On page 66 of my book Real Money, which comes out in paperback on January 12, I talk about the incredible importance of saving for retirement – no matter what the environment.
It’s such a big issue, I want to take two days to talk about retirement savings. So we’ll do Part I today and Part II tomorrow.
From personal experience, I can tell you the best move to make is to start saving for retirement as early as possible - something my father touted again and again to me after I got my first steady paycheck in November, 1977, from The Tallahassee Democrat. (For the record, I covered homicides and sports, including Ted Bundy’s horrible crimes and the Florida State Seminoles first win, in the Tangerine Bowl). Sure enough, after Tallahassee, when I was going through tough times in the late 1970s, I was actually living in my car while I was a reporter living in Los Angeles for the now defunct Herald Examiner. Even so, I still managed to put $1,500 away for my retirement with the legendary Peter Lynch at Fidelity’s Magellan Fund. That money alone, put in consistently for multiple years, has compounded enough to provide a good retirement income for someone to live on comfortably for a half-dozen years after retirement.
Today, as 2009 dawns, saving for retirement is as important as ever, given the unstable nature of the job market and the economy. Anyone who knows me knows that I take the issue seriously; and that I’ve long advocated dividing investment money into two pools, one for retirement, and one for “mad money”.
It’s the first pool I want to focus on today and tomorrow – especially about early retirement (I’ll get to that in a moment).
In a nutshell, saving for retirement can be managed best with an age-specific mindset. For example, your twenties should focus on growth stocks, as you have plenty of time on your side to take a little more risk. In your thirties, people should pull the reins back a bit and focus more on more stable dividend stocks. In your 40s, bonds become a bigger portion of your portfolio, as capital preservation becomes a bigger priority.
I still believe the age-specific investment approach is your best option for retirement. But in this economy, even the best-laid plans may go out the window. Many people nearing retirement age have lost their jobs. A growing number of small business owners may find themselves closing shop as the economy worsens. Some people may simply be sick of the rat race and want to get out.
In those situations, early retirement might be your only option. What to do if you find yourself looking at an early retirement?
For starters, know where you stand – One rule of thumb is that you’re going to need 70% of your annual income to live on in retirement. Anything short of that and you may be at least looking at going out and getting a part-time job to get by. To figure out where you stand and how you’ll need to retire early, check out BankingMyWay.com. Full disclosure; the Street.com owns BankingMyWay.com. Fuller disclosure; I believe BankingMyWay.com is much better and more comprehensive than the endlessly touted Bankrate web site.
Be realistic – Chances are you’ll live a long time in retirement, so retiring early may be a riskier venture than you bargained for. If your calculations on BankingMyWay.com show that you don’t have enough money to retire, it’s time to re-assess. If you can, stay on the job a bit longer. Or learn to live with less. If this stock market has shown us anything, it’s that we can’t depend on double-digit investment returns every year. One more item: unfortunately, because of the heavy reliance by many investors on all of the stocks in many funds, there will now likely be a few more years of work ahead of us than we likely planned or wanted.
The miracle of compounding (and the “Rule of 72”) – Money grows over time through compounded interest. In fact, you can roughly estimate how fast your money will double down the road through the “Rule of 72”. It’s simply figuring out the number of years needed to double your money at a given interest rate. For example, given eight percent interest, it will take you nine years to turn $1,000 into $2,000. If you watch CNBC's "Mad Money" then you know I bring up the Rule of 72 all the time. That’s especially true when I discuss the accidentally high yielding stocks; stocks that have now declined so much that their dividends now produce juicy yields.
Your personal circumstances will influence the moves you make as you get ready for early retirement. But the above advice can act as a good rule of thumb. In Part II tomorrow, I'll have even more tips for you. In the meantime check out Geezeo.com. An online personal financial community from The Street.com, Geezeo enables you to create a secure, online profile and from there, Geezeo experts and the Geezeo community can help you meet your financial goals - even an early retirement.