Planning for retirement.

* ESTABLISHED IN 1981, THE 401(K) PLAN IS NOW the most popular method companies offer to employees to establish a retirement nest egg. More than 30 million people now participate in 401(k) plans. With the growing trend in retirement plans to switch from predictable defined-benefit plans to the

unpredictable defined-contribution plan and the uncertainty of Social Security, it's imperative that more people understand the rudiments of retirement planning and its main component, the 401(k). J. Michael Scarborough does just that, explaining the intricacies of 401(k) plans and retirement planning in his book, The Scarborough Plan, published by Corinthian Books.

Though Scarborough addresses many issues, his main theme is how to maximize the advantages of a company-sponsored 401(k) program. Full of practical advice, he intentionally includes very little economic or financial theory. While this makes the material accessible to all, it may prove too simplistic and frustrating for those seeking a more sophisticated discussion of financial planning for retirement.

His discussion begins with the fundamentals of retirement planning, including the proper allocation of assets, the benefits of tax-free investing and compounding, the importance of participating in 401(k) plans to the fullest extent possible, and the consequences of inflation. Though some ideas are basic, Scarborough tries to bring a fresh and innovative perspective. For example, in asset allocation, he points out that asset allocation between investment risks should be based on a number of factors, one the length of time until retirement rather than the age of the individual. Also, Scarborough declares the conventional thought that only 60% to 80% of pre-retirement income is needed during retirement is rubbish. Rather, 100% of pre-retirement income is needed, and any thought of dying broke isn't prudent.

The second section focuses on concepts to maximize the power of a 401(k). Practical dos and don'ts are provided, such as don't borrow from a 401(k) because it keeps the borrowed portion of the assets from growing. A discussion of IRAs and how they can complement a 401(k) plan is provided, as is a primer in traditional, Roth, and rollover IRAs. This is where Scarborough gets the most technical, providing some financial and economic support. While it may be a bit complex for some, it is possibly the most interesting for readers seasoned in finance.

The final chapters are devoted to the proper management of retirement savings once a person is retired, including advice on professional assistance with retirement planning. This is an appropriate discussion since after-retirement use of a nest egg requires just as much planning as it did to create the nest egg. As always, Scarborough's guidance is simple but sound. He counsels that determining the proper management of retirement funds requires an understanding of the ABCs: assets, beneficiaries, and circumstances. Once these three variables are assessed, a knowledgeable decision can be made regarding withdrawal and use of funds. Though advice is given as to what assets should be depleted first, Scarborough suggests the goal should be to plan withdrawals so as to never touch the principal, or, if necessity dictates, maintain the principal's value as long as possible. Rejecting conventional rules of thumb (e.g., expect to live to the age of oldest-relative-plus-10), Scarborough exhorts that your financial retirement plan should assume that you will live forever and that you should plan to die with more assets than at retirement!

At the book's conclusion, Scarborough lists The Scarborough Plan in 21 steps. Many of them can be summarized simply: Begin saving for retirement early in life, and live frugally!--Brian Porter, CPA

Brian Porter, Ph.D., CPA, is an associate professor at Hope College in Holland, Mich.