We used to take it for granted: young people go to college, get an education that would enable them to land a good job, then start their careers. Over the course of forty years, if you’re smart and frugal and make good money at your work, you accumulate enough money to retire comfortably at the age of 65.
Some feel that this scenario has never been a good one, that it means people sacrifice their “good” years to build that nest egg. In fact, I read more and more Y-generation people saying that they refuse to work the 9-to-5, refuse to sit in a cubical or even in an office for 8 or more hours each day. More and more young people are rebelling and are trying to succeed on their own terms, hence the huge success of books like The Four Hour Workweek.
For Many Americans, Retirement is Slipping Away
But even if you accept that this is the way things are supposed to be – even if this is your dream – to work for 40 years, accumulate a nice nest egg, then retire, for a growing number of Americans the recession means that this dream is slipping away.
“Who’s gonna be able to retire at 65? That’s only seven years away. Not me. I’ll be working until I die” says Marguerite DiGaetano, 58, and she’s not the only one. As our nation goes through a grueling recession, more and more 50 and 60 year old people are in a very bad place – their 401(k)s and other retirement savings have lost a lot of value, as did their homes, and they were laid off from their job. At these ages, when you’re still not eligible for Medicare, it’s very easy to go through your savings very quickly and be left with nothing.
When You’re Young, You Have Time To Recover
Most of us, those who read and write this blog, are still young enough that we have time to recover from the current recession. If you’re in your twenties, thirties, even forties, you should generally be OK. But if you’re in your fifties and sixties when a bear market hits, you’re facing a big problem.
How can we make sure this doesn’t happen to us? We are told over and over again that we should invest in the stock market, that it’s the only way to beat inflation and to grow our money in the long term. This is very true, but it’s important to remember that the market works in cycles, and that those cycles can be brutal.
Invest for the Long Term
Generally, I believe that the best thing you can do as an investor is to invest in the stock market for several decades. Be a “buy and hold” investor, rebalancing your portfolio once a year but don’t try to time the market; pick high quality, low expense, no load mutual funds run by great managers; diversify your portfolio; and then sit back and relax. Yes, the market will get ugly – very ugly – but if you keep that money in the stock market for 30 years, it will reward you nicely, growing better than any other investment you make.
But Around the Age of 50, Start Pulling Out
The only caveat: when you reach the age of 50, it is my opinion that you should start gradually pulling out from the market. You’ve had 30 years to nicely grow your money, but now it’s time to slowly lower your stake in the market. Don’t worry about the “100 minus your age is how much you should have in the stock market” rule. I never cared much for this rule, because even when I was 30, I was never comfortable with having so much of my nest egg (70%) in the market. I always felt that 40% was the maximum I was willing to allocate to stocks. And my personal plan, as I age (I am now 39), is to lower this gradually – 20% at age 50, 10% at age 60.
This is my risk tolerance – yours can be different of course – but what I’m trying to say is, that you should never allow yourself to get to an age when you are ready to retire and most – even just half – of your portfolio is in the stock market. It is simply too risky. And while I am well aware of the theory that says that for some older people, an aggressive portfolio may be their only way to catch up and fund their retirement, I simply don’t feel that the risk of losing almost everything is worth it.
Get Out of Real Estate Too
The same could be true for real estate – this market too moves in cycles, so if you’re over fifty, plan to retire around the age of 60 and the market is in an up cycle, you might want to consider selling your house now, rather than taking the risk that when you are ready to sell it, it won’t be worth as much. This is assuming that part of your retirement plan is to sell your house, live off the proceeds (as well as your savings) and rent a smaller place.
Obviously, retirement plans are personal. How are YOU planning for retirement?
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Wow,
The author of this article is so out of touch with reality.
My money needs to go towards food and shelter. Why the hell would I want to give it to the same people who screw this country over and over. When I say same people, I mean any a-hole in the financial services industry who are one of two things. Ignorant on purpose because they want to avoid seeing how corrupt their industry (and themselves) are, or they are just honestly corrupt and don’t care.
We have sold out our future for Ugg boots and reality television.
Don’t forget that many people in the financial services industry earn commissions and bonuses and such based on sales of products (often to ignorant people). Only companies that are fiduciaries are required to put your best interests first and sell you the product that’s best for you, as opposed to any product that might be suitable.
The first step is realizing you have a problem. 🙂
Most people don’t have a plan for retirement let alone the funding to finance it and as such are more than likely doomed to fail. Unfortunately it’s really only when that day is actually approaching that people realize this and by then its generally too late to do anything. It is essential that people realize they need to have the right amount of money available at the right time if they expect to live happily ever after.
There’s a great phrase in business planning … it goes like something like this … PLAN -> DO -> CHECK -> ACT & repeat.. People need to exercise the same behavior in their retirement planning and budgeting in general.
A lot of Americans are going to have to accept that retirement won’t look the same to them as it does now for their parents’ generation. Many of us will have to work into our 70s, even if it’s just part-time menial jobs, just to fill in the gaps. Social Security won’t pay out what it used to, pensios are going bust, the states and federal government are going to have to continuously raise taxes for decades to beat down this deficit they’ve created and we’ll likely see some pretty hefty inflation down the road.
Life expectancy is increasing which is great from the obvious standpoint, but it also means we’re going to need more money in retirement, when many of us are headed toward “less”. This is the new reality.
