DON'T BE TOO CONSERVATIVE IN YOUR RETIREMENT PLANNING
I received an interesting question from a reader that seems to be cropping up lately. He says he is 58 years old, and wonders if he should be more conservative about investing in his 401(k) as he moves toward retirement.
Traditionally, advice has been that as you get older, you should get more conservative because in a market downturn, you're not going to have the time to recover that you would if you were 25 or 30 years old. While in general that may still be true, I think the time-lines are broadening considerably, because people are living longer and retiring earlier.
It used to be that often people worked until they dropped. If that's your intention, you don't need much of a retirement plan. It also used to be that people would work until age 65, retire, live a couple of years, and at 68 or 69, tip over; and in that case as well, a retirement plan may not be necessary. All of that is changing now. People are retiring at 62, 59 ½, and yes, even 55, and they're living a whole lot longer! 75, 80, 90 years of age is not uncommon. And the bottom line on all of that is, you're going to need a considerable amount of money to finance your retirement, and that money's going to have work pretty hard. Getting too conservative too early as you near retirement may be a mistake.
Remember, even in retirement you are still theoretically a long-term investor with an investment horizon of 10, 20 or even 30 years. It's estimated today that about 40% of our workforce has either a 401(K) or 403(b) program through their place of work. It's a wonderful long-term savings plan that we've discussed before and have urged employees everywhere to participate in. I also suggested to employers that it's good business to make those plans available, as employees understand that it is to their benefit to have these high-powered savings vehicles.
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That said, it is not too surprising that we have gotten several inquiries from viewers concerning what is a reasonable rate to expect to earn in a 401(k) or a 403(b). The answer, as you might suspect, is more complex than can be covered in this space, but here are a few thoughts;
Over the last seven decades, in good times and bad, the Standard and Poor 500, since 1926, has averaged 11.33 %. That, of course, is just an unmanaged index, so you'd like to think that with a little bit of help, your rate of return over a long period of time could be considerably better than that.
We always advise our clients to feel free to check with us in choosing the investment areas within their 401(k) or 403(b). Full service brokers should be happy to advise you even if they don't control the money. It is important that you seek professional help, since for most people, the 401(k) or 403(b) represents the lion's share of their ongoing and future retirement prospects.
One important thing to remember is that even if you have a 401(k) or 403(b) plan at work, and even if you make tons of money, you can still do an IRA. This is a source of constant confusion to people who keep telling me, "I thought I couldn't do an IRA!" At certain income levels you can't deduct your Ira, but you can still do one.
The bottom line on all of this is, whether employer or employee, most of us realize that we have to take charge of our own retirement future. Retirement programs at work should be your first long-term savings place for retirement. But right behind it is the good old IRA and the Roth IRA, which has the big advantage of no deduction, and given certain restrictions, all the money you put in can grow, and at your time of retirement, it comes out tax-free.
The bottom line on all this is that yes, you have to live your life. You can't put yourself in a position where you're going to be a millionaire when you're 60, but now couldn't buy yourself a hot dog and a Coke! But a comfortable retirement with the funds necessary to support your lifestyle, is not just going to mystically materialize. With a little concentration and a little effort, you can get the job done, especially if you start early. After all, it is your retirement we're talking about.
(Tom Butenhoff is a First Vice President with J. E.
Liss & Company in Milwaukee. The views are his and not necessarily
those of Liss Financial Services or the Job Connection/Hiring
Network.)