The Keys To A Solid Retirement Investment Program

You need to plan carefully when setting up a solid retirement income program. Like a good chef, you’ll need to mix the right ingredients. Such ingredients include:

• Knowledge
• Disciplined and consistent savings and investing
• A clear vision of your retirement lifestyle
• Time

Knowledge

“Ignorance may be bliss, but not when it comes to retirement planning”

Ignorance may be bliss, but not when it comes to retirement planning. One of the primary reasons many people don’t plan is that they don’t think they need to. They don’t focus on how Social Security is a diminishing factor in their overall retirement plan. They go through their working years thinking it’s all taken care of because they have a pension and Social Security. However, it is important to become knowledgeable about the ever-changing economy and the need to take matters of financing a retirement into your own hands. You need to understand the different sources of retirement income and how they work together to create a total program of income. Consider the following questions:

• How should your personal savings and investments be managed to produce the levels of return that will support the retirement lifestyle you want?
• How do you build an investment portfolio that will provide the income you’ll need? Which of the investment categories available to you are you comfortable using?
• What is your investment risk tolerance?
• Why is it risky to be too heavily invested in fixed income investments such as bonds or CDs?
• Can your investment choices outpace inflation?
• How confident do you feel about making financial decisions?

Answers to many of these questions will be found as you explore the options. The opportunities to invest for your long-term needs continue to expand. The past decade has opened up more investment opportunities then ever before with a wide variety of mutual funds, stocks, bonds, and other options to choose from. There are investment opportunities for different levels of risk and those that pay steady income. You need to learn about the various options and begin to look at the long-term picture knowing what different types of investments can do. This is an area where a financial advisor can be very beneficial in explaining the various options.

Disciplined and consistent savings and investing

“As a rule of thumb, you should save 10% to 15% of your gross annual income in savings plans and investments —Paula Dorion-Gray, Ready, Set, Retire! ”

Remember: slow but steady still wins the race. Let’s face it. You’re not going to lose weight unless you diet and exercise regularly. Fads simply don’t work. Likewise, you’re not going to have money tucked away for your retirement lifestyle unless you save and invest money on a consistent basis. By saving money, we mean simply not spending it. Americans tend to spend more than they should, saving at an average of less than 5% of their gross annual income. As a rule of thumb, you should save 10% to 15% of your gross annual income in savings plans and investments, with anywhere from 40% to 80% of those assets invested for growth, depending on your age and risk tolerance.

Making regular contributions to your investment vehicle(s) of choice is the only way in which you will succeed at putting money away for retirement. Just as 401(k) and 403(b) plans have money taken directly out of your paycheck and invested for you, you need to do the same thing for yourself. Defined-contribution plans are usually not enough. It’s up to you to “pay yourself first” and set aside x amount of dollars on a regular basis before paying anything else. This method of regularly contributing to your own retirement plan will have you using the old dollar cost averaging method of investing.

A clear vision of your retirement lifestyle

Unless you know where you are going, you’ll never know when you’ve arrived. As discussed earlier and reiterated throughout this site, it is important to have a mental picture of your retirement lifestyle—one that is both realistic and enjoyable for you. This will require discussion with your spouse because your lifestyle choices for retirement may differ, but in the end, you need to have that Norman Rockwell painting of the two of you in your retirement years etched in your mind, whether it’s moving to a new location, traveling abroad, spending time at home with hobbies and grandchildren, or starting a new career. Yes, external factors may change, and you may need to paint new brush strokes over the original plans, but you need to start working your way toward a goal, and the more planning you have in place, the easier it is to reach that goal or adjust to the changes that take place along the way.

Time

“Time is your greatest asset”

In the words of the Rolling Stones, “Time is on your side—yes, it is.” Time is your greatest asset. Your ability to create the retirement of your dreams depends more on this single factor than on anything else. If you start planning at 40, you’ll be in a far better position than if you start at 50, even if you have half the resources of a 50-year-old. Time lets you make midcourse corrections in your plan and adjust to external factors that may occur between now and the time you retire from your regular work schedule. It also lets you take advantage of one of the great mysteries of the universe: compounding. Compounding essentially means that your money is earning money.

What this means is that the first dollar you invest is the most powerful because it has the most time to experience the effects of compounding. It also means that the earlier you start, the less you need to set aside and the more you will have in the end. The difference of even just a few percentage points can amount to hundreds or thousands of dollars in total returns over the long term.