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Article #365: Investing: Saving Your Retirement

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Everyone would love to retire early, but egg follow conventional wisdom it will
they also desire to be free from the fear needlessly reduce their lifestyle or
of running out of money. Changing your impact what they leave their children or
attitude toward investing and the use to support charitable causes.
approach you take will help you Traditional portfolio management views
accomplish both. Read on to see how you stocks as being risky and bonds as being
can retire years sooner and make you safe. As such, you should increase the
money last decades longer. amount you have in bonds and decrease the
Last week I talked about our need to amount you have in stocks as you get
change the way we view retirement. I closer to retirement. The rule of thumb
explained that seeing retirement as a is that you should have roughly your age
transition to a less-stressful, more in bonds, so if you are fifty your
enjoyable job drastically reduces the portfolio should be 50% bonds, 30% stocks
amount you have to have socked away. Even and 20% cash. That's crazy!
working just part-time during retirement Along with that view is the philosophy
can allow you to retire years sooner, or that you should buy an investment and
make your money last years longer. hang on to it--buy and hold. Investors
Changing our view of retirement is only that lost 30-50% between 2000 and 2002
half of the solution. We also need to know that buy and hold can be a risky
change our attitude and approach to proposition. We all know that there is
investing for and during retirement. This the potential for stocks AND bonds to
by itself will have a similar impact on lose value. This is referred to as market
when you can retire or how long your risk and interest rate risk. Since the
money will last. Combining the two industry believes that you should buy and
together can completely change the hold, the only way to minimize the
retirement equation. overall risk to your portfolio is by
Our life spans grow longer every year, changing the allocation between stocks,
placing greater demands on our nest egg. bonds and cash.
Moreover, as a nation we are saving less It all sounds great--but by believing it
and less. In fact, recently the national you may be forgoing tens (or even
savings rate was negative--collectively, hundreds) of thousands of dollars. I
we spent more then we earned. don't accept their underlying assumptions
Let's face it--few of us save as much as and neither should you. There are other,
we should. The demands of raising a more effective ways to manage portfolio
family, saving for our kids' education risk that may dramatically increase your
and caring for aging parents make it returns.
difficult to set aside as much as is Think about it. Interest rates the last
needed. By the time our kids are several years have been at historic lows.
independent, our retirement may only be That didn't change the traditional
10-15 years away. allocations provided by the industry.
Unfortunately, the conventional wisdom They still said you should have 50% of
provided by the financial services your nest egg in bonds if you were 50
industry hasn't made reaching our goals years old. The return on bonds wasn't
any easier. Conventional wisdom says that even enough to keep place with inflation
you should invest more conservatively and you were supposed to put half your
each year you are closer to retirement. money in them? Ridiculous.
Their wisdom also says that in It's possible to grow your money faster
retirement, you should only withdraw 4% with less risk. It's possible to draw out
from your portfolio each year. more than 4% without the fear of running
The conventional wisdom is wrong. out of money. And it's done by adjusting
Frankly, if the average person follows conventional wisdom to the realities of
this advice it will be a wonder if they the markets. Next week I will share
retire at all! If those who have been specific strategies and methods to do
successful setting aside a healthy nest just that.






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