help determine how much you can save and offer insight into discretionary versus non-discretionary expenses. If you\u2019re retired and find yourself spending too much, this will help identify areas to cut back.\r\n\r\nUnderstand what you have to determine what you need. Just as important, but perhaps more difficult to calculate, is the current state of your assets. Houses and physical assets are easily quantified, as are investment portfolio values. But this is just the beginning. The vast majority of investors have multiple accounts spread across several institutions\u2014a current 401k, an old 401k, a savings account, an IRA here, a taxable account there. There\u2019s a good chance you\u2019re richer than you think.\r\n\r\nGet organized. There are two key ways to stay on top of your investments. The first is to track your assets via manual spreadsheets. This can be a tedious process, requiring a great deal of time. The other option is to utilize a free online tool. Personal Capital can help you monitor your investments easily and securely, doing all the legwork for you.\r\n\r\nUnless you\u2019re painstakingly tracking all your investments in a spreadsheet, chances are you don\u2019t have a firm grasp on your true asset allocation and how you are positioned. Within your investment portfolio, understanding your aggregate asset allocation is imperative. Studies show it is the single most important driver of long term returns. If spreadsheets sound too tedious, Personal Capital\u2019s award winning free service can help you to track your income, spending, assets and liabilities. It can also provide a holistic asset allocation breakdown by aggregating your various investment accounts and other personalized investment help.\r\n\r\nGetting organized might seem daunting, but it\u2019s easier than it sounds! By spending just a few moments you will be able to set a strong foundation for informed decision making.\r\n\r\nSet Goals\r\n\r\nUnderstand where you want to be. Once organized, it\u2019s time to set goals. When do you want to retire? How much do you want to spend per year? Do you have assets you would like to leave to heirs? To a charity? Answering these questions will help determine your savings and withdrawal strategies.\r\n\r\nIf retirement is too far off for specifics, try framing these questions differently. For most people, maintaining their current lifestyle in retirement is the primary objective. Does this apply to you, or do you expect to increase or decrease your standard of living? Rough estimates are better than no estimates.\r\n\r\nIt is important to understand how other spending goals impact retirement. Sending your kids to college, for instance, could potentially extend your working years or reduce your targeted standard of living. Knowing the impact will help you better assess the importance of non-retirement goals. The last thing you want is to run out of money and have to start a new career when you\u2019re 81.\r\n\r\nDon\u2019t feel like you need to iron out every detail, and try not to get frustrated when you hit road bumps along the way. You will hit road bumps. That\u2019s why your financial plan and investments should be dynamic and fluid\u2014as your life and goals change, so should they.\r\n\r\nWith an organized foundation and basic vision of the future, you can begin formulating savings and withdrawal strategies and properly position your investment portfolio.\r\nStep 2 \u2013 Formulate a Savings & Withdrawal Strategy\r\nSaving\r\n\r\nIf you are in the middle of your career and accumulating assets, this section applies to you. If you are already retired or about to retire, skip ahead to the withdrawal section.\r\n\r\nWhen it comes to saving, there are two major variables: how much and where.\r\n\r\n1) How much to save?\r\n\r\nFor most people, the right amount is whatever allows relatively smooth consumption over their lifetimes. With so many variables, and over a long time horizon, this can be tricky to calculate. You need to save enough but you don\u2019t want to live below your means either\u2014balance is key.\r\n\r\nTry not to get complacent about saving just because you still have plenty of time until retirement. Due to the magic of compounding, saving early helps disproportionately and can make things a lot easier in your 50\u2019s and 60\u2019s.