A Crash Course in Basic Retirement Planning

NEW BERLIN, Ill. (TheStreet) -- A recent survey found that seven out of 10 Americans are more concerned with short- and midterm spending, placing long-term savings a distant third place.

The survey further found that about two-thirds of people who unexpectedly retired due to a corporate downsizing or a medical condition indicated they weren't financially prepared. Sixty percent of those still working say they are behind schedule in saving -- regardless of age, income or ethnic background. Seventy percent of those surveyed expect to work at least part time for the first 10 years of retirement to supplement income. More than half of those surveyed expressed an extreme lack of understanding of how to choose financial products to meet their long-term savings needs.

More than half of the people answering a recent survey expressed an extreme lack of understanding of how to choose financial products to meet their long-term savings needs. But it's not too late.

A Comprehensive Approach
To address these shortcomings, it is necessary to understand all of your potential areas for funding your long-term savings plan -- including employer plans, IRAs, Social Security and even annuities.

After reviewing all of these available avenues, the question becomes how to fund the savings plan. How can you free up cash to add to your savings?

Parkinson's Law
Welcome to Parkinson's Law, specifically the Third Principle. For those of you not familiar with this, the Third Principle of Parkinson's Law states that expenses always rise to meet available income, and then some. You may also recognize this statement: "It's always possible to live outside your means."

The good news is that it can work in reverse.

When you voluntarily reduce your expendable income by diverting it into savings, it may be a little awkward and painful at first, but you'll quickly figure out how to bring your day-to-day expenses into equilibrium. As you accomplish this, you can gradually build up the amount you divert to your savings.

Where should I put this?
Your next concern should be what vehicle to put your savings into. The following order makes sense for most folks:
  • 401(k) up to your employer's match
  • Roth IRA
  • Finish maxing out the 401(k)
  • Taxable savings or low-cost annuities

Allocation
The next question is how to allocate your investments. A very general way to look at this is to consider the primary types of investments -- stocks and bonds -- and think about the best way to split your investment across these categories.

Stocks are generally the more risky of the two but provide a possibility of greater returns over the long run. Bonds, on the other hand, are generally less risky, but the yield from bonds, while steady, generally lags that which can be found in the stock market.

For a younger investor, with 30 or more years in their goal horizon, a portfolio consisting largely of stocks (80% to 90%) works very well. It makes the most sense to maintain a fairly high equity or stock position while very young, gradually reducing the risk component until you reach retirement, at which point the transition begins toward the distribution years.

It is necessary for most investors to maintain exposure to the stock market to be able to keep up with inflation. Bonds won't normally provide a hedge against inflation, so a component of stocks is necessary even in retirement.

Summary
To reverse the trends cited at the start of this article (at least for yourself), it's important to do what you can, as early as you can, to increase your rate of savings. Hopefully this crash course has given you some ideas to use for your own situation.

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