Retailers have built up Black Friday as a shopping holiday for a good reason: It’s traditionally the date that stores expect to be “in the black,” that is, profitable for the year.
It falls the day after Thanksgiving, so knowing the company will finish the year with a profit is vitally important as the Christmas season looms. Why not kick things off with a big sale, just to get people excited about spending?
Of course, from the consumer perspective, Black Friday is all about the deals. We put off buying big ticket items such as electronics and appliances on the expectation that competition will drive down prices on the most-desired items.
What if there was a Black Friday sale on your own retirement? What if you took the retailer’s perspective and actually set a hard date each year in which you no longer worked to pay the bills and instead worked to ensure your ability to retire on time.
Here’s the thing: Retailers don’t wait until Thanksgiving to figure out if they’re going to make a profit or not. They set a date in order to remind themselves that the race is not won near the end of the course but by the pace you set all year.
That forces them to make choices early. How many to hire and where. What trends to pursue or promote. Cost-cutting where it matters and spending where it helps the bottom line.
You can do the same with your own retirement planning. Ask yourself on Jan.1, how much money do I need to set aside this year to make headway on the retirement plan? How much should I spend on myself instead this year?
What expenses can I trim to ensure I make my monthly or biweekly saving goal? What experiences, travel or consumer goods will I give up to make it happen? Eating out? A new car? Or working more hours?
A personal Black Friday would not be a once-a-year thing but a monthly checkup on progress. You should see your retirement balances climbing steadily throughout the year, whatever your goal may be.
A great way to make sure you get to your retirement goals is by focusing on the cost of investing. Using costly managers can do real damage to a retirement plan. So can chasing stocks or market trends.
Relax and enjoy
The best Black Friday deal is a sale you roll on your own. Chop your mutual fund costs permanently by using index funds. Invest fixed amounts periodically to avoid emotional traps around buying and selling.
And try to relax at the end of the year. Holiday spending is easier if you know you’re well on your way toward making your long-term savings and retirement goals.
Call it peace of mind. Call it a personal Black Friday. Just be sure to take saving seriously and then enjoy whatever comes next over the holidays.
Figuring out a retirement plan is no walk in the park. The variables are many and the future is unwritten. And it’s stressful.
Here’s the thing. That stress that is bothering you is not from thinking about retirement, it’s from actively not thinking about retirement.
You’ve probably met people who have their retirement plan worked out. Money never comes up. They seem at ease with any outcome in life, even big setbacks, because they know they have controlled for the controllable.
Yes, your health may change for the worse. Yes, financial calamities can hit the markets, the economy, everything. Those are the uncontrollables. It’s why we own insurance.
The controllable things are how much money you have saved and how well it’s invested for your future self. Get a good head of steam going on that and money becomes a secondary topic in life, after family and career and your interests.
Ready to get on the road to money serenity? Here are three retirement rules of thumb, good, better and best. They all work. Only the exactitude rises.
Good: Use a multiple of your income
This is a great starting point. Essentially, Fidelity Investments tells you to take your current income and multiple it by a number. Decade by decade, that multiple is the size your portfolio must become to sustain your lifestyle into retirement.
It works like this. If you make $75,000 a year:
- At 45 have saved up three times your salary ($225,000)
- At 50 make it four times your salary ($300,000)
- At 55 be at five times your salary ($375,000)
- At 60 have six times your salary ($450,000)
- At 67 have eight times your salary ($600,000)
There are caveats, but this is a good starting point.
Better: Use a simple calculator
The investment management firm BlackRock offers a free, relatively simple (to use) retirement income estimator. Just move the slider to your age, enter your savings on the next page and the calculator tells you how much income to expect.
Under the hood it’s quite complex, but not many online calculators give you as robust yet simple a tool to check your assumptions. It factors in inflation, life expectancy, interest rates, all the kinds of moving targets that it takes a financial analyst’s training to understand.
The calculator is only a tool, and the answers can change day to day, but it’s a very sophisticated way to figure out if your first number from the Fidelity rule above will hold water later on, when you need the numbers to work.
Best: Go whole hog with a Monte Carlo simulator
Financial planners love simulators. They especially love the Monte Carlo model, which runs your input data against thousands and thousands of market outcomes over decades. These are quite complex, but Vanguard has a free one that’s easy to use.
A Monte Carlo model offers a view of how often a long-term plan will “fail” based on your assumptions, that is, in how many cases would your plan run out of money before a specific retirement age.
