There are no right answers for the following quiz on your retirement. You won’t be graded on whether you are going to have enough to retire on in the coming years. Instead, it is more of an exploratory look at what you could possibly be thinking retirement will be – when you get there. (The answers follow.)
The first question has more to do with what you see your retirement plan doing for you when you finally decide it is just no longer worth it to keep working. Many of us have made the bold proclamation that we will work beyond that arbitrary sixty-five-years-old mark. Some of us simply can’t imagine another day beyond that goal, many of us wishing for the earliest possible leave from our jobs. Truth be told, the average age for retirement is still 62-years-old. What would life be like on fifty percent less salary?
The second question is more about your perception about your plan. In many instances we have adequate access to some sort of retirement plan. Some of us use it, utilizing every aspect of it, employing not only the tax-deferred plans like your 401(k), but also the IRA in both forms, traditional and Roth. Do you think you can get your plan to perform without taking any risks?
The third and last question deals more with what you are rather than who you are. The vast majority of us need to know that we will have shelter over our heads, that we will be able to eat, raise our kids, take care of our relatives should they need us, and have some leisure time left over to do what we want to do. That’s most of us.
Some of us, though, dream of owning our own business. That ambition, in the right person, knows no bounds. In fact, the real entrepreneurial spirit that drives folks to begin a business is wholly self-centered, a spirit that is focused internally on their own assessment of their skills and talents. That’s not the majority of us. We aren’t that focused to a single end. We instead have our fingers in may different “pies”, not because we can’t make up our minds but instead because we like the distractions that life offers. Some of us are so focused in the truest sense of the word, on the business they are creating, will do so by abandoning many of the “pies” life offers. If you do not think of yourself as this sort of person, how do you plan on retiring without some sacrifice?
The first answer: You can’t see it and you don’t want to believe it. But if you aren’t putting enough of your current salary to work for that far-off or possibly near- distance future, that is your life. There are numerous professionals who suggests only getting your feet wet when it comes to your retirement plan – I am one of them – and we do this because we feel that once you get some sort of idea how the process works, you will wake up one day and realize that you should be taking full advantage of the plan.
When I say I am guilty of this, I am on the record as suggesting you put at least 5% away in your 401(k). This is one of those some-is-better-than-nothing approach that will still leave you far short of any reasonable expectation for the future. It is a way of prodding you to something as opposed to nothing and the logic offers you this: by putting 5% away, you will find that it will not affect your take-home pay. Upon reflection, it is a pathetic way to get you to do something you should already be doing.
I have also been on this crusade to get fellow writers to drop the word save when they refer to what you should do about this dilemma. It is investing; not saving. But it is something we all have to do. Fortunately, we need only know a few basic things and we can be rather successful at the process.
The second answer, if you answered yes suggests that you have come to grips with your own mortality and are comfortable working until they cart you off. If you answered no, then you would have to wonder how much risk is too much. You can utilize your plan, at least in my opinion, to its fullest by taking calculated risks.
First, don’t be tempted to buy your own company’s stock in your 401(k). This warrants a brief explanation. Once you begin buying it, you never stop until one day you find that you own so much of one type of share, it has overshadowed any hope of diversification. Then what? If you buy an index fund, you will be, in all likelihood, a shareholder.
The second which applies to all sort of retirement plans from 401(k)s to IRAs, embrace the mutual fund; it is your friend. You hire a fund manager to invest your money to the best of his ability. If you want it to work hard, buy into an actively managed fund and unless the expenses are absurdly high (over 2%), let them do what they get paid for – if not, find another fund. (This might be more difficult inside a 401(k) with only a small basket of funds from which to choose, but some plans are rather robust and do offer choices. If not, don’t worry about it.)
The third part to this answer goes back to diversity. Many folks have fallen prey to the set-it-and-forget allure of the target date fund. This type of fund offers you the option of picking some date in the future and as you close in on it, the fund manager will begin moving your asset allocation from stocks to bonds. This is unproven territory and odds are strongly against that fund manager you originally hired to the job will still be at the helm in thirty years. Not only that, know one has ever done this with any real success on such a grand scale. But so many of piled it to these sorts of funds after you saw your portfolio nosedive, we have literally crippled any real ability for the fund to do what it has promised.
Pick a minimum of four funds: One actively managed, one indexed to the total market, one indexed to the the rest of the world and one indexed to the emerging markets. That’s 25% to each. At age fifty, add a total market bond fund and change it to 20% each.
The third answer if you are indeed the entrepreneurial type is “I will do whatever it takes, work as hard at finding the solution and understand that the world is not a static place.” If you are not such a single-minded individual, you aren’t putting enough of your income away to do what it should.
Unfortunately if you are not looking at your current life and saying “these are the lean years; I’m doing the best I can”, you really have no idea how lean it can become once you decide either you can’t work or simply don’t want to. Right now, double what you are putting away and increase it each year until you max the plan out or 15% of your income, whichever comes first. (Start with 5% if you haven’t yet begun.) If you are already there, open an IRA (a Roth IRA would probably be best considering there is still the issue of taxes to contend with and a Roth has this taken care of). But this additional tool could make all the difference.
Remember the goal here is self-sufficiency when you need it the most. And running out of money does not allow for any self-sufficiency. It does quite the reverse.
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