Achieving your financial goals doesn't just happen by itself. It takes a plan, implementing the plan, adhering to the plan, and when necessary, adjusting the plan.
Simply put, failing to plan is planning to fail. Don't plan to fail!
- Only 40% of Americans have calculated how much they need to save for retirement.
- In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
- The average American spends roughly 20 years in retirement.
Nearly everyone will receive Social Security, but Social Security won't pay all the bills.
1. Regularly saving is critical. Once you begin an automatic payroll deduction into a retirement account, you won't miss it. I promise. For many saving in their company's 401(k), the goal is to put 10% of pretax income in his/her 401(k).
Understandably, that seems like a mighty big chunk of cash, at least in the beginning. So, starting with 4%, raising it to 7% after three months, and then bumping it up to 10% three months later can be a better course of action. Taking baby steps can be much easier than attempting to summit the peak in one leap.
I can't overly emphasize the importance of capturing your entire company's match. It's free money. Don't leave free cash with your employer.
2. Start as early as you can. For many young people preparing to graduate from college, retirement is another planet, if not another universe.
But we all know the magic of compounding. The savings we socked away when we were younger has paid big dividends.
Here's an instance, a person in his early 50s is semi-retired. Yet, he sometimes laments that he started saving when he was 26 and not 22. For many, he's ahead of the game, even if he didn't start right out of college. Still, his decision to start early and max out his contributions put him on the path to financial freedom.
Let's illustrate with more specific examples. Tom is 28 years old and plans to save $500/month or $6,000 per year until he retires at 65. With an annual return of 7% (assuming annual compounding), Tom will have amassed $962,024 when he turns 65 years old. Total contributions: $222,000.
Kate decides to put away the same amount. Kate is 22 years old and will save for 43 years. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.
3. What plan best fits my need? That question will depend on your personal circumstances. For many, your company's 401(k) is tailor-made to save for retirement. This is especially true if your firm has a matching contribution.
Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and expected rate in retirement.
A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you won't capture a tax deduction on contributions.
Current tax law does not require minimum distributions, which can be a big advantage as you travel through retirement.
A Roth may also be advantageous if you do not believe your marginal tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.
4. How much will I need at retirement? Again, much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs.
An old rule of thumb that you'll need 70% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or, do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?
One approach some folks consider is the 4% rule. It's relatively simple. Withdraw 4% of your total investments in the first year and adjust each year for inflation. Keep in mind, however, that this is a rigid rule. It assumes a 30-year time horizon and minimizes the risk of running out of money.
Depending on Social Security and any pension you may have, a more generous "allowance" from your savings may be in order.
5. How do I find the right mix of investments? What worked when you were 30 years old probably isn't appropriate today.
While our advice will vary from investor to investor, we can offer broad guidelines. Furthermore, retirement may be broken into different stages, which may require adjustments to the plan.
Some investors decide its best to take a very conservative approach. You know, "I can't lose what I've accumulated because I don't have time to recoup losses." But that has its drawbacks. For starters, you don't want to outlast your money. Equities, which have historically offered more robust returns, may still be an important part of an investment strategy.
Others may be swept up by what might be called "the current of the day." Stocks have surged, which may encourage investors to load up on risk. However, a comprehensive financial plan helps remove the emotional component that can creep into decisions.
6. I've saved all my life. How do I begin withdrawing from my savings? It's a complete shift in the paradigm. No longer are you socking away a percentage of each paycheck. Instead, you are living off your savings.
First, if you are required to take a minimum distribution from a tax deferred account, take it.
Next, consider interest, dividends and capital gains distributions from taxable investments, which continues to tax shelter assets in retirement accounts.
If additional funds are needed, consider withdrawals from your IRA or other tax-deferred accounts. If you are in high tax bracket, you may consider pulling from your Roth. Those in a lower tax bracket could leave the Roth alone and take funds from their traditional IRA.
Bottom line
Let me reiterate that many of these principles are simply guidelines. One size does not fit all. Plans we suggest are tailored to one's specific needs and goals. If you have any questions, we would be happy share our recommendations. We're simply a phone call or email away!
A September pothole
The S&P 500 Index surged an impressive 60% from the March 23 bottom to the most recent high in early September (St. Louis Fed S&P 500 data). But stocks hit a roadblock in September.
Table 1: Key Index Returns
|
|
MTD%
|
YTD%
|
|
Dow Jones Industrial Average
|
-2.3
|
-2.7
|
|
Nasdaq Composite
|
-5.2
|
24.5
|
|
S&P 500 Index
|
-3.9
|
4.1
|
|
Russell 2000 Index
|
-3.5
|
-9.6
|
|
MSCI World ex-USA*
|
-3.1
|
-9.0
|
|
MSCI Emerging Markets*
|
-1.8
|
-2.9
|
|
Bloomberg Barclays US
Aggregate Bond TR
|
-0.1
|
6.8
|
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD return: Aug 31, 2020-Sep 30, 2020
YTD return: Dec 31, 2019-Sep 30, 2020
Given the incredible run, a pullback was inevitable. But as I've counseled before, the timing, magnitude and duration of a pullback is impossible to predict. Your success is based, at least in part, on time in the market, not timing the market.
There were several factors that played a role in last month's pullback.
- Any uncertainty creates a good excuse to take profits after a big run-up in price.
- Daily Covid cases in the U.S. ticked higher last month, per Johns Hopkins data.
- While it won't be cheap, Congress has yet to find common ground on a new fiscal stimulus bill. The economic bounce in Q3 has been much stronger than most initially thought possible. But investors and many analysts believe more support is needed.
- Finally, the election is front and center. We may not have a winner on election night. Worse, a disputed election would add to investor angst.
2020 election
President Trump and the first lady tested positive for Covid, injecting a new round of uncertainty into an already tumultuous election. How this may play out is unknown, as we're in uncharted waters.
Much will depend on the path of the virus, but heightened uncertainty does put a damper on investor sentiment.
Amid acrimony on both sides, let me first say that my role is to be your financial advisor. I have worked hard to earn your trust. I am not a political analyst. I am here to guide you as you journey toward your financial goals.
Therefore, I will carefully and cautiously review the current contest through a very narrow prism-through the eyes of a dispassionate investor focused on the economic fundamentals and how that might impact equities.
Let's consider these facts.
- Stocks have performed well under both parties.
- The conventional wisdom isn't always right. Recall that stocks weren't supposed to do well with a Trump win, as investors wanted the continuity a Hillary Clinton presidency would offer.
- Compromise and gridlock may engulf a dominant party, as a one-sided win tends to expose party divisions. Remember how Republicans would quickly repeal Obamacare?
Some investors fret that a Biden win would lead to higher corporate taxes and heap more regulations on businesses. But might we see more fiscal stimulus and an easing in trade tensions, which could support shares?
Longer term, stocks march to the beat of the economy, Fed policy and corporate profits.
A growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. In my opinion, that's not about to change.
I trust you've found this review to be helpful and educational.
We have addressed various issues with you, but I have an open-door policy. If you have questions or concerns, let's have a conversation. That's what I'm here for.
