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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