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Terrible Twenties

WHEN I WAS IN MY 20s, with two young children to provide for, I had neither an emergency fund nor nearly enough life insurance. I knew both were important—but I simply didn’t have the money to spare.
Make no mistake: Launching a financial life is daunting. Most twentysomethings have modest incomes, and yet they’re supposed to save for retirement, buy a car, build up an emergency reserve and put aside money for a house down payment,

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Early and Late

HOW MUCH WILL YOU give up in monthly benefits if you claim Social Security early? To find out, you need to know your full Social Security retirement age—a crucial piece of information, especially if you’re married and trying to figure out the best strategy for claiming benefits.
If you were born between 1943 and 1954 and hence your full Social Security retirement age is 66, your benefit will be reduced by 25% if you claim benefits at age 62,

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Sequence of Returns

CONSIDER THIS HELLISH scenario: You retire with what you imagine is plenty of money—and you’re immediately hit with a brutal market decline, even as you pull out a growing sum from your portfolio each year to cover rising living expenses.
This double drain quickly depletes your savings. A few years later, the markets bounce back. But you don’t benefit much because, by then, your portfolio has been whittled down by your need for spending money.

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Adjusting Your Mix

IN YOUR 20s, 30s and 40s, you might have invested heavily in stocks because you had a paycheck to cover your living expenses and didn’t need to worry about plunging financial markets. When you retire, you give up that paycheck—and that has big implications for your portfolio. Suddenly, you want not just growth from your investments, but also income.
Later, when we talk about issues facing those age 65 and older, we’ll discuss how you might generate income from your savings while fending off the threat from both short-run market declines and long-run inflation.

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Financial Calculators

AS A RULE OF THUMB, you should probably save 12% to 15% of your pretax income toward retirement. If your employer has some sort of traditional defined benefit pension plan, which will pay you income every month in retirement, you can likely save less.
Similarly, if your employer makes a fixed or matching contribution to its 401(k) or 403(b) plan, you might be able to trim your savings rate. Suppose your employer matches your 401(k) contributions at 50 cents on the dollar up to 6% of pay.

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Your Safety Net

IT IS A RETIREE’S worst nightmare: Your stocks are hammered by a market crash. Your bonds are battered by rising interest rates. Yes, you have your dividends and interest. But to get more income from your portfolio, you might be compelled to sell stocks and bonds at the worst possible time.
To avoid that nightmare scenario, which many retirees faced in 2008-09 and 2022, try dividing your portfolio in two. You might allocate 80% to a mix of stocks and riskier bonds designed to deliver healthy long-run growth.

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Step 1: Emergencies

YOUR PLAN FOR financial emergencies might have four components: a cash reserve, credit lines, a Roth IRA and low fixed living costs.
One rule of thumb says that, as an emergency reserve, you ought to keep six months’ living expenses in conservative investments, such as a savings account or a money-market fund. This can be a heap of dough. For instance, if you make $75,000 a year, you might need to set aside $25,000 to cover your living expenses for half a year.

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Graduating College

AS YOU LEAVE COLLEGE and enter the work world, money will likely loom large—or, to be more precise, the lack thereof. Still, don’t let a modest paycheck deter you. With the right steps, you can put yourself on the fast track to achieve two of life’s most important financial goals: buying a home and retirement.
Live beneath your means. As you consider what sort of place to rent and what other expenses to take on,

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Moving and Shaking

THE CLEMENTS household has been in turmoil since May. After weeks of shoehorning our life’s possessions into endless cardboard boxes, we moved home and then, three days later, headed off for 10 days of vacation. My wife and I aren’t quite sure how we settled on this crazy schedule (though we’re pretty sure the other spouse is responsible). But we’re painfully aware of the result: It’s been months since we’ve had anything that felt like an ordinary day.

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Lists

THERE’S SOMETHING compelling about numbered lists. One day, maybe we’ll even draw up a list of the “Top 10 Reasons Lists Are So Popular.” But for now, you’ll have to make do with the lists below.

31 Rules of the Road
45 Steps to Success
Seasoned Investor
Where Money Grows Up
10 Questions to Ask
Favorite Websites
The Right Portfolio
Say This to Them
51 Things Not to Do
Troubling Signs
Unheard Of
People Count
50 Shades of Risk
Fooled You
10 Key Decisions
Wisdom That Isn’t Wise
Take It to the Limit
Jonathan on Happiness
10 Headscratchers
That’s Rich
Connecting the Dots
A Happier Life
Did I Say That?

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Houses

Land vs. dwelling. As you contemplate the potential return from owning a home, it’s helpful to distinguish the dwelling from the land underneath it. You can be fairly confident the land will appreciate over time. By contrast, the dwelling itself will deteriorate, requiring regular maintenance and occasional upgrades if the property is to keep up with the broader housing market. The dwelling, however, also provides you with shelter—which is the key reason to own residential real estate.

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Retirement Income

Longevity risk. This is the danger that you will live longer than you’re financially prepared for, forcing you to cut back spending or take other drastic financial steps, as your savings start to dwindle.
Inflation risk. Over the course of a 20- or 30-year retirement, even modest rates of inflation can severely crimp the lifestyle of retirees who rely on income streams that are fixed in dollar terms, such as the interest payments from bonds,

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Saving for Retirement

Human capital vs. financial capital. Your human capital is your income-earning ability. Early in adult life, it’s your most valuable asset. Academic economists view the income from human capital as similar to the interest earned from bonds. To diversify your human capital “bond,” you might invest heavily in stocks when you’re younger. During your working years, your goal is to convert your human capital into financial capital—meaning a huge pile of savings—so that one day you can retire.

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Taxes

HUNTING FOR STOCK market winners is fun. Managing taxes is tedious. Yet a few hours each year devoted to minimizing your portfolio’s tax bill will likely yield a far bigger financial return.
Imagine you invest $10,000 for 30 years and earn 8% a year. If you lost 22% of your gain to taxes every year, you would have $61,467 after 30 years, which sounds impressive. Now, instead, suppose you could defer all taxes for 30 years,

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Retirement

IF YOU JUST ENTERED the workforce, it’s time to start preparing for retirement. Over the next four decades, you might pull in tens and perhaps hundreds of thousands of dollars every year. It’s lucky you have all that income coming in, because ahead of you lies life’s toughest financial task: amassing enough money so you can retire in comfort. In dry economic terms, your working career is about accumulating enough financial capital, so that one day you’ll no longer need the income from your human capital.

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