\r\n\r\nFor example, let\u2019s assume you max out your 401K, saving $17,000 every year starting at age 25. Assuming a 7% return, you will have about $3.4 million at age 65. If you wait until you\u2019re 40 to save, the final amount drops to $1.1 million. For perspective, adjusted for 3% inflation and 20% tax, these sums would allow relatively safe withdrawal rates of $125,000 and $40,000, respectively. Coupled with Social Security, these values may be sufficient to meet many people\u2019s retirement goals, but you can see the huge impact of getting started early.\r\n\r\nA general goal for retirement is to accumulate assets worth at least 20 times the amount you want to spend each year, not counting money received from Social Security or pensions. This can include your home, but only if you are willing to sell it.\r\n\r\nIf this number seems too far off and daunting, set up smaller checkpoints along the way. With 4% inflation adjusted returns, the real value of your assets will double every 15 years, roughly speaking. This means if you can reach 7 times your expected withdrawal amount by 15 years before your retirement, you\u2019re in good shape \u2013 as long as you can continue to save.\r\n\r\nHere\u2019s an example:\r\n\r\n\r\n\r\nDesired Annual Spending in Retirement:\r\n$100,000\r\n\r\n\r\n\r\nExpected Social Security:\r\n$30,000\r\n\r\n\r\n\r\nShortfall:\r\n$70,000\r\n\r\n\r\n\r\n\r\n\r\n\r\nDesired Nest Egg at Retirement:\r\n$1,400,000\r\n($70,000 x 20)\r\n\r\n\r\nTarget Nest Egg at 15 years to Retirement:\r\n$490,000\r\n($70,000 x 7)\r\n\r\n\r\n\r\n2) Where to Save\r\n\r\nSaving in the right accounts can make a big difference in your retirement. Assuming a 25% tax rate, a 40 year old maxing out their 401K will retire at 65 with about 40% more money than if she saved equally in an after-tax account (assuming the tax savings are also invested, not spent). It is true she will eventually owe tax on the 401k balance, but the impact should still amount to about 25% more spending power in retirement. This makes a huge difference.\r\n\r\nEvery situation is unique, but these guidelines should help:\r\n\r\n\tIf your company matches 401K contributions, always participate up to full amount of the match. Always.\r\n\tGenerally speaking, put as much in your 401K or other tax-deferred retirement plan as you can afford. If you are self-employed, make use of a SEP IRA.\r\n\tIf you don\u2019t have a 401K plan, contribute the maximum to an IRA.\r\n\tIf you are eligible for a Roth 401K or IRA, making the right choice is beyond the scope of this paper. Diversifying 401K contributions between a Roth and Traditional is often reasonable.\r\n\tAvoid using savings to pay down your mortgage unless you are stuck in a loan paying over 5%.\r\n\tThe exception is if you are risk averse and will not be investing much money in stocks, then it is better to pay down a mortgage than sit in cash or low yielding bonds.\r\n\tIf you are stuck with a high rate loan, see if you can refinance.\r\n\tIf you have children who you are fairly certain will attend college and you want to pay for it, contribute to a 529 account only after you have maxed out your 401K or IRA.\r\n\tDon\u2019t keep excessive cash in a low-yielding checking account. At most, a few months of expenses. Excess cash should be invested or at least placed in higher yielding savings accounts or CDs.\r\n\r\nWithdrawals\r\n\r\nA withdrawal strategy is the exact opposite of a savings strategy, but the same factors are at play: how much and where.\r\n\r\n1) How much to spend?\r\n\r\nMany people spend too much, too fast. Others, constrained by fear, can be overly frugal.\r\n\r\nMany people make bad investment decisions because our brains are poorly equipped to deal with volatility. After a few years of high investment returns, many people get comfortable spending at a higher rate because they still see their balances go up. Humans are wired to extrapolate current trends into the future. We begin to think our investments will continuously generate income. It takes a lot of discipline to avoid this trap.\r\n\r\nUnderstanding the timing of investment returns is also very important. Someone who retired in 1992 could withdraw in excess of 7% of their portfolio annually and still watch their balances grow. This is not the case for someone who retired in 1999.\r\n\r\nMost financial planners suggest limiting portfolio withdrawals to 4% per year. Historically, 5% withdrawals are generally safe. Here are some guidelines we find useful for retirees who need their money to last for at least another 25 years:\r\n\r\n\t4% is a very reasonable annual withdrawal rate. If 4% is too restrictive, 5% is also reasonable, but be prepared to reduce spending during poor performing years.