These days, we can hardly pick up a newspaper and not find an article about retirement. Of course, the endless articles addressing the current election often camouflage these articles. Elections, especially Presidential elections, always make for meaty reporting, but I don’t have to tell you that this one seems to be over the top. However, hidden amongst the election news are important articles about how to prepare for retirement. I’d like to add a piece to that stack.
Retirement seems daunting to many because of the multitude of worries regarding money, healthcare and simply what will you do in retirement. There are too many unknowns; market returns, interest rates, future taxes, and inflation are all uncertain. All of these worries can cloud the fairly simple concept of how to save for retirement. At the risk of sounding like a cliché, I recommend that clients apply the KISS approach – Keep it Simple Stupid. You can achieve success in retirement savings by focusing on three basic factors.
1. Save as much as possible (and a little more). The amount to save will depend upon your retirement goals, but an easy back of the envelope approach is to save 12-15% of salary over a career. The single most important factor in saving for retirement is how much you save. Take full advantage of the company match (if offered) to help you reach that 12-15% goal. Compounding returns also help, which means that the earlier you start to save for retirement, the better.
2. Diversify your investments and take an appropriate amount of risk. Younger savers can afford to take higher risk in their portfolios because they have more time to weather market downturns. Riskier portfolios achieve higher expected returns over time. Investors should reduce risk as they move closer to retirement. Regardless of risk level, prudent investors should broadly diversify their portfolios globally and across asset classes.
3. Seek advice from a professional when making decisions about how much to save and how to invest your money. Retirement is the largest investment most people will make. These are extremely important decisions that have the potential to significantly impact your life. Getting them right could make the difference when it comes time to retire.
So, going back to the KISS concept, saving for retirement can be simplified into three key principles. Save as much as possible, invest smartly by taking the appropriate amount of risk and diversifying broadly and seek advice when you need it. It does not have to be more complicated unless you want it to be.