Retirement strategies you can’t
afford to ignore
Years have
passed since Benjamin Franklin wisely counselled people that if they wanted to
be wealthy, they had to think as much about saving as about getting. Since
then, other retirement strategies have been devised, ridden the wave of trendiness,
and then been abandoned to changing economic and cultural circumstances.
But still
there is a truth to starting every retirement strategy with a solid savings
plan. In fact, if you want the ultimate success strategy to having as much
money as you need when you retire, from the very first moment you receive a
paycheck in your 20s, you would put 15 percent of it away in savings.
David
Chilton, the Canadian storyteller who 20 years ago took the investment world by
storm with his bestselling The Wealthy
Barber built around the benefits of saving and achieving compound interest,
three years ago took up the cause again with his sequel, The Wealthy Barber Returns.
He explains
how saving and living within your means as a retirement strategy is a mindset
that if cultivated, will prepare you for many golden years ahead. It’s not that
he doesn’t think you can try to do some of the things your friends do, or make
the occasional renovation on your house, but if you neglect the rule that
“spending begets spending,” then you will be doomed to a life of playing slave
to the cruel master of debt.
Chilton
reminds us that the four most expensive words in the English language are
“while you're at it” and the four most expensive letters are HGTV (Home and
Garden Television) that spur people to spend more than they have in their
budget.
There’s
truth to the validity of saving as a key foundation of any retirement strategy.
Consider if from the age of 25 onward, you put away $3,000. You could secure it
in a tax-deferred retirement account.
If you did
that every year for 10 years, and then, at 35 and perhaps with a growing family
that made it impossible to save for a few years, you had to stop, do you
realize that the $30,000 you had saved in that one decade would turn into
$472,000 when you wanted to retire at age 65, thanks to be benefits of compound
interest. These figures were calculated assuming there would be an eight
percent annual return, which is reasonable to assume.
What do
these tax-deferred savings vehicles look like in the United States?
The two most
common ones are Individual Retirement Accounts (IRAs) and 401 (k)s. For many
employed individuals with good benefits, the latter is a great vehicle because
often the employer will match whatever you put into it. Your $3,000 a year, for
example, can become $6,000 and look then how fast that adds up.
By tax
deferred, this account means that you do not have to pay taxes on the money you
invest or the interest you are earning on it until you start withdrawing this
money when you retire. At that point your income is substantially reduced, so
you will end up paying a lot less in taxes.
But if tax
deferred savings accounts build the foundation of your financial retirement home,
where do the walls come from?
You need
other tools to build from your foundation and those primary tools are stocks
and bonds. Let’s say you keep another savings account just for investment
purposes. You raise $100,000 over another decade and decide to invest it in
those building tools.
The rule
then is that the younger you are, the more of that investment you should put
into stocks, and correspondingly, the older you are, the more you should invest
into bonds. That is because stocks are more volatile and they will go through
periods of ups and downs and you must have time to ride them out before you
have to cash them in. Bonds are far less volatile, so they are considered a
safer investment.
But you pay
a price for safety. In the years between 1926 and 2009, for example, the
average rate of return on stocks was 9.8 percent, but the average rate of
return on bonds was 5.4 percent.
As a general
rule, financial advisers will counsel their clients to decrease the stock
percentage of their portfolio as they get older. For example, it might be 50
percent when they are 60, 40 percent in their 30s and only 30 percent in their
80s, or even less if the person is extremely risk-adverse.
What other
tools will build your retirement security?
You may have
private pension plans from your work place, and social security payments as
well. You can also buy into other investment mixtures, including the popular
mutual funds. These are open-ended funds operated by investment firms who take
money from their shareholders and invest it into a group of assets. Their
popularity as a retirement financial plan strategy remains high, although they
too can be subject to the volatility of the financial market.
The number
one question people have about their retirement strategy, figuratively the roof
of their financial retirement home, is “how much money do I need?” The
traditional answer to that question used to be 60 to 70 per cent of your
working stage income.That is
proving not to be the case anymore as baby boomers begin to retire in record
numbers. With significant assets and energy, instead of slowing down the pace
of their lives, they want to travel, buy their dream homes, renovate their
current homes and live life to the fullest.
Many baby
boomers will need closer to 90 to 100 percent of their current income. If they
have not been prudent with their savings over the years, they will have to
achieve that by working longer, taking part time jobs to augment their
retirement income, or disposing of some of their hard assets like homes and
cottages.
This
challenge of having “enough” in retirement will continue to grow in importance.
Consider that according to the latest figures from the US Census Bureau, there
are currently just over 40 million Americans aged 65 and older and they comprise
13 percent of the population. By 2030, people over 65 will make up 20 percent of
the population.
