5 Important Tips To Save For Retirement
The recession and the sluggish economy that followed have been blamed for causing untold numbers of 60-somethings to postpone their retirement and continue working. Many would-be retirees blame themselves for not having enough money to retire. Many look back on their savings habits and realize they made a series of mistakes that ended up dramatically shrinking their retirement nest eggs.
And now in hindsight retiree wannabes are sharing their experiences in the hopes of educating others. Here are five tips from retirees and financial advisers that we all would be wise to heed.
Start Saving Early
This is a big regret of older investors, many of whom waited until their 30s or even 40s before they started saving for retirement. Let’s consider two fictitious savers who represent lots of people. Mary started saving $1,000 a year starting when she was 22 years old. She enjoyed an annual rate of return of 8 percent – the historic rate of return for the stock market. After saving for 45 years, Mary decided to retire at 67 and ended up with $287,522. John also saved $1,000 a year, with the same rate of return, but he didn’t start saving until he was 42. After 25 years of saving, John also decided to retire at 67, but his nest egg was only $65,642. If those numbers don’t make you want to start saving today, maybe nothing will.
The other big saving-related regret that retirees often mention is that they should have – and could have -- saved a lot more over the years, but for whatever reason, they didn’t. Let’s look at Mary again and at Tom, another saver. Remember that Mary put away $1,000 a year for 45 years and ended up with a nice little nest egg of $287,522. Tom also started saving at 22, enjoyed the same historic rate of return and also decided to retire 45 years later, at age 67. But Tom chose to invest $5,000 a year, not $1,000. He ended up with $1,437,610. Enough said.
Don’t Underestimate Your Future Expenses
Surveys that question retirees about their savings usually conclude that about a third of them say their expenses are higher than they budgeted, and only one out of 10 says his/her expenses are lower than projected. Many people assumed they would eat out and drive less frequently as retirees and spend less on travel and household expenses, said Pat Black, a financial adviser from Texas. You can get a better handle on your future expenses by making a complete list of your current expenses, crossing out those that will end when you stop working and adding those that you’ll have during retirement that you don’t have now. Figure in the inflation rate and try to live on that budget for at least a few months before you retire.
Don’t Invest Too Conservatively
There is a time to invest conservatively, and it’s not when you have 20, 30 or 40 years left before you retire. A recent Consumer Reports survey found that conservative investors ended up with only 77 percent of what aggressive investors earned, and moderate risk takers made 91 percent of what aggressive investors made. Financial advisers usually recommend that investors take more risks when they’re young, and then as they get closer to retirement age, weigh down their portfolios with less volatile investments, such as bonds and certificates of deposit. Investors with, say, $100,000 to invest during a five-year period can put it in a five-year jumbo CD, which pays about 1.5 percent and end up with $106,540. But if they put that money in the stock market for five years and receive an 8-percent historic rate of return, they’ll end up with $138,949. That difference -- $32,409 – is enough for many people to live on for a year.
Financial advisers preach diversification, and here’s another reason why: In the Consumer Reports survey, retirees who invested in only one, two or three financial products ended up with only 46 percent of what those with seven or more types of investments earned. This held true whether savers were poor, middle class or wealthy. They did better the more they diversified. If you have your money in only a few types of investments, consider talking with a financial adviser, most of whom will meet with you for free. If you decide to work with a financial adviser – some investments can be made only with the help of a professional – you may want to hire one on a fee-only basis. (To learn more about how to select a financial adviser, see A Helpful Guide For How To Choose A Financial Adviser.)
The bottom line is that it is never too early to start saving for retirement. Get started now and save as much as you can on a regular basis. You’ll be handsomely rewarded when it’s time to retire.