If you enjoy a nice helping of humor along with the usual dry subject of personal finance, Motley Fool is the website for you. I was poking around their content rich site the other day when I decided to pop my head into their retirement section and found an article written by Robert Brokamp (TMF Bro) titled: 5 Retirement Must-Knows – Everything you need to know about retirement planning on a single Web page. Well, given such an auspicious title, I just had to take a look. What were these five must-knows and were they really must knows?
You can’t look to your parent’s retirement as a guide for your own. What this means is that when you retire in twenty to forty years (even then, someone retiring in twenty will have a different retirement than someone retiring in forty) years, you’ll have to face challenges that your parents may not be facing right now. You will probably live more actively and live longer, enjoy more things, and generally need more income to sustain you in your later non-active income years. So while you’ll need more, you have more weapons at your disposal in the retirement battle because thirty years ago IRAs and 401Ks were unheard of. Everyone thought they’d retire on pensions and social security… which leads into the second must know.
You’re on your own. Retirement can be seen as a three-legged stool, propped up on Social Security, defined benefit plans, and your own savings. Social security is underfunded, people aren’t staying long enough at jobs to build up a large enough benefit in pensions and other defined benefit plans, which leaves savings as the only real dependable retirement option left for many folks.
Starting saving now. It’s never too early or too late to begin saving for retirement. The earlier, of course, the better; but starting late means you started, which is better than not having started, right? The article has a slick looking picture that you should check out that shows growth curves based on when you started, your investment return, and how much is saved.
Stocks are better than bonds. We all understand that stocks are better than bonds, but how much better are they?
According to Jeremy Siegel’s Stocks for the Long Run, for every rolling five-year investing period from 1802 to 2002 (i.e., 1802-1807, 1803-1808, etc.), stocks outperformed bonds 80% of the time. Stocks beat bonds for 90% of the rolling 10-year periods, and essentially 100% of the rolling 30-year periods. For holding periods of 17 years or more, stocks have always beaten inflation, a claim bonds can’t make.
Does this mean that you should put 100% into stocks? No! Put a mix that makes sense for you. What makes sense for you? Read up on asset allocation but the gist is the younger you are, the more you should put in stocks because you can weather the downturns because you have the benefit of time. If you’re close to retirement, you don’t want to have to weather downturns.
Defer taxes if you can. There are a lot of defined contribution plans, now that the defined benefit plans are going away, that allow you to defer your income (and taxes!) into your retirement years so you had better take advantage of them. Why is this smart? Your contributions aren’t taxed until you withdraw them and your earnings aren’t taxed until you withdraw them either, so you have a bigger investment bucket to grow into your later years. Use them!
Source: Motley Fool