Lower is better. Having a plan that fails in 1% of market scenarios over history is much better than one that fails 10% of the time, or 40% of the time.
Get on the path to retirement serenity. The first leg of your journey might be trying, but the views from higher ground are fantastic.
What does it take to retire on time? Money, of course. But that’s where most of us stumble. Having money on payday doesn’t translate on the spot into savings unless you do something about it.
We also tend to overthink saving and retirement. What’s the best stock to buy? When should you buy and sell a mutual fund? What about the economy, the markets, the world?
All of these things are well beyond your control and you know it. Yet the one thing we can control with great certainty — our own habits — gets lost in the shuffle.
Here are three key ways to save more for retirement by fooling yourself into better saving habits:
You can’t spend what you don’t have (credit cards notwithstanding). The simplest and best way to save is to set up an automatic deduction from your paycheck. If you have a 401(k) at work, use it.
If you don’t, open an IRA at your local bank or at an online brokerage. Figure out what your maximum contribution is for the year (currently $5,500 a year or $6,500 if you’re over 50) and set up automatic monthly or quarterly withdrawals from your checking account.
Consider a Roth IRA as well. You won’t get a tax break this year but withdrawals are tax-free in the future. However you do it, get yourself out of the decision process. Make it 100% automatic, even if you set the bar low at first and raise it later.
Once you have a few thousands bucks in an IRA, you’re likely to wonder how to invest it. Don’t fall into the trap of “playing the market” as a hobby. You’re far better off building a solid, risk-adjusted portfolio.
Why? Because a portfolio of diversified index funds will grow without a lot of mental effort on your part and reduces the risk of emotional moves that can cost you big money. Keep the costs low (use index funds) and just rebalance periodically.
What you want, in the end, is for your money to work for you, rather than you working for money. It won’t feel like a lot of money in the beginning, but once you hit a certain dollar level the incoming interest and appreciation will become real cash-flow.
Keep it automatic. Let those incoming dollars reinvest and redistribute them by rebalancing. That keeps your emotions in check and helps you compound your savings into a real retirement.
It’s just three steps, but it starts with automation. The problem with most retirement plans isn’t the design. It’s getting the plan off the ground with action and then keeping it going with regular saving and investing.
It can be done and it can be fun — once you take the first step.
How many jobs have you had over the past 20 years? Two, three? More?
The typical long-term career involves seven or more job “hops,” that is, moves not within one company but across an industry from one employer to another. Previous generations stayed with one company start to finish, but that’s no longer true.
In fact, U.S. government data suggests that for “young boomers” under 48, the number is more like almost 12 jobs. Some younger folks just assume they’ll last less than three years at a new employer, and their experience tends to back that up.
If you are a prudent, long-term saver, chances are you started off on the right foot at each of your old jobs, opening a 401(k) and joining the company health plan.
If that’s you, it’s very likely that you’ve left retirement money behind in each case. How much? Probably not enough to “worry about” but absolutely enough to matter to your retirement.
The problem is cost. Most small to medium-sized employers have expensive 401(k) plans. It’s only when the company has tens of thousands of employees do you find plans with costs that are aligned with the long-term goal of retirement.
It’s counterintuitive but true: Small-company employees who probably need the most help with retirement planning too often get the worst deal when it comes to their 401(k) plan. High fees and conflicted advice are the norm.
What can you do about it? First, take out your resume and look over all of the places you’ve worked over the years. Make a note of any at which you might have opened a retirement plan or had one opened for you by human resources.
Then, call them up. Your HR department will have all your records of past employment and benefits. Chances are they’ve changed their 401(k) provider but no matter, the money is still there.
If you find old savings sitting at a custodian, contact them and ask for information on how to do a rollover. The goal is to move the money out of the hands of your old, expensive 401(k) and into an IRA where you can manage the costs.
It might be a few thousand bucks or, with any luck and some years of compounding, even more. Every penny matters. Get all of your money into one bucket first, then take stock of how to manage it for your retirement.
If you are at a new employer, ask about the fees you pay for your current retirement plan. It might be reasonable to move your money into that plan and let them manage it.
However, the more likely outcome is that you’ll find the fees at your new employer are unacceptably high. You should be able to get management at well under 1%, including the cost of the mutual funds they buy in your name.
If not, consider instead managing it yourself using low-cost index funds. It’s not that hard to build a decent risk-adjusted portfolio using exchange-traded funds (ETFs) and rebalancing is not rocket science.
