Take a look at financial websites or switch on a cable TV program and you get the impression that smart retirement planning requires you to stay constantly attuned to every wiggle in the economy and the stock market—and act on it: dump one investment, buy another, re-jigger your entire portfolio...do something, anything, to react to the latest buzz. This, of course, is nonsense.
In a constantly shifting global economy, there are far too many things going on for any person—any organization for that matter—to keep tabs on, evaluate and integrate into a master retirement plan. And then do it over and over again as conditions inevitably shift. It's just not realistic.
Even if you could stay on top of the overwhelming amount of financial information, it's still not always clear how best to react to news. For example, a good GDP report can be a plus for stocks if investors take it as a sign that a recovery is gaining traction—or bad if it stirs fears that interest rates will rise causing stock prices to soften.
So given the complexity of today's financial world, what can you do to better assure you'll have a secure and comfortable retirement? My advice: Focus on getting these four Big Things right.
1. Set a target—but make sure it's the correct one. Generally, you'll do better at any activity—career, health, sports—if you have a goal. Retirement is no exception. The Employee Benefit Research Institute's latest Retirement Confidence Survey notes that people who've tried to calculate their retirement savings needs are more likely to feel very confident about affording a comfortable retirement than those who don't.
Over the years, however, the target of choice seems to have become Your Number—or the specific amount of money you'll need to fund a comfortable retirement. But Your Number isn't a very good benchmark. It gives a false sense of precision, and can often be so big and daunting that it discourages people from saving at all. (What's the point if I have zero saved and need $1,378,050?)
A better barometer: Keep track of the percentage of your pre-retirement income you're on pace to replace both from Social Security and draws from your retirement savings. Granted, this figure isn't exact either. Experts generally say that to maintain your standard of living you should try to replace anywhere from 70% to 90% of your income just prior to retirement. But it's a number you can more easily get your head around, and more easily translate to an actual lifestyle. Many 401(k) plans include tools that allow you to see how you're doing on this metric. If yours doesn't, try the Retirement Income Calculator in RDR's Retirement Toolbox.
2. Save at a reasonable rate. If you're still in career mode, setting aside a sufficient amount each year in a 401(k) or other retirement accounts is the single most important thing you can do to improve your retirement prospects. What's sufficient? I'd say 15% of salary is a good target. But if you can't manage that, try starting at 10% and working your way up. Employer matching funds count toward that savings figure, so be sure to take full advantage of any employer largesse.
Once you reach retirement, tending your nest egg and managing the amount you spend is key. You don't want to spend so much that you delete your savings early on; nor do you want to be so miserly that you leave this mortal coil with a big pile of cash behind you.
3. Invest like a smart layman, not a dumb pro. I'm being a bit facetious here to make a point. Professional investors and money managers are not dumb. But many of them do things that I consider dumb, like jumping from one market sector to another in a vain attempt to outguess the market or trading so often that they rack up transaction costs that depress returns.
The smart layman, on the other hand, knows that the two best ways to invest retirement savings are to set an overall mix of stocks and bonds that best reflects your appetite for risk, and then stick to low-cost investments that allow you to pocket more of the returns your savings earn. For guidance on creating a stocks-bonds blend that will generate the returns you'll need without subjecting you to more downside risk than you can handle, you can check out this Investor Questionnaire.
4. Monitor how you're doing, but don't obsess about it. Retirement planning is a long-term proposition. So while you definitely want to be sure you're making progress toward accumulating the savings you'll need—or, if you've already retired, that you'll be able to maintain your standard of living—don't over do it. Re-assessing your progress once or twice a year by going to a retirement income calculator like the one highlighted in RDR's Retirement Toolbox is probably sufficient.
Constant check-ups may make you more likely to tinker with (or, worse yet, dramatically overhaul) your investments or your plans. This urge to make changes is especially strong during periods of upheaval in the economy and the markets. And changes made on the fly or precipitated by an emotional reaction to duress often do more harm than good.
That said, there can be times when adjustments are called for. But when they are, you'll typically do better by making small changes and then later re-assessing whether you need to do more rather than going with a dramatic move that could knock you even farther off course.
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