We’ve heard a lot recently about how Americans aren’t going to have much of a retirement. We’ll work longer and have less, and things don’t look much better for our underemployed kids.
Such headlines induce a feeling of paralysis, I know. Why bother, you might conclude, if there’s no hope? Yet there are plenty of things you can do. It is mathematically possible to save sufficiently to retire well.
The future is not as doom-and-gloom as you might guess. But it’s absolutely crucial to take the retirement problem seriously. Here are the five mistakes you simply cannot make along the way:
Error #1: You won’t save nearly enough
Five percent? Ten percent? Ignore the rules of thumb. Instead, sit down and come up with your real cost of living in retirement. Like a pension fund, you should first calculate your true future liability, then work toward the income you need to meet it.
A person earning $100,000 in an urban area with high taxes and high real estate costs needs every cent to get by. Imagine living in Manhattan on that salary. If you retire and move to Wilmington, N.C. you need just $43,751 to have the same lifestyle. People in Bowling Green, Ky. get by with $41,376. In Pueblo, Colo. you’ll live the same on $37,509, and so on.
If you have a few hundred thousand in an IRA and 10 years of work left, you’ll need more money to stay in the Northeast. Recast your plans to the South or West, and you might find a way to retire in less than five years. Just be sure to hit that mark, without fail.
Error #2: You will try to time the market
The past 20 years of market ups and downs has taught us one very clear lesson: Sometimes investments go down. But it has led some of us to a truly dangerous conclusion — that we should try to predict the next collapse.
The market will decline again. That’s as far as anyone can go with certainty. Yet retirement investors who decided at the start of 2013 to go to cash missed a huge climb in stocks. If history is any guide, they’ll wait until the market is higher still and then go in big, likely just in time to buy the high.
Retirement investing is not about timing the market. Rather, it’s about owning a disciplined portfolio that automatically takes gains when they appear and protects you from the downside in rocky times.
Error #3: You will speculate rather than invest
If you’ve been following the saga of Bitcoin, the virtual currency, it’s been a really interesting lesson in speculator hysteria. The cryptocurrency supposedly offers its holders shelter from the vicissitudes of printed fiat money, yet so far it’s mostly been a roller coaster.
Dormant for many months, the price of the electronic money took off in November, going from below $200 to above $1,100 in short order. By the beginning of this year it had fallen in half, rebounded sharply and now trades in the vicinity of $600.
Know what else demonstrates this kind of volatility? Technology stocks. Precious metals. Investors love the idea of a “silver bullet” investment that will solve all their financial problems. So they tend to glom on to a great short-term story and drive prices up. Sooner or later, reversion to the mean sets in.
You’d be much better served by owning the whole market in an index fund than in trying to figure out which stock or asset class will outperform. Even if you get it right today, there’s no reason to believe you will stay right long enough to realize the gains. Yet you’ve amped up your risk tremendously in the meantime by doing so.
Error #4: You will pay for worthless advice
A corollary to the “silver bullet” investment is the guru advisor, the one trader in the crowd who knows what’s going on while everyone else is in the dark.
There are a bunch of assumptions at work here, each more dangerous than the last. First, unless you command tens of millions of dollars in investments, be assured that your choice of broker will be limited to whoever is on deck. That’s just how it is.
Second, consider that your broker has a lot of clients. You could be on the top of his list of people to call today, but probably not. You might not hear from him or her for months.
That sounds depressing, but the silver lining is that the multimillionaire is not getting better investing advice. In fact, you can buy exactly the same portfolio advice the rich get at a tiny fraction of the price.
That’s what we do at Rebalance, my own firm. You won’t get estate planning from a portfolio service, but if what you want is a rigorously built portfolio that will grow your wealth and a firm hand to guide you, there’s no reason to pay big bucks for it.
Error #5: You will trade
Oh, you will trade. You will watch cable TV shows on investing and subscribe to newsletters and talk with your friends about the ins and outs of IPOs in the news. You will know more about Mark Zuckerberg’s latest plans for Facebook than you likely know about what’s happening this weekend in your own hometown.
It’s a fine hobby, but it’s not a retirement plan. Put some money in a side account and trade away, but keep your IRA and workplace 401(k) money far, far away from any kind of active trading.
Long experience in the markets and mountains of academic research have shown that investment success is greatly restricted by the costs of trading. One new study found that investors pay 1.44% a year on average just in trading costs.
The more a mutual fund trades, the worse its performance, the study concluded. The highest fifth of funds measured by trading activity trailed the least-trading fifth by 1.78 percentage points annually. That’s a serious drag, and it doesn’t even take into account the fees active funds charge for doing all this trading on your behalf.
You can retire well, mathematically speaking. Avoid these five errors and make a few simple decisions about lifestyle and a good retirement is yours for the taking.