Costs matter. Fees matter. Leaving money behind in expensive 401(k) plans can be costly and a big mistake. Better to take action and take charge while you can.
If you spend enough time on the Internet you eventually run into web sites that promise you a nirvana of “passive income” for life.
If it sounds too good to be true, it is. Usually, these scams are nothing more than multi-level marketing operations, pyramid schemes or worse. You end up having to subscribe to some newsletter and the credit card charges never stop.
Yet “passive investing” is a real thing and inside that you will find a form of true passive income. Not only is it real, it’s by far the best way to invest for retirement.
So what is passive investing for retirement? It’s owning stocks and bonds, but more importantly it’s not picking and choosing among stocks and bonds.
Rather, you own the entire stock market through an index fund. The passive investing part is the fact that you no longer attempt to figure out which stocks are “better” than the others, when to buy or sell them or whether the prospects for any given company are improving or worsening.
Nor do you attempt to guess which parts of the economy might heat up, or even if the economy is moving toward growth or recession. It’s a passive investment. You hold it and do nothing.
That might seem scary, but the data show that just staying invested is the key to superior long-term performance. As JPMorgan explained in a recent letter to investors, missing the 10 best days in the market is shockingly expensive.
Staying invested in the S&P 500 over 15 years through the end of 2014 would have returned $65,453 on a $10,000 initial investment. In percentage terms, that amounts to a 9.85% annualized return.
Missing those 10 best days, however, would have resulted in a 6.10% return. It doesn’t sound like a huge difference, but the dollar amount is half the money — you end up at $32,665.
It just gets worse from there, missing the best 20 days, best 30 days, etc.
But think about that. Thirty days is just one month over 15 years. You could have been invested nearly the entire time but if you were out on just those 30 days your $10,000 becomes just $13,446.
In percentage terms that’s a 1.49% annualized return, lower than the long-term inflation rate. You’re actually losing purchasing power.
Passive investing power
The reason staying investing works is because of compounding, the ability for invested money to grow significantly as the years stack up. The other feature, which is truly passive income, is the fact that stocks often pay a dividend.
A big part of your overall return each year is dividends, cash income that typically amounts to 2% a year on your money. In short, just staying in can help keep you even with inflation, while appreciation and compounding turn small dollars into major retirement wealth.
You really don’t need a get-rich-quick scheme to figure out how to create lifelong passive income. The idea is so simple, yet so few people seem to understand it.
Buy investments, stay invested, reinvest dividends. Compound and repeat, hopefully at a low cost. That’s really all it takes to retire on time.
A story popular on the Internet this week tries to make the case that the CNBC host Jim Cramer gave out terrible advice when he picked 49 stocks about six months back.
Touted as “no lose” propositions, the stocks as a group did lose ground, falling in value at about twice the rate of the overall stock market.
But hold on. Cramer makes a living at this, doesn’t he? Where did he go wrong?
First of all, absolutely nobody should be investing in six-month time frames. Secondly, owning 49 stocks is too few.
Third, no stock is a “safe” from declines, ever. To even claim that is senseless on the face of it. It’s a good headline, but Cramer knows better.
Specifically, Cramer suggested that the 49 picks were well positioned should a general stock downturn happen, which did. So he did screw up if the idea was to protect investors from losses.
On the other hand, it’s only a mistake if you sell and take the loss, and Cramer didn’t pick awful stocks, just stocks that were challenged in the short term.
So what should a prudent retirement investor do differently, if anything? Let’s go step-by-step here.
First of all, never market time. That’s a common problem even among people who think they’re investing for decades to come. They think they know something about the future when, objectively speaking, nobody knows anything about the future.
You won’t pick the right moment to get in or out of a stock. If you buy a stock and it falls in value, the logical (if difficult) move is to buy more. After 15 or 20 years you won’t remember or care at what price point you entered.
Second, buy stock markets, not stocks. You need exposure to large-cap and small-cap stocks in very broad numbers — hundreds and even thousands of individual companies, not dozens. Index funds achieve this very cheaply.
Thirdly, measure your returns in five-year increments at a minimum. You’ll find that the stock market will bring you a return of about 6.6% over long periods of time, if you reinvest the dividends. That’s what the research shows.
You might think, well, I can beat that! No, you can’t. Bonds return less, with interest reinvested, commodities still less and cash is subject to inflation.
You can, however, build a portfolio of all of these assets and rebalance them periodically. That can add a percentage point or more to your overall return, if you stick to a strategy year in and year out and keep costs low.
