The most striking thing about mail from readers who are thinking about retirement is something I call the personal action gap.

What's that?

Simply this. Many devote a lot of effort to things with uncertain results, like investing. Remarkably little attention goes to personal actions that have surefire results.

So here are five simple steps toward retirement. They require personal action. They don't require help from others. They require willpower and intention. They don't require an MBA.

  • Eliminate debt. The greater your debt, the more income you'll need in retirement. Debt may be easy to handle when you are working, simply because you are working. But it will be a lot more difficult in retirement -- because you won't be working.
While you are working, a $300 monthly car payment may represent only 10 hours a month of your pre-tax earnings, assuming you earn $30 an hour, or $60,000 a year. Once you are retired, however, it will take about $90,000 in investments to generate your monthly payment. (This assumes a safe withdrawal rate of about 4 percent.) Since a $300 monthly car payment would only finance about $15,000 of car, there's kind of an imbalance here.

Worse, having to take money from your nest egg to make loan payments may increase your income tax bill. As I have pointed out many times, the formula for the taxation of Social Security benefits works to slowly increase the number of retirees who must pay taxes on their Social Security benefits. Why? Because the formula is one of the few pieces in the entire tax code that is not indexed for inflation.

According to a 2005 report by the Congressional Research Service, for instance, 15.5 million of the 40.4 million people who receive Social Security benefits paid income taxes on some portion of their benefits in 2003. This number is only going to rise.

Having no debt, on the other hand, means you get to enjoy your household assets without payment or tax burden.
  • Know what you're spending. Even at age 62 or 65, millions of people are clueless about how much they spend or where they spend it. At one time this could be excused. Most of us don't want to be bookkeepers in our spare time. But today, with programs like Quicken and Money, none of us have any excuse for not knowing where our money is going.
We have a fundamental choice here. We can either discover where we spent our money -- usually the wrong place. Or we can decide where it will be spent.

Life will continue to be full of surprises, but if you start tracking your spending, you'll be amazed at how stable and predictable much of it is. Stability and predictability are precious.
  • Put your possessions in good condition. The best way to keep your expenses stable -- at least for a few years -- is to retire with everything in good condition. That means recent model cars, recent home appliances, and a house that won't need a new roof next year. Then you won't have any major expenses -- the kind that blow budgets -- for several years.
  • Do the same with yourself. Our bodies are our most valuable possession. Without them, we aren't. Taking walks, doing moderate exercise and losing weight can help stave off problems from circulatory disease. It can reduce the need for knee replacements and other indignities. I'm not saying that paying attention will ward off heart disease or cancer for everyone, but we can do a whole lot better.
  • Make sure your income exceeds your outgo. The best financial advice ever written did not come from an economist, an investment adviser or a personal finance columnist. It came from a novelist. In "David Copperfield," a Charles Dickens character named Wilkins Micawber provides us with a fundamental equation for happiness:"Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."


Scott Burns is the Chief Investment Strategist for AssetBuilder, Inc. and his columns are syndicated across the country. Readers can register at and post questions/comments or send directly to Questions of general interest will be answered in future columns and remember to click on the "Archive" navigation to see other columns. All comments are welcomed and appreciated.