\r\n\tPortfolio withdrawals above 6% annually should be considered depletionary, but there is about a 50% chance the gamble pays off and you can sustain them over the long-term.\r\n\tYou can\u2019t gamble with aggressive withdrawal rates if you are unwilling to gamble with a relatively high equity allocation. High withdrawal rates coupled with mostly bonds is usually disastrous.\r\n\r\nOther questions to consider:\r\n\r\n\tDo you have real estate or other assets that can be sold if necessary?\r\n\tHow much can you rely on Social Security and other income such as pensions or annuity payments?\r\n\tWill your children support you if necessary?\r\n\tDoes your spouse place a higher priority on current expenditure or future safety? This may be an uncomfortable conversation, but a necessary one in certain situations.\r\n\tAre future medical expenses covered? This area is commonly underestimated.\r\n\r\n2) Which Accounts to Draw Down?\r\n\r\nHere is the industry standard for ordering withdrawals:\r\n\r\n\tTaxable Accounts (Individual, Joint, Trust, etc.)\r\n\tTax Deferred Accounts (IRA, 401k, 403b, etc.)\r\n\tTax Exempt Accounts (Roth IRA, Roth 401k)\r\n\r\nThe idea is to defer taxes as long as possible and maximize tax deferred or tax exempt growth. It can make a big difference, often extending the life of a retiree\u2019s assets by years. Once you hit 70\u00bd you will have to take required minimum distributions, or RMDs.\r\n\r\nThis simple rule works well and is good enough for most people. But those with complex tax situations may benefit from a more sophisticated analysis. Here are some common exceptions to the rule:\r\n\r\n\tIf a disproportionate amount of your assets are in retirement accounts, withdrawing a small amount until you hit the 25% federal tax bracket may make sense.\r\n\tIf you have high income in retirement and leaving money to heirs is not a high priority, spending down a Roth can help lower taxes.\r\n\tIf you have highly appreciated assets in a taxable account that may benefit from a step-up at death, it often makes sense to maintain them and spend from retirement accounts instead.\r\n\tRoth conversions may be beneficial in certain situations.\r\n\r\nStep 3 - Invest Wisely\r\nWell thought out goals and a solid savings plan are essential, but they mean little without a strategic investment approach. Here, we list three critical decisions you should make before buying a single stock, bond or mutual fund. We also provide some tips to minimize headwinds caused by taxes and fees.\r\n\r\nCritical Decision #1: Self vs. Professional Management\r\n\r\nMany individuals manage their own investments. While there is nothing inherently wrong with this approach, average investors can have difficulty setting aside emotions. This often leads to rash investment decisions that are more reactionary than calculated. Take the last downturn for example. The market\u2019s drop sent investors running for the hills\u2014ditching equities in favor of cash. And it left sizeable emotional scars. Many retirees saw their nest eggs cut almost in half. Out of fear these investors remained in cash, waiting for the \u201call clear\u201d signal and missing much of the huge rally since the market\u2019s March 2009 bottom. Unfortunately, this emotionally-charged decision is forcing some retirees to return to work, or at least significantly reduce their standard of living.\r\n\r\nWhen done correctly, there\u2019s nothing inherently wrong with self-managing assets,and professional managers can make similar mistakes. But on the whole self-managing investors tend to do more harm than good. Market research firm Dalbar compiles an annual study of investor behavior, and recent findings support this theory. In 2011 alone, the average equity mutual fund investor lost 5.7%, despite the S&P 500 being up 2.1%. That\u2019s a sizeable difference, and it\u2019s precisely because investors succumbed to fear, making the wrong decisions at the wrong times.\r\n\r\nAlternatively, you can hire a professional. If chosen correctly, an advisor can significantly boost your odds of a successful retirement\u2014they help you make objective decisions and generally have more investment knowledge and experience. But if chosen incorrectly, they can make matters much worse.\r\n\r\nThe type of advisor can make a difference. Brokers are paid on commission, meaning they often make money selling investments to, and buying investments from, clients. This is problematic because it creates conflict of interest. What\u2019s to stop a broker from simply recommending investments paying the highest commission? In fact, often times this is exactly what they do. Even brokers who mean well can\u2019t fully avoid conflict of interest\u2014it\u2019s embedded in the business model.