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Are You Saving Enough for Retirement?

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If you are approaching retirement age, do you have enough capital to retire comfortably?

Or, if you are many years from retirement, do you have a proper investment plan in place? One that will ensure you have adequate retirement funds down the road?

In fact, many people about to retire do not have enough capital saved.

So this is a crucial issue for both older and younger investors.

U.S. Federal Reserve data analyzed for The Wall Street Journal [4] determined:

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement …Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings.

While this is U.S. data, I think it is applicable to individuals in most countries.

What lessons come out of the linked article?

Benefit From Compound Returns

If you recall my posts on compound returns [5], the sooner you begin to save, the greater the wealth accumulation over longer time periods. Even relatively small amounts will nicely grow. But the longer you delay saving, the more you will need to put away later in life.

For a comparison between starting early versus starting late to save, this example demonstrates the difference [6].

Start saving for retirement today. If you are 20 years old, it will be less onerous than if you wait until 30. And if you are 30 or 40, it will be easier than if you wait until 45 or 50.

Err on the Side of Caution

Always be conservative in your assumptions. Besides starting late in life to save, individuals are too optimistic in their retirement planning.

Never assume that past performance in an asset class will continue in the future. Markets rise, fall, and remain stagnant over periods. Inflation may be higher than anticipated and erode purchasing power from accumulated wealth. Illness, layoffs, job changes, etc., may interrupt or alter income projections.

If problems arise, staying conservative will provide some protection. And if all goes well, you will find yourself way ahead of the game at retirement time.

Properly Diversify Your Portfolio

Pay attention to your asset allocation and portfolio diversification.

Asset Allocation

As you approach retirement, start to shift capital into lower risk assets. This will safeguard your funds. One couple cited in the article had planned to retire in one year. However, a “stock collapse knocked 40% off their savings” and they had to delay their retirement four years.

When seeking to retire in one year, it may not be prudent to have a substantial portion of wealth invested in a highly volatile asset class such as common shares.

Portfolio Diversification

The same thought applies to portfolio diversification. One lady in the article was “an executive assistant at America Online and had stock options she figures were once worth $1.7 million. The options’ value collapsed with the company’s stock.”

If you have significant exposure to any one investment, it may be wise to sell some holdings or use derivatives to protect your unrealized gains.

This is especially true if the asset is tied to your source of employment or business income.

For example, consider many Enron employees. They invested heavily in their own company, a large portion in their retirement accounts. When Enron went under, they lost much of their savings, not to mention jobs.

Do Not Rely on Your Government or Employer

Not mentioned in the article, but a serious concern of mine, is the stability of government and employee pension plans.

Government Pension Plans

At some point in the near future, governments will have to address their pension plans.

Here I refer to social welfare programs where one’s government supplements retirees’ personal pensions and savings. Canada Pension Plan, Social Security, Old Age Pension, National Insurance, are a few examples.

In most countries, there are huge solvency issues that must be addressed. This will likely result in: reduced benefits paid; clawbacks based on means tests; increased age before eligibility for benefits results; or other cost saving measures introduced.

The bottom line is that you will receive less in real dollars than is paid to retirees today.

Employer Pension Plans

I have similar concerns for employer sponsored plans as well.

Government plans for public sector employees is one area that will be restructured.

Public sector employees include firemen, teachers, government employees, etc. This is different than the social welfare plans discussed above.

I am not saying they should be restructured, so save the comments on how valuable public sector employees are and that contracts are contracts. But they will need to be adjusted downward simply because of the math. Not enough money coming in from taxpayers to finance employee retirement benefits. That is the unpleasant reality.

The same thought applies to any company that provides defined benefit retirement plans.

Many companies (and governments too) are significantly underfunded as far as their pension obligations. Unless companies generate adequate cash flow to catch up, something that is all the more difficult with no compound returns on the non-funded balances, there will be insolvencies and non-payment of obligations to retirees.

I would feel much more secure in a defined contribution plan that is continuously funded.

So if you are expecting your employer or government social security plans to offset any personal saving shortfall, do not count on that.

Educate Yourself or Hire Expertise

I do not write this blog to develop my own business. But when I read stories like these, I do think that individuals should become much better educated as to their investment and retirement strategies.

That can come through self-education; hopefully this blog assists in that effort.

Spending some money on a competent financial advisor may also be an excellent investment.

If paying someone a relatively small amount results in significant asset accumulation and allows you to ultimately retire with enough capital to live comfortably, it will be worth the cost.

I Wish I Am Wrong

I hope I am wrong about the future.

Unfortunately, I strongly believe that people will need to depend almost entirely on their own savings in retirement. Relying on social welfare or employer pensions may be a poor strategy.

Save as soon as you can and as much as you are able.

If I am wrong, you will enjoy a fantastic retirement with all the excess accumulated wealth.

But if I am correct, you will be better prepared than most of your peer group.