I’ve had several people ask me about retirement planning lately, so I thought I might outline a few recommendations in my blog this week.
First and foremost is that you can NEVER start too early. The power of compounding interest is phenomenal! I saw a statistic just the other day that said if someone had invested just $1 in the generic stock market (presumably an index type fund) in 1801 today that $1 would be worth $8.8 million! Incidently $1 worth of gold would be worth $14, so don’t let anyone con you into putting everything in gold… unless of course you can see a mushroom cloud off in the direction of D.C.! The main point here being that over time, a small investment can pay big dividends! Start early and be consistent!
Secondly, have a plan. Don’t just start stashing away money without having an end goal in mind. You need to decide when you think you’d like to retire and figure out how much money you will need to live on in todays dollars and then factor in inflation. Of course to do this it is very helpful to already be living on a budget. That way you’ve got a pretty good idea of how much money you need.
Once you know how much money you will need annually to live on, divide that number by 0.06. The reasoning behind that is that you should pretty easily be able to get a 6% return on your investment when its in nice secure mutual funds after retirement. You should be getting MUCH better than that prior to retirement. If you can live on 6% of your retirement fund, and you can get a 6% return on your money, that means your principle will never be touched. You’ll be living strictly off the interest. And don’t worry if you just don’t know when you plan on retiring or what kind of lifestyle you’ll be living then. This is a goal, and it can always be adjusted along the way.
Now that we have an idea of how much you need to save total, you can figure out with simple calculations how much you need to save every month between now and your projected retirement to reach that total. The stock market (using the DOW) over a 10 year period averages a 10% return on your money, so be sure and factor that into your calculation. The longer the time period, the bigger the impact the interest will have and the less out of pocket money will be required.
Okay, so now we know how much money needs to be saved, so what do we do with that money? There are lots of fancy strategies out there for investing and making money, but there are also huge risks associated with it. Do you really want to bet your future on whether or not they will work? I like a very simple and conservative solution. It’s not fancy, but it works… just like the tortoise wins the race every time I read The Tortoise and the Hare.
The main thing is to diversify. Don’t put all your eggs into one basket. Some things do better during hard times, and some things do better during boom times. One of the best ways to diversify is with mutual funds. Mutual funds are made up of a broad base of different stocks in a certain category and the fund is managed by really smart guys who live, breath, and sleep this stuff.
Also you need to select mutual funds in four different categories. You want something in Growth, Growth and Income, International, and Aggressive Growth categories. To be a little more conservative, you may want to replace the Aggressive Growth category with a Balanced Fund, but the further you are from retirement, the more important that Aggressive Growth category is. That’s where all the action happens. When its bad its bad, but when its good, its really good.
Make sure you select mutual funds that have a good long track record of performance. Funds that have been around for 10 years or more are usually the most stable and you can easily look at how well they have performed over time.
Now that you’re armed with all of this information, go out and find yourself a good Financial Advisor who believes in these same principles and is willing to explain things to you and let them help you pick some good funds. If you’d like some help with all of the calculations for retirement as well as developing a good budget, give me a call or an email and I’ll help you through it.