Money’s Retirement Tips
October 28, 2009 Leave a comment
Most of us lead frantically busy lives and tending to retirement plans is not always at the top of the To- Do list. Portfolio building can seem so overwhelming. That and the fear that one has started too late can be discouraging enough to avoid starting altogether. None of us can accurately predict what our lifestyle, taxes or health benefits will cost so don’t worry about the estimated amount you’ll need to retire. Just ignore the big number and get into the game.
Your first step is to get into the habit of saving so over time your money will work for you. Start by putting 5% of your income in a tax deferred retirement plans- such as a 401k, 401b or a 457. You should save what you are comfortable with but then increase it by 1 or 2 % per year.
If you don’t have a work savings plan then set up an automatic investment program with a fund company, brokerage or bank. If you are self-employed you can save the lesser of $40,000 or 25% of your income in a simplified employee plan or SEP-IRA.
Money experts advise putting 60% of your money in stocks and 40% in bonds. You don’t need to change the mix until your ready to retire. If you’re under 50, you can increase the percentage of stocks but advisors caution not to put more than 80% in stocks.
To get a 60-40 stock and bond mix, all you need is two broadly diversified index funds such as Vanguard Total Bond market for Bonds and Fidelity Spartan Total Market index for the stock portion. Why index funds? These types of funds are expected to return an average of 7 to 8% a year over the next decade and index funds are the least expensive on the market. If two funds are still more than you care to manage, you can choose a simpler, life- cycle fund. These retirement funds hold both stocks and bonds and reduces your exposure to stock as you near retirement. Life- cycle funds allow you to choose a target date for retirement and adjust allocations automatically over time.
Once you create a 60-40 stock and bond mix plan to update it at least once a year.
If your allocation is more than 5 or 10 percentage points off than you may want to make changes. Or if stocks grow to 75% of your portfolio, sell enough to bring the portion back to 60% and put the proceeds in tax bonds. In a tax sheltered plan you won’t owe taxes on those gains.
If you are having trouble finding enough money to save, check your debt load. Knowing how much is going out and where it is going can really help you see where your financial weakness is coming from. Once you have done this, you can put the money that you used to spend into your retirement savings plan.