Saving for Retirement? Here's How as published in InsideNova.com
As a financial planner in the D.C. region, most of my conversations are about my clients’ financial goals – especially the essential end game for most investors: planning for retirement. After that, we usually end up bemoaning the performance of our pro sports teams around these parts. Clearly, I can’t do much about that, but I can tell you the four main factors that contribute to a successful retirement:
3. Investment allocation
4. Investment performance
In my experience, I’ve found most people end up fixating on that last one – investment performance – chasing the latest hot holdings and fleeing frightening downturns. That’s too bad, because it’s the variable we have the least control over. Plus, getting it wrong can cause a lot of damage. Believing you can predict what’s coming next in our capital markets is like believing you can predict if your team is going to beat the point spread in the upcoming game. If it were that easy they wouldn’t have to play the game.
Fortunately, that leaves three, much more manageable “levers” to control.
Time – When will you retire? Every year you postpone retirement will have a double impact: one more year of retirement savings and once less year of retirement spending.
Savings rate – This is arguably the most important lever. If you don’t save enough, the others probably won’t bail you out. Also, the earlier you start saving, the less your monthly savings need to be.
Investment Allocation – How will you divide your investments among stocks, bonds and cash? Stock returns jump around a lot more than bonds or cash (they’re more volatile), but they also are expected to deliver more in the end. Balance your bumpy-riding stocks with some smoother-riding bonds, and you’ve got yourself a plan for the long haul. If you instead avoid stocks, that’s fine. Just be aware that the lower expected return will increase your need to commit to more time and/or a higher savings rate before you’re ready to retire.
By working these three levers, and not getting too caught up in chasing performance, you stand the best chance for scoring your desired standard of living in retirement.