Retirement Funding & Your Future Financial Success
It is important that you fund your retirement in a manner
that is in your best interest. Even if
your discretionary income is low—or your current expenses are high—you must put
together a plan that will take you to where you need—or desire to be—in your
No one knows what the financial markets will do in the
future in the short, intermediate—or long term, however there are things that
“you” can “control” to increase your odds of success in the future.
The power to control
the following—as it relates to your investing—lies within you—as "far" as you can see:
It is also your
responsibility to know your portfolio’s rate of return—in comparison to appropriate
market indexes—over the past year—3 years—5 years etcetera!
You can see how your portfolio is doing relative to appropriate benchmarks by visiting the appropriate sites.
If you have a mixture of large and small cap mutual
funds—you can compare your overall return to that of the Wilshire 5000 Index or
the Vanguard Total Stock Market Index Fund—if they are United States Mutual
Funds. If you have a mixture of Domestic
and International Funds—you can compare your return with the Vanguard Total
Stock Index Fund. For Bonds—the Vanguard
Total Bond Index Fund will work as an appropriate benchmark.
By doing the comparison on a consistent (at least yearly)
basis you can view the total return of both the index fund—and the fund you are
comparing it with. Be aware that the
comparison should be with an “index fund” (considers dividends and expenses—or
total return—not just change in price) as opposed to and “index” (only
considers change in price)—that way you can make the comparison on investment
sites such as Morningstar—and others—that use total return as the benchmark.
In today’s financial environment many companies and
brokerages have appropriate benchmark tools that you can use free of charge—or
for a stated fee—that will show your performance relative to the overall
market. You can go to mint.com or morningstar.com
and aggregate your portfolio’s—to track your overall return more effectively.
By making an
appropriate comparison you will know if it is in your best interest to hold—or
sell. If a fund that you own have returns that have
been less than appropriate—on a consistent basis (several percentage
points behind those in their class—for several years)—you may want to sell.
If you have funds that are being managed—consider the cost of that management—as many managed funds lag the return of appropriate benchmarks. In many cases you can do just as effective a job—or better at selecting appropriate funds for your portfolio—as the professionals.
if you plan on investing in emerging international markets—and small and mid-size
stock funds—a managed fund should be given serious consideration.
How Much Should I
Contribute to my Retirement Account?
The amount that you should contribute will depend on where
you are in your “life stage”—your current earnings—and your future retirement
goals—at a minimum. If you are now
working—are you contributing to your retirement plan (401k, pension, IRA
whether ROTH or Traditional) at the appropriate level?
Will you be able to self-fund your long-term care (LTC) needs—or will you need insurance?
What is the
appropriate level—you ask?
That depends on your future goals—your age—and who you ask!
If your employer offers a match in your 401k or 403b plan—be sure to contribute up to the match—if at all possible!
However, general consensus in the financial industry is that
you should receive at least 85% of your pre-retirement (final year of your
salary while you are working) income to live at a comfortable level—however you
must also consider compensating factors (will my house be paid off, will my
spouse continue to work, will I be totally debt free, am I factoring in rising
health costs and rising long-term-care insurance costs etcetera).
That 85% will consist of your pension, 401k, IRA—Social
Security and any other streams of income that you will receive during your
If you are now age 40 and you don’t have 2 times your annual salary saved—you are behind schedule in most cases—if you are age 50 and you don’t have 4 times your salary saved—you too are behind schedule.
If you are age 60 and you don’t have at least 8 times your salary saved—you too are well behind schedule.
Keep in mind that the
above benchmarks are general in nature—as your “compensating factors” and your
unique “personal situation” must also be factored in.
So, depending on where you are at—you may need to save a higher percentage of your income to reach the level of income that is needed during your retirement years.
have not done so already, it is imperative that you establish a debt payoff—or debt
pay-down plan, you properly establish an emergency fund—and you save monthly at
the appropriate level that is needed.
If you have payed off or payed down your debt, and you have properly established an emergency fund—you are now in position (if you have not been doing so already) to save monthly so that you can reach your retirement goals.
If you are age 40 and earn $50,000 annually and you have not started saving—you will need to be more aggressive by saving 15% ($7,500 or more—annually) or more of your income.
