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Investing: Saving Your Retirement

Aug 17, 2007
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. 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.
About the Author
Nationally-syndicated financial columnist and Certified Financial Planner Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He will answer your financial question FREE at http://www.guardingyourwealth.net
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