The day you leave the office with your gold watch is a poor time to start thinking about how to make investments. But in today’s wait-and-see economy, more middle-aged workers are putting off the tough decisions, says Spencer Sherman, author of “The Cure For Money Madness (Random House). And what they think is conservative may prove risky. Here’s his take on what you can do today with limited resources to plan for what will, hopefully, be abundant golden years.
What’s your advice to those with retirement in sight, if not around the corner?
The way I generally define retirement is when you are no longer dependent on earned income. One of the best preparations for that is to discover what you really need to live on. Start moderating your expenses, because the biggest driver of retirement success is how much you spend. If you’re in your 50s and you keep amplifying expenditures every year from 50 to 65, it’s a much steeper mountain to climb than if you can keep your expenses level or below what they are now. Plan for what you can let go of in retirement years. For some people their strategy is to spend money on international trips in the first 10 years of retirement and then forgo travel in the later years.
Next, take a look at where you are now and how many years you have left to retire. For those variables you determine asset allocation for how much you should put in bonds vs. equities. The key thing that people forget is that they are going to be retired for many years. If you’re 65 you may have 30 years, which is a lot of years to recover from a market drop. Most people tend to be conservative. I prefer to see people kind of gradually shift from equities to bonds.
If you are heading into retirement with debt, should you devote more
resources to paying down the debt or to investing?
It’s crucial to pay down the debt but at the same time put something toward the 401(k), even if it’s only $50 or $100 a month. You have to keep that savings muscle exercised, especially if your company matches your 401(k) contribution, which is one of the only free lunches in life, then there is no reason not to do it. The other thing people have to focus on is their asset allocation between bonds and equities to make sure you really are diversified. Most people think they are diversified but there are not; they usually have it all in U.S. stocks or technology stocks or in real estate. What I recommend is having your money in 14 different investment categories, including real estate and international stocks.
What are some common mistakes people make?
Putting all their money into bonds and CDs on the day they retire. Even people who still have 30 years of life ahead of them, they just go too conservative but end up being very risky, not protecting themselves from inflation, which is the biggest hurdle to success. It’s the only thing that has wiped people out totally. Stocks are not all that risky compared to being in CDs or bonds when there is hyperinflation. You are getting dollars that are worth less and less.
Another mistake is in assuming that you need to own your own home, which is a very expensive way to live. Many retirees are better off selling their homes and investing the money and renting a place, because of all the unknowns in terms of repairs and maintenance. If suddenly the roof goes, you could lose $40,000.
When you’re retired you want more certainty when you don’t have income to make up for that uncertainty.
Another mistake is in forgetting that we are most valuable when we are in our 60s and 70s, and we can work part-time as a mentor and teacher rather than drop out of the workforce. Many people find fulfillment in working five to 10 or 15 hours a week. You can plant the seeds for a part-time consulting job for yourself when you get to your 60s. And for people who are self-employed, it’s a good time not only to plant the seeds for part-time income later but also to make the business more saleable when you retire.