Done correctly, your retirement portfolio will double in value roughly every 10 years. That’s the approach of pension plans and college endowments, and it works — no stock picking necessary.
Hiring a financial advisor is tricky. It’s not like selecting a carpet cleaner or a pet-sitter. You can easily hire a different company next time you need your carpets scrubbed, while a financial advisor is likely to be handling your money for years.
That’s a good thing, in general. Continuity and discipline keep a retirement plan on track. But it means that the level of homework you have to do before hiring investment help is that much higher.
Here are three key questions to ask before hiring a financial advisor:
1. How are you paid?
This is huge. Some financial advisors are truly planners. They might charge you a flat hourly fee and be available as you need them throughout the year. Others will expect to earn a fee based on the assets you have.
Still others will charge you a fee and, separately, accept payments from mutual funds and insurance companies for selling you specific products. Under current law, such financial products need only be “suitable” for you, although not necessarily in your best interest.
Ideally, you pay as little as possible for investment advice that you can trust and follow without confusion. There should be no conflicts of interest. If the advisor does accept outside money such as commissions, these should be clearly disclosed upfront.
2. What will you do for me?
Do you need someone to help you by and sell stocks? That’s a broker. Do you need help setting up an IRA? A financial planner is best. Do you need insurance or estate planning help? Then an insurance agent or lawyer is the call.
A good all-around financial advisor knows what he or she can reasonably do for a client and when to suggest a colleague in another area with more expertise. Understand your advisor’s strengths — and weaknesses — before you hire.
3. What returns should I expect?
Stocks, bonds and other investment classes have easily understandable long-term return averages. Held in a portfolio and rebalanced, you can predict the performance of your savings with reasonable accuracy.
Any advisor who promises you double-digit, market-beating returns might be able to do that. Just as likely, they could lose your money, too. Make sure the numbers you are shown, if any, jibe with returns that make logical sense.
Finally, like with a doctor, it’s really a matter of a good fit and trust. If you start off with a financial advisor and then find after six months it’s not a match — move on. You can’t afford to wait 10 years to make a decision if the advisor you initially choose isn’t the right advisor for you.
You know the old proverb: “Don’t put all of your eggs in one basket.” Nobody ever asks about the efficiency of multiple baskets for egg carrying, but there’s a reason we say this.
It makes sense. Spreading risk is fine idea and it sounds like good advice. But what does that look like in a retirement plan, and how much risk spreading is enough?
When you put your eggs into different baskets in an investment plan, what you’re really doing is diversification. It means owning a variety of investments and owning a lot of different versions of investments.
Let’s break this down a bit. You can diversify your retirement portfolio by:
- Owning multiple investment types, such as stocks, bonds, real estate, commodities and foreign equities and debt.
- Owning a variety of each investment type, so inside the stocks portion you might own domestic and foreign stocks, large caps and small caps, dividend payers and growth companies with no dividends. Inside the bond portion you’d have government and corporate bonds, foreign and domestic and each at differing maturities.
- Even so, in each sub-asset class you’d own not a dozen but hundreds and perhaps thousands of individual investments. So, for the large-cap stock portion, you would own an index fund representing several hundred big U.S. firms. For small cap, hundreds more.
And so on, until instead of a basket or two you literally have thousands of baskets with an egg or two (your retirement savings) in each.
Why go to such extremes? Because it’s possible to do so cheaply using index funds. There’s really no reason to focus on which stock to buy or which bond to avoid when you can virtually erase risk by owning them all.
The research has shown, over and over, that exposure to asset classes is what matters, not security selection. A lot of people labor under the delusion that they can pick stocks better than the professionals.
What they should admit to themselves by now is that even the full-time stock and bond pickers are grasping at straws. Wall Street routinely gets it wrong on earnings, on macro events, on what will move the markets next.
There’s just too many factors driving money in and out of individual securities, many of them unaccounted for and, frankly, most of them impossible to account for.
That’s why pension plans and university endowments focus heavily on portfolio construction instead of bothering with stock picking. They get it. Lower costs, focus on risk management and let the assets generate compounding return.
Add to that disciplined rebalancing and it’s pretty hard not to make a decent return and, importantly, you don’t have to worry about a given company’s quarterly numbers or the risk of a specific bond defaulting overnight.
If you are diversified enough — if you have enough baskets for all those eggs — a lot can go wrong and have no practical effect on your retirement. You can relax and focus on things that matter more, which if you’re truthful is just about anything else in your life besides money.