\r\n\r\nInstead, find a professional whose interests are aligned with yours. Fee-based investment firms, often called RIAs (registered investment advisor), charge clients based on assets under management, not commissions. This means their interests are on the same side of the table\u2014they too benefit from increasing asset values. Since there is no incentive to sell inappropriate products, these firms can provide truly objective and unbiased advice.\r\n\r\nUnfortunately, it can be hard to know when you\u2019ve found a good financial advisor and when you\u2019ve found a good salesperson. The best advice we can give is to look at several options, ask a lot of questions and trust your gut. And if you have an advisor you are unhappy with, don\u2019t be afraid to move on.\r\n\r\nCritical Decision #2: Active vs. Passive\r\n\r\nThe next key decision concerns management style: active or passive? Active management is the belief one can outperform the market through superior stock selection, or by over\/underweighting specific categories. Conversely, there are no active investment decisions involved in passive management\u2014it is the attempt to mimic a specific index and match its return.\r\n\r\nPassive investing is gaining popularity. According to the Investment Company Institute, net passive mutual fund assets increased from $371 million in 2001 to almost $1.1 trillion at the end of 2011. But this only represents a small slice of the $11.6 trillion domestic pie. Actively managed funds still account for over 90% of U.S. fund assets.\r\n\r\nWhich management style has a better track record? To answer this question, S&P puts together an annual report ranking the returns of actively managed mutual funds to passive S&P indices: the S&P Indices Versus Active Funds (SPIVA) Scorecard. On a one-, three- and five-year basis, the S&P 500 outperformed 81%, 69%, and 62% of all domestic large cap mutual funds, respectively. The same trend is present across the mid and small cap spectrums. In fact, no ten year period exists where a majority of actively managed mutual funds outperformed their benchmarks.\r\n\r\nThe reality is most active fund managers leave their customers with less money than passive indexing. And diversifying across multiple funds isn\u2019t the answer. Simple math dictates the odds of underperformance increase as more active funds are added to a portfolio. Investors should even be wary of managers with strong track records. History is littered with examples of star managers who attracted considerable assets and performed terribly thereafter.\r\n\r\nGiven low odds of outperformance for active funds, we believe passive indexing is the more prudent approach to investing. This applies to savers and retirees alike.\r\n\r\nCritical Decision #3: Asset Allocation \r\n\r\nWhether you use active or passive investment vehicles, asset allocation is the most important investment decision you can make. This refers to the percentage of stocks, fixed income, alternatives, and other asset classes held in your portfolio, and studies show it is the single largest driver of long-term returns. It is the cornerstone of modern portfolio theory.\r\n\r\nThe table below shows correlations of various asset classes relative to each other. A value of one implies the assets are perfectly correlated\u2014they always move in the same direction at the same time. A value of negative one means the assets move in opposite directions, and a value of zero implies the assets are uncorrelated.\r\n\r\n\r\n\r\nAsset Class Correlation Matrix\r\n\r\n\r\n\r\nDomestic Equity\r\nInternational Equity\r\nDomestic Fixed\r\nInternational Fixed\r\nAlternatives\r\nCash\r\n\r\n\r\nDomestic Equity\r\n1.00\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\nInternational Equity\r\n0.66\r\n1.00\r\n\r\n\r\n\r\n\r\n\r\n\r\nDomestic Fixed\r\n0.04\r\n-0.08\r\n1.00\r\n\r\n\r\n\r\n\r\n\r\nInternational Fixed\r\n0.00\r\n-0.12\r\n0.88\r\n1.00\r\n\r\n\r\n\r\n\r\nAlternatives\r\n-0.31\r\n-0.20\r\n-0.24\r\n-0.23\r\n1.00\r\n\r\n\r\n\r\nCash\r\n0.00\r\n-0.03\r\n0.19\r\n0.46\r\n0.08\r\n1.00\r\n\r\n\r\nProduced by Personal Capital Corporation\r\n\r\n\r\n\r\nAs the table shows, these assets classes behave differently from one another, so owning a combination of two or more can actually reduce portfolio volatility. Said another way, if one asset class decreases in value, another would hypothetically increase and mitigate the impact. The traditional approach is a basic combination of domestic equities, fixed income and cash. But this should be taken further. Construct a global multi-asset class portfolio utilizing all available liquid asset classes. As seen in the two figures below, this can actually reduce overall portfolio risk while simultaneously increasing return\u2014the Holy Grail in investing.