If however, you have $100,000 or more saved (in your retirement accounts)—you could possibly save 10% ($5,000) for the next 20 years and reach your retirement needs.
If you reach age 70—and realize that you have your health and long-term care insurance properly in place—and you have $600,000 in your retirement account—you could take out $30,000 annually for twenty years—and still outlive your retirement savings.
If you also received $1,500 per month in social security income—you would easily replace 85% of your income.
If you were totally debt-free—you can easily see that you would enjoy life on your terms!
You would be in position to assist your grand-kids with their educational needs—take the vacations of your dreams—purchase that boat or vacation home that you always wanted—or pursue many other goals and objectives that you may have in mind.
You must ensure that
the amount of your savings will outlast your life—the more you save—the better
the odds are that you will outlive your savings!
If you have not yet started and/or are unable to contribute 15%
or more, despite having reduced your debt and establishing an emergency
fund—you can still put a plan in place that will get you on target by increasing
your annual savings rate by 1-2% a year until you reach the 15% (or more)
Be sure to consider
automatic withdrawals from your checking account to fund your retirement
accounts—whether it be a 401k or 403b with your employer—or self-direct IRA
accounts (2013 maximum contribution $5,500—or $6,500 if age 50 or
higher)—whether ROTH or Traditional. By
doing so—you will enhance your vision and focus—and increase the odds of
outliving your retirement funds.
How Should I
Apportion My Investments
How to apportion—or divide your investments up among various
classes of investments (cash, stocks, bonds, mutual funds, real estate
etcetera) depends on your time horizon, risk-tolerance and your overall
goals. A stock fund will help grow your
investments and guard against inflation.
Your asset allocation
will depend on a formula you set—based on your risk—or you can select target
date funds that gradually move you into conservative investments as you age.
If your formula is out of balance you will have to
re-allocate—or rebalance by selling assets of one class and purchasing assets
in another class—or you might choose to keep things as they are—and direct your
future investments in another class.
Your goal—when reallocating is to buy low—and sell high—thereby
increasing your retirement balance—and living conditions.
Most of those who save for retirement look at their finances
at least annually—and may rebalance annually or every two or three
years—depending on how far their investments differ—from the formula that they had
selected. You can get a real handle on
where you are now by going to morningstar.com and selecting the portfolio
How Do I Assess the
In the financial industry—the standard way of assessing your fees are to look at the “expense ratio” that is often stated in the financial literature. It is critical that you know this number as it can cost you “thousands” in the future.
While many consumers do comparison shopping
on consumer goods that often save them a few dollars a month—many rarely
consider the impact of expenses on their retirement earnings. It is critical that you do not make that
A range of .1 to .90 is the average range—but it really depends on your asset class—so the rate varies—be sure to do your research on the front end!
Again, we return to the subject of “total return”—as your total return will be negatively affected by high “annual expense ratios.”
In cases where your managed funds returns are significantly higher than other funds in the same class—paying higher fees may be advantageous to you.
know your fees—and your returns—relative the asset class that you have
In addition, you must
consider the tax impact on your portfolio—especially if you have high income or
a high net worth. Dividends inside of
an IRA are normally tax-free—whereas one in a brokerage account outside of a
retirement account would normally be taxable.
Also as you near your retirement age you might want to
consider combining accounts (be aware of scammers) so that you can more effectively
manage them. Many companies offer
credits—or cash bonuses if you move a certain amount of your funds to their
By doing so you will
reduce paperwork, calculate your withdrawals based on your life expectancy
easier, and more accurately calculate your RMD (Required Minimum Distribution)
once you turn age 70.5!
You will also be able to slowly (3-4 years before
retirement) draw out funds that are needed for your living expenses and put
them in a CD or other safe account that provides more liquidity and safety.
It is important that
you have the patience that is needed to attain your future goals—and you must
realize it is normally a long-term process.
There will be ups and downs and times of uncertainty—however you must continue to invest in a consistent manner so that you can attain the goals that you desire—knowing that uncertainty is a part of the equation—but doing what “you can” on your end to reduce that uncertainty as best you can!
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