Investment advisors brace for these moments in the markets. The stock market erases the year’s gains. The phone starts ringing. It’s time to do some hand-holding.
Which is fine. It’s a financial advisor’s job to be the rock in a high tide and to help long-term investors see beyond the headlines.
Advisors spend a lot of time explaining what to do when stock markets slide. Yet it can be summed up in a single word — “nothing.”
That’s right, nothing. If you are properly invested on a Tuesday when the market is at an all-time high, you are still properly invested the next Friday when it has lost hundreds of points.
Warren Buffett has talked about this phenomenon at length over the years. He cites his mentor, the late Benjamin Graham, who tells the story of Mr. Market.
In Graham’s story, you are a business owner. Your equal partner is a wildly unsettled fellow named Mr. Market.
When sales and profits are up, Mr. Market values the business very highly. He’ll never sell. Never! You can offer to buy him out all day, every day and he won’t hear of it.
When the opposite occurs, as you can imagine, Mr. Market is ready to liquidate. He begs you to take his half of the business at any price. ask a vet free . Pennies on the dollar, please just let him out.
As Buffett explains, the stock market is your fictional partner, Mr. Market. At some points during a given week, month or year, things are going great and he’d never sell. Then a reversal comes and he can’t wait to cash out.
As Graham explained, the stock market is a voting machine in the short term but a weighing machine in the long term. Opinions of the value of the companies that comprise the market can move wildly in the short run.
But, over time, the true value of the companies in the index is apparent. The data over the very long term suggests that stock valuations go up at about twice the rate of economic growth. That’s largely thanks to reinvestment of dividends.
The other major point to make is that money begets money. If you earn a competitive market return and fail to panic and sell when prices decline, you can be relatively assured that your money will compound, that is, it will double in value as time passes. And double again.
Whether that’s in a few years or more than a decade is a function of how much stock exposure you can tolerate and your ability to stay in the markets as they go up and down in the short run.
But compound it does, ultimately leading to powerful wealth creation and the ability to ignore Mr. Market with confidence. What would Warren Buffett do in a stock correction? Mostly, nothing.
It’s really that simple.
The headlines are enough to give any stock investor pause. Volkswagen’s CEO stepping down over emissions cheating, a crazy biotech startup raising drug prices 5,000%, Caterpillar flummoxed by the global slowdown, and so on.
It’s enough to make you want to sell it all and just sit in cash. Yet you know that’s a mistake, too. How can anyone stomach stock scandals and stay an investor?
Easy enough: diversification.
I am reminded of a friend with a young son. Like any pre-teen, the boy is caught up in brands. Clothing brands, electronics brands, car brands — you name it.
He’s just testing out ideas, searching for an identity. So he asks his dad, “Hey, do we own stock in Nike?” Yes, answers the father. “Adidas?” Yes, the father says, adding, “Before you ask, we own all of the major shoe brands, the sock makers and the store that sells them, too.”
That’s diversification. By owning an index fund, the family has invested in nearly all major companies worldwide. They don’t own very much of any given stock — index funds are weighted to represent the size of each company’s stock “float” relative to the others — but they do own them all.
In exactly the same way, the long-term stock investor is effectively insulated from stock scandals by diversification. If you own a foreign stock index fund, you own Volkswagen. If you own a U.S. blue-chip stock fund, you own Caterpillar.
You probably don’t own that startup pharmaceutical company making headlines last week for all the wrong reasons, but here index funds protect you again. You can own small cap stocks through an index fund, but generally not microcaps and startups. Too risky.
Volkswagen took a hit from the emissions mess it managed to get into. They have nobody to blame but themselves. And the stock will recover.
Moreover, for the long-term index investor a temporary dip in one large stock is no reason to panic. In fact, it’s an opportunity.
Ignore stock scandals
That’s because a stock index fund rebalances internally, repurchasing shares using incoming dividends. All things being equal, some of those shares will be cheaper for a while. Then they will rebound. Volkswagen is not going out of business. Neither is Caterpillar.
Likewise, a portfolio of uncorrelated asset classes allows the long-term investor to put even more money into temporarily cheap assets. If stocks as a group fall hard enough, long enough, cash inflows from other asset classes can be liquidated to buy more.
That’s rebalancing, a powerful strategy for increasing return.
So don’t sweat the crazy headlines you might see about car companies gone rogue or whatever is leading the business news. Unless you have your entire retirement invested in one stock — as some company employees unfortunately do — you simply aren’t exposed to serious risk.
On the contrary, you’re doing just fine, retirement intact.