donít have to be a genius, a math brain or know
anything about the stock market to invest your money
well and retire comfortably.
people donít think of themselves as investors. But
just about anyone with a fourth-grade education can get
key money decisions right ó like feeding a 401(k) or
IRA regularly ó and retire with a stash thatís large
enough to last until youíre in your 90s. But you have
to be deliberate.
today, as I write the final installment of this advice
column before moving to another writing venture, I want
to leave you with some crucial basics. Get these right,
and a lot of money matters fall into place.
TALK ABOUT COLLEGE
all heard about recent graduates so buried in student
loans they donít feel like they can have children, buy
homes, or leave a good-paying job for the job they
really want. But most people struggling with college
debt didnít finish college or got a degree that wouldnít
lead to a career lucrative enough to cover their student
be deliberate about college decisions. When you are 18,
itís impossible to see your future precisely, but if
you are drawn to art, social work, early childhood
education and other jobs paying maybe $25,000 a year,
you donít want $40,000 in loans. Follow this rule of
thumb: Donít have total college loans that exceed your
annual gross income. This means researching your likely
career and its expected pay.
college isnít for you, consider an associate degree in
a technical field that pays well. About 28 percent of
people with two-year educations earn more than the
average bachelorís degree graduate, according to
Georgetown Universityís Center on Education and the
DILEMMA: COLLEGE OR RETIREMENT?
struggling to pay off their own student loans, many
parents donít want their children to experience the
same pressure. So parents start setting aside money in a
childís college fund while skipping or scrimping on
their own retirement savings. This is backward. The rule
of thumb: Save 10 percent of your pay for retirement
starting with your first job. Miss starting in your 20s,
and you will need to save 12 to 15 percent in your 30s.
thereís not enough money to save for both college and
retirement, itís the college fund that should get
shorted. While parents donít want children to have to
borrow for college, no bank is going to give a loan to a
75-year-old who has run out of savings and needs food,
medicine and electricity. How do parents know if theyíre
saving enough for retirement? Try the ballpark estimate
a survey by the Employee Benefit Research Institute, 70
percent of people said they could save more, but they
didnít. The trouble is that too many people make
financial commitments that sabotage their ability to
save adequately. They decide on a house, apartment or
car they like and maybe a gym membership or activities
for the kids. The result: They are tapped out from the
start, with nothing left over to save and credit card
bills that never get paid off.
they need to follow some rules of thumb to keep them out
of a financial straitjacket. Among them: Spending only
28 to 30 percent of their income on housing ó whether
they buy or rent. Spending no more than 10 percent of
monthly pay on a car, and taking a car loan only up to
a 50-30-20 budget. For necessities, you spend only 50
percent of the pay you have after paying taxes.
Necessities include the mortgage or rent, insurance,
food, utilities, student loan payments, etc. Thirty
percent goes to wants, like gyms and vacations, and 20
percent goes into savings. Save automatically for
retirement in a 401(k) at work, or an IRA outside of
work, and in an emergency fund to get you through six
months if you lose your job.
have become wiser about taking on debt since the 2008
recession, but some still use credit cards without
realizing how much they waste.
the consumer who spends $5,000 on furniture. She puts
the purchase on a credit card with an 18 percent
interest rate and pays the minimum of 3 percent a month.
She pays month after month, spending a grand total of
almost $9,000 by the time all is paid off in 34 years.
She might not have liked the furniture as much if the
original price tag had read $9,000, not $5,000.
you have a 401(k) at work you are fortunate, and if your
employer offers to match a portion of your contribution,
make sure you get every penny of that free money.
a 25-year-old making $35,000 and working for a company
that will give him free money if he saves for
retirement. If he saves 6 percent of his annual pay in
the 401(k), his employer will match half of that. So the
25-year old puts $2,100 into the 401(k) and the employer
adds $1,050. Assume this same process happens year after
year as the employee receives 3 percent raises a year
and the investments gain 8 percent on average annually.
At age 65, he would have about $1.2 million for
retirement. The free money from the employer ended up
providing almost $400,000.
a person doesnít have a 401(k) he should be putting
money from each paycheck into an IRA outside of work.
Investing is easy with whatís known as a target date
fund. The fund is based on the date you expect to
retire, and the investments are calibrated based on the
number of years you have until retirement.
THE STOCK MARKET
stock market has been on a roll, growing about 12
percent this year. But it wonít last. Scary times in
the stock market, known as bear markets, happen on
average about every 3.5 years, although there hasnít
been one since the 2008 recession.
a bear market stocks decline on average about 38 percent
and the downturn lasts an average of 19 months,
according to The Leuthold Group, an investment research
scary times people flee the market, but in doing so they
lock in losses and canít ever recover if they stuff
their remaining money in a savings account. No one is
ever sure in a bear market when stocks will recover, but
they have after every scary market thatís occurred.
The stock market has gained more than 260 percent since
the last bear market.
of trying to time the market, pick a mixture of stocks
and bonds and stick with it. For young people, advisers
often suggest keeping 70 or 80 percent or more of your
money in the stock market. Often advisers suggest that
those early in retirement invest half in stock and half
in bonds, and those late in retirement invest 25 percent
THE MONEY LAST
you retire, a key issue is making your money last.
Almost half of married women live to 90.
retiring, calculate what you expect to spend each month.
Once you know what you will need, see if your savings
will provide it.
is a rule of thumb applied to retirement money: Take
only 4 percent of your savings out the first year of
retirement and increase the sum just slightly each year
to cover inflation. If you ignore the 4 percent rule,
thereís a strong risk that you will run out of money
too early in retirement. The withdrawals are based on
the assumption that you have about half invested in
stocks and half in bonds.
if you have $1 million saved in a 401(k) or IRA, you
remove $40,000 for the first year of retirement and
tweak it slightly each year to cover inflation. Itís
not a perfect approach, because market conditions can
disrupt the plan, but you can adjust by cutting spending
during a bear market.
planning is complex. While I believe in do-it-yourself
saving while young, it pays to see a trained financial
planner before retiring to make sure you have adequate
savings, that you have timed retirement to maximize
Social Security, and that you will withdraw your funds
in a tax-efficient way. For this job you want a
financial planner who is also skilled with tax planning.
a certified public accountant who is also either a
certified financial planner or a personal financial
specialist. Beware of designations that sound close, but
arenít the real thing.