Take Charge Of Your Retirement In 3 Easy Steps
I run across a lot of statistics in my job. It comes with the territory. But I saw one a few days ago that truly shocked me. Here it goes:
Seven in 10 Americans have less than $1,000 in savings.
That’s a sobering thought. Millions of workers haven’t put away the first dime from their paychecks in either an IRA or 401(K). And the majority of the population only has a few hundred dollars in the bank. That’s barely enough to cover an unexpected expense like a fender bender or broken air conditioner. In fact, most respondents said they would be forced to use a credit card for such an event.
Nobody wants an unexpected bill to cause real financial hardship. That’s why most financial gurus recommend keeping an emergency fund equal to at least three months’ salary. But many workers have barely managed to save three days’ salary, let alone three months.
So how will these people fund retirement expenses when the paychecks stop coming in? Let’s just say that luxurious vacations to Tahiti are probably off the table.
Maybe that’s why some people’s retirement planning consists of lottery tickets… and prayer. But fear not. Even if you’re a little behind (and statistically speaking, many of you are), a comfortable retirement is still in reach. It’s never too late to start building a stockpile.
As Easy As 1-2-3
I broke into this business as a financial advisor. In a job like that, you witness firsthand the struggles many families face when trying to start a retirement fund. I met with people from all walks of life, from young hairdressers to powerful attorneys. And regardless of background, most are far more concerned with meeting today’s needs than worrying about a distant retirement 10 or 20 or 30 years in the future.
Besides, the cost of living is going up faster than our paychecks. In real terms (adjusted for inflation) wages have been virtually stagnant for the past two decades. So after the car and house payments, utilities, grocery bills and other expenses, there might not be much leftover disposable income to send to your broker.
Throughout the 1950s and 1960s, the average American saved about 10% to 12% of their annual income (a percentage most advisers still recommend today). But that rate began to slide in the 1980s and 1990s. For a brief period following the 2009 recession, it actually dipped to a negative 2.1%.
That means for every dollar of income, we spent $1.02. Needless to say, you can’t build a nest egg that way. All you can do is dig yourself deeper into debt. The national savings rate has improved since then, to around 7% currently. But still not where it needs to be.
In theory, workers approaching retirement age should be much closer to their goals, considering they’ve had decades to save and invest. But many aren’t even in shouting distance. According to the Economic Policy Institute, the median household savings of wage earners between 50 and 55 is just $8,000. Those between the ages of 56 and 61 are doing a little better at $17,000.
Still, that won’t go too far.
What about Social Security? Well, as I explained in this article, I personally don’t count on seeing a penny of all the money that has been confiscated from my paycheck and put into the system. The demographics are just too daunting.
My intent isn’t to scare anyone. Any drastic overhauls are more likely to affect workers in their 30s and 40s than those who are closer to retirement age. Still, even in the best-case scenario, this popular safety net was never meant to be a primary source of retirement income — only a supplement.
3 Steps To Take Charge Of Your Retirement
All of this boils down to one thing: you can’t count on anyone but yourself to achieve a comfortable retirement.
I firmly believe blue-chip, dividend-paying stocks and other high-quality interest-bearing securities remain the best way to achieve that goal. If you’re looking to get started (or simply need to get back on track) I would start with these three simple steps.
1. Determine Your Needs
Some people have modest retirement agendas. They might be able to get by on 50% to 60% of their pre-retirement income levels. Others plan to live large… golfing, traveling, you name it. In that case, it’s better to plan on needing perhaps 70% to 80% of your former income, or possibly more.
There are other variables that need to be considered, such as anticipated inflation rates (the enemy of anyone living on a fixed income). $50,000 in annual withdrawals might sound ample today. But you can bet it won’t buy nearly as much 20 years from now.
Just to give you an idea, picture a couple in their mid-40s who want to retire at age 60 with $60,000 in annual retirement income lasting until age 78. Ignoring social security (we’ll count that as a bonus) and assuming a 4% yield in retirement, they will need to accumulate a starting balance of $990,741 by day one.
It’s not an exact science, and there is no accounting for the unknown. But at least you’ll be making an educated guess as to how much you’ll need to accommodate your expected retirement lifestyle.
2. Start Saving NOW!
Once you know how much cash you’ll need before you can stop punching the clock, the next step is to make a ballpark projection of how much your current portfolio will be worth at that point in time. Be careful about assuming lofty double-digit rates of return.
Personally, I wouldn’t count on the market delivering more than 8% annually over the long-haul. If you actually earn 9% or 10%, great, you’re ahead of the game. But it’s better to aim lower than to come up short. If you’ve been a diligent saver until now and continue to save aggressively, then your projected account value might outpace your projected needs.
But for most people, there will be a sizeable gap.
3. Rebalance Annually
You might not realize it, but the biggest determinant of your long-term returns isn’t the individual performance of the stocks, bonds, and mutual funds you select. It isn’t market timing either.
A groundbreaking study involving 94 mutual funds over a 10-year period found that 90% of an investor’s ups and downs are explained by the overall mix and proportion of various asset classes within their portfolio. So the best use of your time is spent on asset allocation… deciding what percentage to invest in large-cap stocks versus small-caps, growth versus value, domestic versus foreign, equity versus fixed income, cash, gold, real estate.
Your asset allocation strategy should be customized for your unique goals and objectives. As such, providing hand-tailored profiles to thousands of different readers here just isn’t practical. But a moderate-risk allocation for investors in their 50s might look something like this:
- 30% Investment Grade Bonds
- 25% Large-Cap Blend
- 10% High-Yield Bonds
- 10% Floating Rate/TIPS/Inflation Protected Bonds
- 10% Global Stocks
- 5% Real Estate/Commodities
- 5% Small/Mid-Cap Value
Whatever you decide, it’s important to re-evaluate at least on an annual basis. This is a good opportunity to cut loose any laggards that aren’t performing to your expectations, and also re-align allocations that got out of whack over the previous year.
In most cases, you’ll also want to dial back your exposure to riskier asset classes as you approach retirement. At that point, you are less concerned with capital appreciation and more interested in capital preservation.
Stick To The Plan
Taking the time to come up with a game-plan is one thing. Having the diligence to stick with it is another thing entirely. But it can mean the difference between a lean retirement and a lavish one. Don’t feel overwhelmed, though; any plan is better than doing nothing. If nothing else, dollar-cost averaging (buying fewer shares when prices are high and more when prices are low) into a solid mutual fund each month can take you a long way.
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