| |
Everyone would love to retire early,
but they also desire to be free from the fear of running out of
money. Changing your attitude toward investing and the approach you
take will help you accomplish both. Read on to see how you can
retire years sooner and make you money last decades longer.
Last week I talked about our need to change the way we view
retirement (read it at www.guardingyourwealth.com). I explained that
seeing retirement as a transition to a less-stressful, more
enjoyable job drastically reduces the amount you have to have socked
away. Even working just part-time during retirement can allow you to
retire years sooner, or make your money last years longer.
Changing our view of retirement is only half of the solution. We
also need to change our attitude and approach to investing for and
during retirement. This by itself will have a similar impact on when
you can retire or how long your money will last. Combining the two
together can completely change the retirement equation.
Our life spans grow longer every year, placing greater demands on
our nest egg. Moreover, as a nation we are saving less and less. In
fact, recently the national savings rate was negative—collectively,
we spent more then we earned.
Let’s face it—few of us save as much as we should. The demands of
raising a family, saving for our kids’ education and caring for
aging parents make it difficult to set aside as much as is needed.
By the time our kids are independent, our retirement may only be
10-15 years away.
Unfortunately, the conventional wisdom provided by the financial
services industry hasn’t made reaching our goals any easier.
Conventional wisdom says that you should invest more conservatively
each year you are closer to retirement. Their wisdom also says that
in retirement, you should only withdraw 4% from your portfolio each
year.
The conventional wisdom is wrong. Frankly, if the average person
follows this advice it will be a wonder if they retire at all! If
those who have been successful setting aside a healthy nest egg
follow conventional wisdom it will needlessly reduce their lifestyle
or impact what they leave their children or use to support
charitable causes.
Traditional portfolio management views stocks as being risky and
bonds as being safe. As such, you should increase the amount you
have in bonds and decrease the amount you have in stocks as you get
closer to retirement. The rule of thumb is that you should have
roughly your age in bonds, so if you are fifty your portfolio should
be 50% bonds, 30% stocks and 20% cash. That’s crazy!
Along with that view is the philosophy that you should buy an
investment and hang on to it—buy and hold. Investors that lost
30-50% between 2000 and 2002 know that buy and hold can be a risky
proposition. We all know that there is the potential for stocks AND
bonds to lose value. This is referred to as market risk and interest
rate risk. Since the industry believes that you should buy and hold,
the only way to minimize the overall risk to your portfolio is by
changing the allocation between stocks, bonds and cash.
It all sounds great—but by believing it you may be forgoing tens (or
even hundreds) of thousands of dollars. I don’t accept their
underlying assumptions and neither should you. There are other, more
effective ways to manage portfolio risk that may dramatically
increase your returns.
Think about it. Interest rates the last several years have been at
historic lows. That didn’t change the traditional allocations
provided by the industry. They still said you should have 50% of
your nest egg in bonds if you were 50 years old. The return on bonds
wasn’t even enough to keep place with inflation and you were
supposed to put half your money in them? Ridiculous.
It’s possible to grow your money faster with less risk. It’s
possible to draw out more than 4% without the fear of running out of
money. And it’s done by adjusting conventional wisdom to the
realities of the markets. Next week I will share specific strategies
and methods to do just that.
Have a financial question? Send me an email and I’ll personally
respond, free of charge. Go to www.guardingyourwealth.com and click
on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide. |
|