\r\n\r\n\r\n\r\n\r\nTraditional Three Asset Class Portfolio\r\nGlobal Multi-Asset Class Portfolio\r\n\r\n\r\nDomestic Equities\r\n60%\r\n40%\r\n\r\n\r\nInternational Equities\r\n0%\r\n20%\r\n\r\n\r\nDomestic Fixed Income\r\n25%\r\n15%\r\n\r\n\r\nInternational Fixed Income\r\n0%\r\n10%\r\n\r\n\r\nAlternatives\r\n0%\r\n10%\r\n\r\n\r\nCash\r\n15%\r\n5%\r\n\r\n\r\n\r\n\r\n\r\nSum of Weights\r\n100%\r\n100%\r\n\r\n\r\nExpected Returns\r\n7.8%\r\n8.0%\r\n\r\n\r\nStandard Deviation\r\n12.4%\r\n11%\r\n\r\n\r\nSharpe Ratio\r\n0.35\r\n0.41\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\nThe appropriate asset allocation should be tailored to your personal financial situation, accounting for your risk tolerance, time horizon, expected withdrawals, and legacy wishes, among other factors. In every scenario, investors should seek the highest return for the right level of risk. The right level of risk is a factor of both ability and willingness to accept risk. An investor may say they\u2019re highly aggressive, but short term cash flow needs, for instance, may limit their ability to prudently assume high risk.\r\n\r\nAlternatively, some investors should assume more risk than they may be comfortable with. Being too conservative can be a big mistake, but accepting a lower expected return may be a worthwhile tradeoff if it means sleeping better at night.\r\n\r\nEliminate Portfolio Headwinds \r\n\r\nEven with all the correct macro level decisions, investors still face numerous portfolio headwinds. The two largest are taxes and fees. Both can weigh on performance and significantly impact retirement.\r\n\r\nTaxes\r\n\r\nPoor tax management could cost you up to 25% of your long term return and severely limit your spending power in retirement. Mutual Funds are notoriously bad at tax management\u2014high turnover often creates large tax bills each year. And depending on when you buy a fund, you may even have to pay capital gains on profits other people made. When you buy a fund, any embedded gains come with it. A 2010 study by Lipper (Taxes in the Mutual Funds Industry \u2013 2010; Assessing the Impact of Taxes on Shareholder Return) showed owners of mutual funds in taxable accounts gave up an average of 0.98% - 2.08% in annual return to taxes over the last 10 years. That\u2019s a sizeable headwind.\r\n\r\nRelative to mutual funds, Exchange traded funds (ETFs) are a step in the right direction. In fact, greater tax efficiency was the primary reason they were created. But the best way to mitigate taxes is to create a portfolio of individual securities, or a combination of individual securities and ETFs. This allows for tax management on multiple levels. With a wider set of options to meet cash flow needs, it\u2019s easier to defer gains into future years. And if you have to sell low basis positions, you can harvest losses from poor performers to mitigate or neutralize the impact.\r\n\r\nIf you have taxable and tax-deferred accounts, you can also tax locate. This involves placing higher yielding securities in tax-deferred accounts to shield their income. Additionally, income from most REITs and bonds does not qualify for the same favorable tax rate as stock dividends. It is advantageous to strategically place these securities in tax-deferred accounts. Combined, these tactics help maximize total portfolio value and reduce your annual tax bill.\r\n\r\nExcessive Fees\r\n\r\nMost people don\u2019t actually know how much they pay for investment management or fund fees, and unfortunately it is often much more than they realize. Not all fees are easily understood, and many are embedded deep within investment products making them difficult to see. Over time they can be a significant drag on investment returns. Always know what you pay in fees. Aggregating your accounts on your Personal Capital Dashboard can help.