You’ve identified a critical point, Darwin. We have to accept that retirement for us will look different than it did for our parents. Many of us in younger generations have already realized that not only will retirement look different, but the career life-cycle is different. My generation has experienced very little job security in our working lives, and we or our friends have been laid off in the dot-com bust or the Great Recession. I’ve taken a few years to learn about investing, and am a self-directed investor. Forget the broker, forget one-size-fits-most rules about the stock market, forget Social Security (don’t know if it will be around when I retire, but it’s safest to assume the worst) and make decisions for myself. The Motley Fool website and books helped me get started.
The boomers sure did a bang up job getting high with Hendrix, taking all the decent jobs, putting zero decent laws or legislation in place that protects or supports the poor, and NOW it’s like…what do we do!!!! WE cant retire!!! WE are fucked up!!! You were dumbasses for 40 years. Lay in your coffin and go night night and let a new generation not be so dumb and useless as you were. THE END. 🙂
Thanks for this article, I feel heard – we are still caught in a struggle even with a fabulous broker (who understands how clergy get paid.) and some real estate….and with doing everything to stay healthy….My 63 year old partner just came in at 38 on his last insurance physical.
I took every think I had invested in the market out to keep our 12 employees afloat last year….we are easing back into have enough work to pay salaries, but it is no frills….and let me tell you just one medical problem and WOW life changes quickly….or a special needs child…
Today my partner and I are going to discuss divorce and dropping my health ins. all together to keep on keeping on….who would have thought we would have been here at this time in our careful frugal lives?
I’m not sure what I could do Patricia, but best wishes to you and everything that’s going on around you. Have trust in yourself that you will straighten everything out.
You know I think you just hit the nail on the head . I have incredible trust in myself and how I handle money – yes I get down, dirty and careful in the midst of the big decisions, but once I make them I have incredible trust that I can move forward. Thank you for reminding me of that inner wisdom and strength.
I am in a position that is suppose to have more answers to these kinds of questions and lead others to a better outcome – when modeling great behavior fails it makes even more eyes focus on me to see how I am going to respond and overcome. I still feel the strong need to keep walking around and doing the work that I am called to do and be strong for so many folks –
I want to have some place for them to get assistance they can understand and make workable.
I have passed on several of your course lists and we have discussed – a good start.
I am also being a bit overwhelmed by the emotions of the whole thing and then having the News pundits driving home the fear factor – I seem to need a place to let off my own steam of feelings and since I am the risk taker, most of the clergy in my district are looking to me for answers and suggestions….
Thank you for your great reply…and a place to just say it out loud and just be me.
My favorite tip in here has gotta be invest for the long run. That doesn’t mean keeping up with your stocks but it may mean checking in on your mutual funds, putting money into your 401K, or even having a CD account that will generate you more interest than a traditional savings. Whatever it is, start young and do it often.
Getting to that nest egg does not necessarily mean deprive yourself of some indulgence during your working years. You can have that nest egg when you retire using your 401K benefits and not the money you saved along the way, though it will be better if you have. I can’t blame the young generation if see life that way. More and more people don’t reach retirement age due to sickness.
I would suggest to people who want to sell their house and live off the profits to consider waiting and renting it out in the meantime. The market will go up eventually, but if the house is paid off or the mortgage is low, renting could be quite profitable until the house regains some value and it won’t be a huge loss to sell it. Personally, I am renting out my condo and even after a hefty fee to the management company, the money I get from it pays off all my monthly bills, so everything I make at work can be used for life and savings (which is where most of it is going right now, even though it has been somewhat drained by education costs and preparing for a new addition to the family, which is technically what it was meant for).
Forget the ‘work until 65 and save a million dollars -then take 4% per year’ nonsense. Every magazine (Money, Kip, etc) suggests that people work juuuust a bit longer to maximize your money.
Instead, cover your monthly expenses with passive income. Figure your monthly needs/wants and work now to cover them using:
1. dividend paying stocks – try to trade in your Roth IRA for tax benefit and stagger the stocks so your getting cash each month.
2. Ladder CD’s once the interest rates come back. Factor the interest as monthly income once the first CD matures.
3. Rental Property – buy in a university town and have it managed for a small percentage.
4. Annuity – consider and research annuities. Take that spare 100K and turn it into monthly payouts and stay healthy. (not a real fan of this one actually).
5. What else? Bonds, social security, pension, 401K payouts, etc..
I don’t know about buying rental property in a university town (meaning it would be rented out to college students). I have always been worried about renting out my condo because of possible damage and college students would scare the hell out of me. Even a security deposit sometimes wouldn’t cover the damage these possibly irresponsible young people might cause. Even if they don’t break anything, the money spent on cleaning, repainting, and other preparation for a new tenant to want to live there could accumulate. I know there are decent college kids out there – I am one myself – so all I am saying is I would be careful. It’s a good place for a steady influx of tenants, but sometimes the risk could outweigh the benefits.
College towns, even in small towns can be very expensive to rent, let alone buy investment property in.
You could consider investing in a real estate investment trust that focuses on stocks. Check out his article in the WSJ
http://online.wsj.com/article/SB10001424052748703882304575465600161453406.html
Saving in a Roth IRA, hopefully getting a 401(k) soon. And doing the opposite of your suggestion above, getting involved in real estate by buying my first home.
Not necessarily the opposite… it depends on your age.