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Jewish World Review
July 6, 2009
/ 14 Tamuz 5769
Fear can force better investment planning
By
Gail Marks Jarvis
http://www.JewishWorldReview.com | (MCT)
You might be scared, but that's not always bad — if you channel it into action.
The stock market and housing market crash, plus rising unemployment and harsh credit card terms, have made Americans aware that their financial futures are fragile. But out of the pain has come laudable behavior: People are thinking twice before spending on a whim, for example.
Now it's time to take it a step further: No matter your age, you probably need to save more for retirement, and you may need to invest more wisely.
Retirement sneaks up on people who wait to invest. And with government debt soaring, you may end up with less Social Security and Medicare, and perhaps higher taxes too.
Here's what to do, at the beginning of adulthood, and through the mid-career years.
— Early start puts you ahead.
A 22-year-old who invests $2,000 a year every year until retirement — or roughly $38.50 a week — would end up with about $611,000 by age 67, if he or she earns about 7 percent a year on average on the investments. That's not a lot of money if spread out over a long retirement, especially considering inflation. It would provide about $24,440 a year to live on, plus annual inflation adjustments.
For $40,000 a year, roughly a $1 million nest egg is necessary. But that would mean investing about $3,300 a year.
If you feel you can't afford to save much, start small — even at 1 percent of your salary — and increase it with every raise or windfall.
If you save nothing by your early 30s, instead of saving $3,300 you will have to stash about $6,500 to get close to $1 million. If it's your early 40s, it will take about $14,500 a year. To maximize your savings, put them into a 401(k) at work. That's where many employers provide free matching money. Say you make $30,000 a year, and your employer will match the first 3 percent of pay that you put into the 401(k). That's $900 a year from your employer, and if it goes into the 401(k) yearly and earns 7 percent, that free money will give you about $275,000 by retirement on top of your own savings. Experiment at https://401k.fidelity.com/public/content/401k/Tools/ContributionCalc.
And whenever you save in a 401(k), you also cut your current taxes.
To make most of this opportunity, consider investing about 70 to 80 percent of your 401(k) money in a Standard & Poor's 500 index mutual fund, and the rest in a diversified bond fund. That index fund is a stock investment and might strike you as overly risky after the huge decline the market just encountered.
But people in their 20s should do well over time. By combining 70 percent in the stock market and 30 percent in government bonds, an investor would have averaged an 8.9 percent return a year over the last 83 years, according to Ibbotson Associates.
When should you bypass a 401(k)? If you have no emergency fund, and are worried about losing your job, you should save for the possibility of a job loss in addition to retirement in a Roth individual retirement account. Money you put into such an account can be removed at any time without penalty. But if you are thinking of the Roth IRA as an emergency fund, invest it safely — perhaps in certificates of deposit at a bank, not in stocks or stock mutual funds.
— How to make up for lost time
Saving adequately for retirement should take precedence over saving for a child's college education. As a rule of thumb, if you save 10 percent of pay starting with your first job, you will be fine in retirement. Find out how you stand at ChooseToSave.org. Do the "ballpark estimate."
To maximize savings and shield them from taxes, put up to $16,500 a year in your 401(k) and an additional $5,000 in a Roth IRA. At age 50, you can put up to $22,000 a year into the 401(k) and $6,000 into the Roth, assuming you fall within the Roth income limits. Up to age 40, advisers typically suggest investing about 70 percent of your retirement money in stock mutual funds. If the downturn subjected you to more loss than you can stand, cut back to 65 percent or 60 percent.
By 50, having only 60 percent in stocks is considered prudent, although not immune from losses. If you were shocked by the downturn, put 50 percent in stock funds and 50 percent in bond funds. Although investors have lost as much as 24 percent in this 50-50 combination in a single year, they have never lost money over a 10-year period with such a portfolio, according to Ibbotson.
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Gail Marks Jarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement without Living Like a Pauper or Winning the Lottery." Comment by clicking here.
Previously:
06/10/09: Best stock buys passed quickly, even for pros
05/12/09: On Wall Street, signs plant a seed of hope
04/08/09: Analysts debate the future of the rally
03/19/09: Gold unlikely to pan out as cure-all
02/29/09: Housing credit could provide sizable boost
02/19/09: Rebalancing being put in different light
02/04/09: Diversification doesn't always offer insulation
01/27/09: Taking steps can help regain some control
01/20/09: How to save for college during a recession
01/12/09: Bonds still risky option to stocks
12/24/08: Some predict mid-2009 for return to investing joy
12/09/08: A small dose of short funds may be useful
11/11/08: Mutual funds can get caught in downward spiral
10/27/08: Investors can bounce back from even the worst of times
10/20/08: Want to sell? Look at 401(k), but don't leap
10/16/08: Want to be like Buffett? There are ways
09/29/08: Money protection only goes so far, so know the risks
08/26/08: Retail stocks may not be best fit for investors
08/20/08: Rear-view mirror investing can be dangerous to a portfolio
07/01/08: What do we do? My daughter didn't get a scholarship
02/25/08: Before abandoning your mutual fund
02/14/08: Dirty little secret of some funds may be haunting
01/29/08: Sorting out the stock market
01/03/08: One word for 2008 crystal-ball gazers: Caution
12/11/07: ‘Buy and hold’ isn't necessarily tried and true
11/26/07: Translating the falling dollar's implications for investors
11/13/07: Gradual retirement may not be key to happiness
11/05/07: Rate cut won't offer immunity to investors
10/29/07: Employers set to help workers save in 401(k) accounts
10/22/07: Playing bounce may be costly to stock investors
10/10/07: Investors find boring often can be fruitful
10/01/07: Make up lost time with swift, smart action
09/24/07: Balance is key for investing by retirees
09/18/07: Homeowners who wait see options fade
09/04/07: Easy matter to rate fund's performance
08/27/07: Mortgage mess could be good for savers
08/17/07: Small stocks are coming with large caveats
© 2007, Chicago Tribune Distributed by McClatchy-Tribune Information Services
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