“The safest way to double your money is to fold it over once and put it in your pocket.” Kin Hubbard
Investing takes time. As humans our brains are more wired toward the flight-or-flight survival responses that got us to the top of the food chain. So we are more prone to panic moves in one direction or another and this is not always in our best long-term interests.
So to retire richer requires a little work on understanding who we are and what we can do to improve our sustainable retirement odds.
There are lots of things in life that we cannot control. And humans in general are easily driven to distraction. We are busy texting, emailing, surfing the web, and all other manner of techno-gadget interruptions from phone, computer and office equipment around us.
It’s no wonder that folks find it difficult to focus on long-term planning. We hear a snippet of news on the radio or watch a talking head wildly flailing his arms about one stock or another and think that this is the ticket to investing success.
For those who remember physics class and one of Newton’s great discoveries, you can just as easily apply the rules of the physical world to human financial behavior: A body at rest will tend to stay at rest; a body in motion will tend to stay in motion.
For most investors, inertia is the dominant theme that controls financial action or inaction. Confronted with conflicting or incomplete information, most people will tend to procrastinate about making a commitment to one plan or another, one action or another. Even once a course of action is adopted, we’re more likely than not to leave things on auto-pilot because of a lack of time or fear of making a wrong move.
To get us to move on anything, there has to be a lot of effort. But once a tipping point is reached, people move but not always in the direction that may be in their best interests. Is it any wonder that most people end up being tossed between the two greatest motivators of action – and investing: Greed and Fear.
So while someone cannot control the weather (unless you remember the old story line from the daytime soap General Hospital in the 1980s), the direction of a stock index or the value of a specific stock, we can all control our emotions.
Easier said than done? You bet. That’s why you need to approach investing for retirement or any financial goal with a process that helps take the emotional element out of it. And you need to develop good habits about saving, debt and investment decisions.
What Does Rich Mean To You?
So you say you want to retire rich? Sure, we all want to. But what does “rich” look like to you. There are surveys of folks who have $500,000 or $1million in investable assets describing themselves as middle class. There are those I know who live quite comfortably on under $30,000 a year and would never describe themselves as poor.
First you should get a good picture of where you expect to be and what kind of life you envision. Be clear about it. Visualize it and then go find a picture you can hang up in a prominent place to remind you of your goal every day. (That’s why I have pictures of my family on this blog reminding me of why I do everything I do).
Appeal to Your Competitive Streak
We are better motivated when we have tangible targets for either goals or competitors. Ever ride a bike or run on the road and use the guy jogging in front of you as a target? Same thing here.
So assuming you know what your retirement will look like, you’ll be able to put a number to it. Now find out how you’re doing with a personal benchmark. One way is to go to www.INGcompareme.com, a public website run by the financial giant ING which allows you to compare your financial status with others of similar age, income and assets. Or try the calculators found at the bottom of the home page for www.ClearViewWealthAdvisors.com. This might help give you the motivation you need to save more if needed.
They can save your life. And even the lives of your passengers. Just ask Captain Sully who credits his crew with good training and following a process that minimized the distractions from a highly emotional scene above the Hudson River.
The daily grind can be distracting. Often we may be unable to see the big forest because of the trees standing in our path to retirement.
So try these tips:
Mid-thirties to early 40s:
- Target a savings goal of 1.5 times your annual salary
- Enroll in a company savings plan
- Take full advantage of any 401k match that’s offered
- Automatically increase your contributions by 5% to 10% each year (example: You set aside 4% this year; then next year set aside at least 4.5%)
- If you max out what you can put aside in the company plan, consider adding a Roth IRA
- Get your emergency reserves in place in readily available, FDIC-insured bank accounts, CDs or money markets
- Invest for growth: Consider an allocation to equities equal to 128 minus your current age
- Let your money travel: More growth is occurring in other parts of the world so don’t be stingy with your foreign stock or bond allocations. Americans are woefully under-represented in overseas investing so try to look at a target of at least 20% up to 40% depending on your risk profile
Mid-Career (mid-forties to mid fifties)
- Target a savings goal of 3 times your annual salary
- Rebalance your portfolio periodically (consider at the very least doing so when you change your clocks)
- Make any “catch-up” contributions by stashing away the maximum allowed for those over age 50
- Consolidate your accounts from old IRAs, 401ks and savings to cut down on your investment costs and improve the coordination of your plan and allocation target
Nearing and In Retirement (Age 56 and beyond)
- Target savings of six times your annual salary
- Prune your stock holdings (about 40% of 401k investors had more than 80% in stocks according to Fidelity Investments)
- Shift investments for income: foreign and domestic hi-yield dividend paying stocks, some hi-yield bonds, some convertible bonds
- Map out your retirement income plan – to sustain retirement cash flow you need to have a retirement income plan in place
- Regularly review and rework the retirement income plan that incorporates any pensions, Social Security benefits and no more than 4% – 4.5% withdrawals from the investment portfolio stash accumulated
- Have a Plan B ready: Know your other options to supplement income from part-time work or consulting or tapping home equity through a reverse mortgage or receiving pensions available to qualifying Veterans.
Don’t be afraid to get a second opinion or help in crafting your plans form a qualified retirement professional. You can find a CFP(R) professional by checking out the consumer portion of the Financial Planning Association website or by calling 617-398-7494 to arrange for a complimentary review with your personal money coach, Steve Stanganelli, CFP(R).