\r\n\r\nProfessionals. Investors who choose to hire a professional often pay annual fees based on assets under management. Amounts vary wildly, but typically range from 1% of assets on the low end to 3% on the high end. Some advisors directly pick stocks, while others pick mutual funds (often called wrap accounts or fund of funds). Paying anything near the high end of that range is almost never warranted, particularly for those picking mutual funds which come with their own set of fees. And if you use a broker, you could be paying sizeable commissions on each and every investment you make. Annuities are notorious for such commissions, which is why brokers are so quick to recommend them. So when hiring a professional, make sure you clearly understand what they charge, as well as any commissions you might be responsible for. While it seems silly, many investors have no idea they pay almost 3% a year in fees to their advisors.\r\n\r\nFund Fees. According to the Investment Company Institute and Lipper, the average expense ratio of equity funds is 1.43%. And expense ratios are just the beginning. Mutual funds carry several additional costs \u2013 some visible and some hidden. These can include sales loads, which are paid to the selling broker, as well as similar fees paid to the fund company. There are also embedded costs associated with trading, research, and potential market impact (hidden fees). Add these up and the real cost of owning mutual funds is often 2% to 3%, or more. These are huge hurdles to overcome considering most funds don\u2019t outperform their respective benchmarks. And this doesn\u2019t even include the impact of taxes. The best way to avoid excessive mutual fund fees is to avoid mutual funds altogether (at least active mutual funds). ETFs are often cheaper, more tax efficient alternatives.\r\nStep 4 - Be Prepared and Stay on Target\r\nIn retirement planning, just like a diet, losing weight is only half of the endeavor. The other half is keeping it off. This means you must continuously monitor your progress and ensure you remain on target. There are plenty of potential road bumps that can threaten your golden years, so it is wise to be prepared.\r\n\r\nOne of the cardinal tenets of prudent financial planning is setting aside a cash reserve. This money should be liquid and easily accessible in the event something unexpected occurs, like losing one\u2019s job. Without it, you may be forced to dip into retirement savings to meet expenses, which could result in hefty tax bills and penalty fees. It\u2019s generally recommended a cash reserve be high enough to cover three to six months of expenses, although the actual value depends on your specific situation.\r\n\r\nYou should also consider insurance needs, particularly life, disability and long-term care. Life and disability insurance typically apply to those saving for retirement. The loss of an income, be it through death or disability, can be financially devastating if not properly planned for. It can push stay-at-home spouses back into the workforce and eliminate the possibility of retirement altogether, let alone achieving any other financial goals. So having a safety net can make a lot of sense, particularly for families with a sole breadwinner. But insurance isn\u2019t for everyone. Those with significant liquid assets and\/or no immediate family can probably go without. For those in need, make sure to take advantage of any coverage offered through work before purchasing from a third party. Work plans are typically offered at a significant discount to market rates.\r\n\r\nLong-term care insurance is growing in popularity, and for good reason. According to the US Department of Health and Human Services, 70% of people age 65 and over will need long-term care services at some point in their lives. Additionally, it costs on average more than $70,000 a year for a nursing home stay. That\u2019s not cheap. So if paying for a year or two would significantly dent your assets, it may make sense to consider insurance as a backstop.\r\nTo A Better Retirement\r\nIf your life changes, so should your retirement plan. On an annual basis, revisit step one: get organized and make sure your goals are on the right track. Stay on top of your investments\u00a0with our free Investment Checkup tool,\u00a0which analyzes your investment portfolios for risk. Run your portfolios through our 401k\/Portfolio fee analyzer to see how much portfolio fees are robbing you from a healthier retirement. Finally, track your cash flow using our easy-to-use financial dashboard to make sure you're always spending less than you earn.\r\n\r\nIf you have any questions or are seeking personalized advice for your specific situation, please give us a call at (855)855-8005.