Friday, April 13, 2012

Investing to Retire – The Most Important Thing You're Not Doing?

It is often said that the largest purchase people can make in their lifetime is a house. I disagree. The largest purchase people can make is their retirement. In the Northeast where I live, the median home price as of March 2012 is $225,800, according to the National Association of Realtors. A properly funded retirement account for someone preparing to retire in 2012 could be many times that amount. If we thought of retirement as something we had to buy, like a car, house or vacation, perhaps it would be easier to understand that we need to save for it.
You can’t invest without saving, and we the people of the USA aren’t saving.  The financial services organization TIAA-CREF found that more than one in three Americans (39%) are not saving anything toward retirement.  Many who do save aren’t saving nearly enough. Forbes Magazine says that we are in a “retirement crisis,” and that age 65 has become a “fantasy” retirement date. According to US News, only 25 percent of us are saving more than 10 percent. As a culture, we all are living beyond our means. Without drastic changes, the idealized retirement picture of leisure, security and abundance will remain out of reach for not just a few, but for a majority of the population.

Why Aren’t We Saving? 

Trapped by debt and struggling with finances, many people simply think they can’t afford retirement savings.  Many who do save have too much debt and no emergency fund. They save a little, but then withdraw money to keep themselves afloat financially whenever problems arise.  Some start saving and investing, but the first time markets get volatile, they stop. (Volatile means that stock prices are fluctuating sharply, wildly and often.) Worse yet, they panic and withdraw the money they have invested, incurring penalties, selling at a loss, and missing the eventual market rebound.
If you think money is tight now, 
try not saving for retirement.
Some people think they can rely on Social Security to fund their retirement. I don’t. Social Security is NOT a retirement plan. It was invented to keep the elderly from starving and freezing, and that’s about all it will do. The average monthly benefit is $1,066. Can you survive on $12,792 a year? Many already do, and many more will need to learn how. According to the Social Security Administration, only about 75% of promised benefits will be payable as of 2037 (that’s just 25 years away), which brings that future number down to $9,594 a year in today’s dollars. Ouch.
Many people might think they will just continue to work until they die. This is a bad plan. Research shows that nearly 60 percent of retirees will end up retiring sooner than they planned; and many of those will be involuntary due to health issues, downsizing, or other factors beyond their control.

What Should We Do?

Investing is simple. Anyone can do it and everyone should. Investing can get complicated, but it does not have to be. The basics really are, well, basic. 
There are only three factors that determine if you will enjoy a secure retirement: How much money you save, how long you save for, and what rate of return (percentage increase) you get on your savings. The hardest part is deciding to do it.
1) How Much You Save
The first step toward saving for retirement is to spend less than what you earn, and pay yourself first. As a nation, we aren’t doing that. The way to make this happen is to do a budget (read about that HERE) and put that retirement savings line item right at the top.  The minimum amount you should save is 10% of your gross income. If you can’t afford to do that right away, don’t give up! Start by saving what you can, and work up to 10% as you are able. 
2) How Long You Save
Is this couple on vacation, or is this where they live?
Only their bank account knows for sure.
You will want to save for as many years as possible, so let’s get going! The sooner you start, the sooner the interest, dividends and capital appreciation of your investment can go to work making money for you. The longer you wait, the more you will have to save to meet your goals. What if you are approaching retirement age and don’t have much time? Start saving anyway. It might be too late to save a million, but a little saved is better than nothing at all. 
3) Rate of Return
The only way to get a decent rate of return on retirement savings is to invest. If you simply leave your money in a savings account, CD, or under the mattress, you will end up losing purchasing power because these accounts do not keep pace with inflation. To build wealth you need to buy stocks, which should be purchased through mutual funds. (Mutual funds are a type of professionally managed collective investment that pools money from many investors to purchase many different stocks and bonds.) Mutual Funds are better than individual stocks because they reduce certain kinds of risk. I do not recommend buying individual stocks unless you can afford to lose every penny you spend, because you will be gambling.
If you have a 401k or 403b plan offered through your employer, terrific! You can use that to save and invest. The money will come right out of your paycheck and be invested into whichever mutual funds you choose. If you don’t have a retirement plan option at your place of employment, then you can just pick up the phone and call any investment management company and tell them you want to open an IRA (Individual Retirement Account). I personally like Vanguard for their low fees, broad offerings, and excellent customer service; so most of my money is there.
Not sure which mutual funds to choose inside your 401k, 403b or IRA? I know that this part can be intimidating. There are many options, and each option has a different focus and goal. Just take a deep breath. You can do this! For starters, there are helpful online calculators that you can use. Chances are the administrator of your account will offer one. The best are set up like questionnaires, where you answer the questions, and then the program suggests a particular asset allocation that is appropriate for you based on your age, goals and risk tolerance. (Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio.)

What I Know

Federal law requires that all articles on the
topic of retirement planning be accompanied
 by a sailboat picture. True story!
Those of you who have been reading my blog understand that I only teach what I know. I have been investing in mutual funds through my 401k and IRA for about 13 years. To achieve a fully funded retirement account on a modest income, investing in good growth stock mutual funds is essential. One could easily argue that the last 13 years have been the most volatile in generations and the worst investment period since the great depression. The dot-com and housing bubbles both burst during this time, each causing two significant recessions. Some investors have named it the “Lost Decade.” Even though the market has been a panic inducing mess for over a decade, I have averaged a 10% rate of return. Assuming a continued average 10% rate of return, I’ll be financially independent (a millionaire, if you prefer) before age 60 with a continued investment of just under $500 a month. What if my calculations and assumptions are off by half? I’ll still have more than half a million by age 60. It sure beats the $9,594 a year that Social Security has waiting for me.
The key to making this work is consistency and diversification. I continue to contribute to my retirement funds no matter what the market is doing. This is called dollar-cost-averaging. When the stock market is down, I keep buying, because that means that everything is on sale.  For diversification, I invest in different asset classes that I selected using the online calculators provided by my fund managers and a small amount of additional research. I don’t worry that I’ve done everything perfectly, because the important thing is just to get in the game. You can always fine tune the details as time goes on and your investments grow.
I share my situation not to boast, but to inspire. I believe that if I can successfully save and invest for retirement while supporting a family on a modest salary, then nearly anyone can. I’ll never understand why more people don’t make the effort. Please, don’t end up trying to survive on the pittance that Social Security will dole out because you didn’t save and invest during your working years. I wish something better for you. 
If you want to get serious about retirement savings but aren’t sure where to begin, e-mail me at and I’ll help you get the ball rolling.
As always, thanks for reading.

The information contained in these columns is for entertainment and educational purposes only. 
While the advice given is accurate and authoritative, you also should consult your own personal 
advisors regarding the particular details of your unique situation.

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