Ready For Retirement?

In this ever more sophisticated age of investing, it becomes a great concern for financial planners such as myself that most folks are still not saving enough for retirement, either due to a failure to realistically assess future costs or by spending too much without saving – which is a hallmark of the baby-boom generation.

Many Americans’ poor savings habits are actually a crisis, because many folks don’t think a shortage of retirement funds will affect them unless someone close to them has an age-related or medical condition that forces the family into a financial quandary. The truth is, many folks in retirement can spend more annually on medical prescriptions than they earn from their pensions, social security, and investments.

A recent survey found that seven out of ten Americans are more concerned with short- and mid-term financial spending, placing long-term (retirement) savings a distant third place.
The survey further found that about two-thirds of people who unexpectedly retired due to a corporate downsizing or a medical condition indicated they weren’t financially prepared. 60% (of those still working) say they are behind schedule in saving, and the consensus of the survey respondents said that they had a consistent lack of progress toward retirement security since the year 2000. This consensus was the same regardless of age, income, or ethnic background. 70% of those surveyed expect to work at least part time for the first 10 years of retirement in order to supplement income. Plus, over half of those surveyed expressed an extreme lack of understanding of how to choose financial products to meet their long-term savings needs.

A Comprehensive Approach
In order to address these shortcomings, it is necessary to get a handle on all of your potential areas for funding your long-term savings plan – including employer plans, IRAs social security, long-term care and disability insurance, and even annuities.
By reviewing all of these available avenues, it becomes apparent that the “vehicles” are available, and the question then becomes how to fund the savings plan.

Parkinson’s Law
Welcome to Parkinson’s Law, specifically the Third Principle. For those of you that are not familiar with this principle, the Third Principle of Parkinson’s Law states that expenses always rise to meet available income, and then some. You may also recognize this statement: “It’s always possible to live outside your means”.

The good news is that it can work in reverse, as well.

So – when you voluntarily reduce your “available resources” or expendable income by diverting it into savings, it may be a little awkward and painful at first, but you’ll quickly figure out how to bring your day-to-day expenses into equilibrium. As you accomplish this, you can gradually build up the amount that you divert in order to start accelerating the savings rate.

Where Should I Put This?
Your next concern should be what “vehicle” to place your savings into. As we’ve discussed previously on these pages, the following order makes sense for most folks:

· 401(k) up to your employer’s match (or other deferred option)
· Roth IRA
· Finish maxing out the 401(k) or other deferred plan
· Your choice – no-load annuities, low-income/high growth stock funds, and/or various forms of ordinary life insurance (no load/low expenses in all cases)

Allocation??
The next question is how to allocate your investments. A very general way to look at this is to consider the primary types of investments, stocks and bonds, and think about the best way to split your investment across these categories.

As you may already be aware, stocks are the more risky of the two, but in general stocks provide a possibility of greater returns over the long run. On the other hand, bonds are generally less-risky, but the yield from bonds, while steady, lags that which can be found in the stock market.

For a younger investor, with 30 or more years in their goal horizon, a portfolio consisting largely of stocks (90% to 100%) works very well. Typically, it makes the most sense to maintain a fairly high equity or stock position, gradually reducing, until about five years from retirement, at which point the transition begins over the final years to get to their ideal ratio for retirement.

As time goes on, you’ll likely want to introduce more stability (and therefore less risk) into the mix, eventually moving to your retirement mix, which will likely be somewhere in the 50/50 range.

It is necessary for most investors, even in retirement, to maintain exposure to the stock market, in order to be able to keep up with inflation. Bonds on their own won’t normally provide a hedge against inflation, so a component of stocks is necessary in nearly all cases.

That’s All There Is To It!
Hopefully this “crash course” in retirement planning has given you some ideas and encouragement as you develop your strategy to save toward your retirement goal.