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Retirement Planning: A Well Developed Retirement Plan, Part One September 4, 2008

Posted by retirementwithaplan in retirement.
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There is no secret that the world of retirement investing has changed. Tax reform has spearheaded a new look at the way we put money away for those golden years – even if it is used to sustain a career that requires less work for a longer period.

Baby Boomers need to face facts. Their group, earmarked as the largest group of retirees ever with the potential to live the longest of any of their predecessors, will need a strategy for investing in an environment that does not necessarily embrace savings.

Conventional wisdom usually calls for some basic principles to be followed. Start early, stay consistent, watch those fees, reinvest dividends, diversify, and of course, invest with some sort of dollar cost averaging. These are tried and true principles that have guided investors for years. I have even espoused these virtues as significant in a well rounded plan.

But suppose you are starting late, have not stayed consistent, have no idea what fees do to the investment you have made (or not), understand the idea of reinvesting dividends or whether that is even a good idea, understand diversity but feel as though that is too conservative for such a late start, and need to jump start your investing with lump sum participation using tax refunds, seasonal bonuses or other significant windfalls. No problem.

Few people develop the ideal investing strategy. Many more find themselves faced with the daunting task of sorting through the old information while culling something of value for a plan that is either nonexistent or sadly lacking direction. Fear no more.

Part One: A Well Developed Plan

The very first thing you need to wrap yourself around is the culture of savings. While many folks play lip service to savings, few ever equate the negative impact of debt on the financial plan. For every interest rate point that is tied to debt, one should be subtracted from every interest rate point earned as part of an investment return.

This argument should not be linked to mortgage payments or financing of what is known as durable goods. The term durable goods applies to cars and appliance, things that are needed to function a normal existence. One the other hand, blazing computers, wide screen televisions, and other non-essential goods are not considered durable.

The important thing to understand is that controlling these kinds of frivolous debts without refinancing or drawing additional equity in your home for debt consolidation requires patience and time. Rolling or consolidating debt is actually adding years, often outlasting the goods that were purchased. In other words, tying products and vacations to your home do not constitute wise money management. Manipulation maybe, but not management.

That said, let’s start with timing. A late start is not a bad thing. Certainly not as bad as never starting at all. There will be 40 million baby boomers celebrating their 50th birthday over the next decade. This seemingly large number is estimated to be the real reason there has been such an urgent call for Social Security reform. More alarming is the fact that many of these “boomers” have not made much in the way of retirement savings outside the equity in their homes. Estimates of retirement savings have been made based on the current group of fifty year olds.

Those results are troubling. Pollsters have found that the average retirement savings amassed by this group by the time they reach their fifth decade is less than fifty thousand dollars.

It is relatively easy to see why. The current savings rate in this country, based on recent Commerce Department figures, is around 0.2%. That is a steady decline from a 1984 high of 10%. That’s right. A mere twenty years ago, the average American was putting away $10 for every hundred dollars earned. What changed?

Some believe the measurement does not portray how America currently saves. The method by which we measure the savings rate is believed by some economist to be antiquated. Currently, the statisticians use a measure of personal income, money brought into the household, and compare them against expenditures, money spent by the same household.

The main complaint about the numbers offered by the Commerce Department comes from the measure current income while ignoring previously invested dollars. The figure they calculate subtracts expenditures from income, an after tax calculation that includes wages, dividends, interest, rents and even an employer’s pension contributions arriving at a rate that may be unrealistic.

Economist believe that this kind of calculation is subject to some basic under-over estimation errors. By underestimating income and over estimating expenditures, it is easy to find flaws with the department’s numbers. The suggestion that the agency also include capital gains and the profits from home sales as part of the calculation for income, economist believe that the number will better reflect disposable income. The flip side of that argument rest on the consistency of such income. The low and favorable mortgage rate that has spurred refinancings and selling offers a glimpse of an accommodative moment in time, not earned income.

On the expenditure side, large purchases usually made over time are booked as one time expenditures rather than time based purchases. Economists suggest that a better method of estimating expenditures of big ticket items like automobiles would be to book them the way the consumer does, as monthly costs rather than a lump sum.

The estimations of actual savings in this country are further skewed by the proportion of the population that actually invests. It is estimated that 10% of the population controls two-thirds of the cash as well as 50% of the invested money in the stock market. That leaves a decidedly small piece of the pie for the remainder of the investing public. When politicians point towards half the nation as an “investor class”, they are basically further skewing the numbers by suggesting that the remaining 90% of the population is responsible for only 40% of the invested dollars.

To begin a well developed plan, it is important to understand that savings are any portion of your income, your taxable wage that includes any money that is regularly received, that is put away in the form of investments for a rainy day or even for retirement.

Next: A Culture of Savings



1. Isabella Coldivar - October 28, 2008

This is a great post! Thank you! Retirement has become quite complex lately. Like you mentioned, having a good plan going in is the way to go! A lot of people haven’t done their research and it’s really going to hurt them in the long run. Planning ahead is key, especially in the current state of the economy.

Keep in mind, that when you’ve made your plan to retire…include the one company that can help you navigate through the coming retirement so you can go into your golden years confident as ever!

AARP is a great source of services and information that can be beneficial to the quality of life. What’s great about AARP is that a membership comes with prescription and travel discounts!

AARP has teamed up with talk show host, Cristina Saralegui and made a fun, customizable video and you’re just a click away from being the next guest on Amigos Live! Check out http://www.upclosewithcristina.com/video to learn more and make your own video!

Also, you can enter to win an all inclusive trip for 2 to Miami while you’re checking out the site! (And even if you don’t win, there’s still those great travel discounts that come with the membership!)

Definitely check out AARP for yourself or a loved one. There are really are some great benefits to joining!

I hope it’s alright that I commented on your blog — wanted to let you know about the fun video with Cristina and AARP’s great benefits. If you have any further questions, please don’t hesitate to email me.

Isabella Coldivar
AARP Ambassador

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