Life is the journey, not the destination. Is your destination a comfortable, independent retirement? A dream home? Buy an RV and travel the country collecting idiotic tee-shirts? For any dream that takes money to realize, the choices you make during your journey will make all the difference in reaching your destination. Or will you run out of fuel before you get there?
A wrong turn, uncorrected, in your journey to a safe retirement could have disastrous affects years down the road that could make the difference between financial independence and a delayed retirement and reliance on a social security system that grows more unsuitable with every passing year.
Speaking from the generation that will not likely see penny one from the national ponzi scheme you don’t want to be caught putting all you eggs in that basket.
When I first got into the business, I knew a lady who cashed in her divorce settlement, a probably well-managed portfolio at Morgan Stanley, and bought all AOL/Time Warner stock. She then proceeded to taunt me about how well her stock was doing. Then the taunting stopped. She sold her house a year later and moved in with her divorced daughter.
If you take the wrong connection on your journey to a beautiful house in Antigua, you could wind up in Haiti, with your divorcee of a daughter, which isn’t the same thing at all.
To wit, here are five checkpoints to follow with your retirement portfolio:
One: You Are Here. The first crucial step in any journey is to determine your starting point. Take an inventory of all your assets, savings and investments. It’s important not only to assess the market value of your assets, but to determine the potential to provide retirement income. Assets might include: pensions, 401(k) plans, IRA’s, or a regular investment or savings account earmarked for retirement.
Don’t stop there inflation and future taxes need to be considered as well. When investing for a far-off (or not so far off) date, it is crucial that your retirement income out pace both inflation and taxes. Never forget that the government will eat your lunch if you let them.
Two: Where Are You Going? Contributing 10% of your income is a great idea for any retirement plan, and not enough people do it. However, a “fire and forget it” plan fails to consider the specifics of a well maintained retirement goal. Specific goals and milestones are crucial to avoid unwanted surprises in your retirement budget.
For example, while child care expenses will likely go way, but medical expenses will increase. You may finally pay off that mortgage, but will you be traveling to a second home? Expenses like cars probably won’t go away even if you put the mini-van out to pasture in favor of a sports car.
Three: If You Aren’t Where You Need To Be, How Can I Catch Up? If you aren’t fresh out of college, and have never had a retirement plan, this is paramount. But beware, don’t fall into the trap of throwing your hands in the air and saying, “it’s too late for me.” It’s never to late to correct a wrong turn.
People are generally shocked, once they quit spending all their money trying to be the coolest guy on the block, how fast you can make up for lost ground. If you neighbor is rubbing his new car in your face, adjust your pants and say something vague like, “Wish I could, I’m throwing money at a new venture in commodities futures.” By commodities futures we mean steak for dinner in 2021.
Four: How Are You Going To Allocate Your Resources? As we’ve said, your retirement portfolio is not a “fire and forget it” investment. You need to check road signs and detours as you go. The investment landscape changes daily and different investments grow at different rates. An 80/20 split in your investments can quickly become 95/5 split over just a few years. It is important to re-balance your portfolio every year so that when your retirement comes around you know exactly where you stand.
Not only does your portfolio need to be tended to keep it in balance, the ideal balance changes as your goals, current income and age change.
If all this sounds complicated, it is. However, there are target-date mutual funds available: these funds re-balance themselves automatically to become more conservative the closer you get to retirement. You don’t want to take any volatile hits to your nest-egg when you don’t have time to make up the loss. Plenty of people took a hit when the tech bubble burst, but if you’ve got 30 years between your last statement and retirement, a hit like that can be absorbed.
Five: Get a Guide: Any journey is a matter putting on foot in front of another. In a world of nearly limitless investment options, the utility of which changes with the seasons, a guide to make sure that every step you take in brings you closer, not further, from your goal.
Now that we’ve provided a road map (free of charge, I might add) here are some potholes for which to be on the lookout.
You Aren’t Selfish Enough. No matter how nice it seems, don’t put college saving ahead of retirement. The simple fact is that there is no such thing as a retirement loan. Money for college tuitions and fees are readily available.
If borrowing for college is out of the question, remember that the army is full of college students, but after 65 it’s hard to join. The government doesn’t issue Osteo-cal for paratroopers.
You’re Using the Wrong Map. Not updating your retirement plans as your beneficiaries change is a danger. Your investment portfolio should reflect not only where you are heading, but where you are. Ancient history is just that.
Paying Taxes You (Legally) Don’t Need To. Not using a tax advantaged savings plan. If the government gives a break on your taxes, it’s best to use it. Please note that Atlas Spinning does not advocate avoiding your taxes. Atlas Spinning should also add that said decision in not made on moral grounds, but legal ones.
You Are Spineless. Withdrawing money from a retirement plan. Your money can’t grow if it isn’t earning interest. LEAVE IT ALONE!