Haven’t Saved Enough or Your Investments Were Devastated by the Market Meltdown? There's Hope
In a perfect world, the value of our retirement savings would climb every year from the time we put the money in until we finally decided to use the funds to pay for the retirement of our dreams. We would never suffer a financial crisis caused by divorce or illness. And we would never find ourselves suddenly unemployed or the victims of the plummeting stock market, like the one we experienced in 2008. The value of our retirement accounts would only go in one direction: up.
In the perfect world, a mix of investments—say 65% stocks, 25% bonds, and 10% cash,1 a combination that represents a diversified, fairly safe portfolio—would earn 8% a year, every year, as it has on average since the 1920s.
This means that in the perfect world, we would know with absolute certainty that if we saved $6,000 a year every year for 35 years toward our retirement, we would be guaranteed to have $1,116,612.89 at the end of year 35.
Well, we don’t live in a perfect world.
You picked up this book because you are concerned that you won’t be able to retire the way you want. That could be because:
- You haven’t saved enough (or you aren’t sure you have) for retirement.
- You are worried about what inflation is going to do to your savings.
- The financial meltdown of 2008 devastated the value of whatever money you had managed to put away.
- You woke up and realized that the traditional retirement age is suddenly right around the corner, and you don’t have a definitive plan for what you are going do once you leave work, let alone how you are going to pay for it.
- Some combination of all of the above.
As two guys in their early 60s and mid-50s, respectively, we understand perhaps better than most what you are up against. We have been thinking about, writing, and advising people about money for an extremely long time.
So who are we and why are we in a position to help you?
Frank, a certified financial planner (CFP) with more than 35 years of experience, founded Investors Solutions, a “fee only” registered investment firm, 15 years ago. (“Fee only” means he does not accept or receive any type of compensation other than what people pay him for investing their money. He does not get a commission for recommending a particular product. The only thing he sells is his time.) The firm now manages more than $400 million of its clients’ money. You probably have seen Frank on TV or heard him on the radio talking about personal finance. He is a frequent guest on all the “money shows.” His best-selling book, The Informed Investor, was cited by Business Week as one of the best personal finance books of the year. His previous work, Investment Strategies for the 21st Century, was one of the first books ever published and serialized on the Internet (in multiple languages, no less). He was also a featured columnist on Morningstar.com for a number of years.
Paul has written about personal finance for more years than he would care to admit. He is the co-author of Grow Rich Slowly: The Merrill Lynch Guide to Retirement Planning, has hosted his own nationally syndicated radio show that was heard five days a week on 168 stations coast to coast, and is grandly referred to as “the financial expert” on ThirdAge.com, a website devoted to people in their 40s and beyond.
Together your authors helped create one of the first personal finance websites, DirectAdvice.com, which shortly after its launch was named the No. 1 comprehensive online financial planning service by Celent Communications, a leading online financial services research firm. And as long as we are bragging, Mutual Funds magazine called the website “great.” The book is the culmination of everything we have learned about how to rescue a retirement plan that has gone off track for whatever reason.
But enough about us. We are here to help you.
We figure you are probably somewhere north of 40. And we also believe you have wondered (at least once), “Am I ever going to be able to retire?” This is a legitimate question to ask, given:
- A) How much the stock market fell in 2008. The Dow was off 33.8%, which means it fell by more than a third, and the S&P (down 38.5%) and NASDAQ (which lost 40.5% of its value) did even worse.
- B) The fact (as we will see in the next chapter) that most of us haven’t saved very much for retirement.
But we are confident that by the time you have finished reading, we will have shown you ways to end up with more money than you would have ever thought possible. Should that increased number still not be enough to fund the retirement you imagined, we will show how you can live better under reduced circumstances. We will also help you consider whether you want to retire at all—the answer may surprise you. (If you can’t wait, turn to Chapter 3, “Maybe You Don’t Want to Retire,” now.)
Speaking of skipping ahead, that’s something we encourage. It’s your book. Read it the way you want. That said, let’s spend a quick minute talking about how Save Your Retirement is organized.
The core of the book is comprised of five different planning scenarios:
- R–15 (pronounced “R,” as in “Retirement,” minus 15) is our shorthand way of saying you are 15 years away from retirement. Here we will lay out your options—and you have a lot of them because you still have 180 months to go until you think you are going to start drawing down your money.
- R–10 is a time when you begin to play offense and defense simultaneously. You still have time to save a substantial sum of money toward your retirement, and certain changes to the tax code—the “catch up” provisions that allow you to contribute more to your retirement accounts than a younger person can—work to your advantage as well. But this is also the time to start thinking about making sure all your investments are positioned exactly the way you want.
- R–5 is when you want to make sure you can handle any unexpected financial situations such as the stock market meltdown of 2008, a sudden illness, or any other catastrophe. Sure, you are still saving aggressively for retirement, but as you do so, you are also shifting a good portion of your assets into fixed income investments—bonds, cash, and cash equivalents (money market funds, Treasury bills, and CDs)—so that you are certain to have a large sum of money available to you at retirement, no matter what happens in the intervening five years.
- R–0. You have reached retirement age. (Congratulations!) How are you planning to withdraw the money you have saved, and how fast are you going to draw it down? We will give you a simple formula to follow and provide a list of common pitfalls to guard against. For example, many people believe that just because their retirement savings have grown about 8% a year over time, they can safely withdraw 8% a year after they retire. This simply is not the case. We will also discuss how your assets should be allocated. (Hint: You might want to have more money in stocks than you might think.)
- R+5. You have been retired for five years. How are things going financially? We will give you a checklist to make sure your money will last (at least) as long as you do, as well as suggesting strategies for boosting the returns on your investments—safely.
The advantage of providing a number of scenarios is twofold. Not only will it be easy for you to zero in on the one that describes your specific situation—you are at R–10, for example—but it also allows you to examine in detail the challenges and opportunities you will have in five years (R–5) or even 15 years ahead (R+5).
Although the five planning scenarios are geared for specific situations, the chapters on either side of them will be applicable to everyone. We will be talking about ways you can save (a lot) more money and how you should think about risk as retirement grows ever closer.
The more you know, the better you can plan. This is good news at a time when we all can use some.
And we think there is another bit of good news, one for which you are responsible.
The easiest thing to do, in the face of bad news—financial or otherwise—is pretend you are an ostrich: You stick your head in the ground, in the mistaken belief that if you don’t see it, the bad news doesn’t exist.
Well, you aren’t an ostrich and ignoring a problem is rarely the way to go.
You aren’t doing that. Simply by picking up this book, you are dealing with the problem of how you can have the retirement you want. You have taken the first step toward creating a solution.
As we said at the beginning, there’s hope.