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Retirement Planning: Confusing Saving with Investing March 11, 2009

Posted by retirementwithaplan in retirement.
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031109hed_hrs2009Think of investing this way: the owner of a horse that has run away suggested when asked if he was upset, that he was but perhaps it wasn’t as bad as it seemed. The next day, the horse returns with a small herd of wild horses. The story continues with his son, trying to break one of the horses, falling and breaking his leg. Someone commented on the tragedy but the owner was not phased by the incident. Soon afterward, the parable goes, the army came looking for the son but rejected him because of his injury.

Think of savings this way: the owner of the horse locks up his animal and the son goes off to war.

The differences are quite obvious. Investing offers your money the opportunity of maybe while savings ignores the possibility, content with what is and feeling secure because of it.

The two words are often confused when it comes to retirement planning. That may be why we are all in shock. We assumed that saving was placing money in a 401(k) or other type of defined contribution plan and that when we did, the growth of that money would be guaranteed. Misunderstanding the risks involved and looking only at the rewards, many of us unlocked the gate and let the horse roam free, assuming that when the horse returned, it would arrive with more livestock in tow. That assumption was, as we have all found, was wrong.

Savings is the horse in the barn, safe and sound, kept from harm and protected from loss. Even now, large financial institutions are still confusing the words and misleading savers and investors alike. Fidelity is among the most recent to jumble the meanings with a new program that offers personal financial advice.

The Challenge of these Economic Times
No one can down play what has happened to our investments (what we placed in stock and bond markets for our futures) and savings (the failure to have any has left many of us feeling more vulnerable than we should).

Fidelity’s attempt at rectifying the events of the past twelve months is outlined in a new program that is based on several of Fidelity’s views on saving and personal money management. Offered as general principles, they seek to take some fiduciary responsibility and explain how they can help.

The begin with retirement suggesting it should be a primary focus. And it should but they make the mistake of misleading some of by calling it savings. It is not. Retirement planning, for those of you that have read the book I have written and the numerous posts associated with the topic in the year since its publication involves understanding that risk plays an important part in the equation. But risk can unfold in some interesting ways.

The forces that can undermine your retirement efforts can come from unexpected directions. Parents can suddenly become your burden even as the welfare of your children shifts from your care to something of their own. Insurance, taxes, and inflation all seek to undermine your efforts as they put strain on what is available to invest. And as we know, those forces can disrupt your thinking but should not disrupt your plan.

The tax breaks provided by a retirement plan make the effort much easier. We can have money taken from our paychecks, pretax, and put into the investments of our choice. Those investments might be conservative (exposure to little risk but not completely safe from market forces and the harm they can sometimes inflict) or aggressive (exposure to greater risk of loss and on the flip side, greater reward if the investment does well). Many advisers try and assess your risk assigning an age to when you should adjust your investment style, protecting assets gained while younger with a more conservative approach. None of this is savings.

Savings needs no rebalancing, no change in allocation, no shift in how you think. Savings comes with no risk. Having no savings on the other hand, does.

Fidelity makes this error on numerous occasions as they attempt to lure investors back into the marketplace. While they suggest that “saving for retirement should be a primary focus. ” Then it gets vague, blanketing the concept on old platitudes and misdirections.

If you have a defined contribution plan where you work, they suggest that, “regardless of age, all workplace plan participants should contribute at least enough to receive the maximum amount of any matching employer contributions, review their portfolio at least once a year and rebalance as necessary.” What should the employee do in the face of diminishing matches, defeated portfolios and little or no knowledge about what do to with what they have.

When they have the opportunity to suggest you save, they simply tell potential retirement planners to “set aside at least three to six months worth of living expenses as a safety net” and get control of those high interest credit cards.

Few people in this country are in a position to max-out their contributions in those employer sponsored plans but no matter. Once you do, you should look into saving (investing) more. Once you do all of that. begin a 529 plan for you kid(s).

There is nothing really wrong with their effort and I never miss an opportunity to poke fun at the misuse of those two words or to wonder how someone with a product to sell can conduct an open and frank conversation. But they do.



1. Retirement Planning: High Risk in a Conservative Approach « Retirement with a Plan - March 13, 2009

[…] during any sort of recovery is akin to stuffing it under your mattress. (The key to investing is making your money work, assuming a little or a lot of risk and doing so for the rewards while […]

2. bob ferguson - March 14, 2009

Nice job Paul! Does one of your other books cover the topics of a reverse mortgage or Social Security opportunities?

3. kbgunman - March 28, 2009

Nice analogy about the horse and the stall. I like to think of savings as an emergency fund to handle life’s unexpecteds. Investing is additional money set aside for a specific purpose (growth). Good stuff.

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