Getting Ready For Retirement - Web Column

   Basic Principles of Saving and Investing

When saving and investing for your retirement, your primary objective should be to accumulate sufficient assets during your working years so that you can maintain at least the same standard of living in your retirement years.  The best way to do that is to have a plan and that plan should utilize five basic principles and four basic concepts.  In this column, we will take a look at the five basic principles.

Principle #1:  Begin your savings and investment program as early as possible;  think long-term and be patient.  Building your nest egg is a long-term proposition and when you think long term, you need to consider growth oriented investments so that your nest egg will grow and also stay ahead of inflation.  Each year that you put off saving makes accomplishing your retirement goals more difficult. 

Saving for retirement should be budgeted into the outgoing portion of your income.  Use automatic savings.  If it doesn't go through your hands, you won't miss it.  Save as much as you can from each pay check.  Invest your raises and bonuses instead of spending them.

Principle #2:  Place the maximum amount of your savings dollars into your tax deferred plan at work.  Use the savings and investment vehicles that have been specifically designed for retirement savings.  Most of the experts say that your best option is a 401k (403b), 457 plan where you can defer taxes on your savings whenever possible.

The longer you can shelter your assets from taxation and also keep your investment earnings compounding on a tax free basis, the sooner you can build up your retirement nest egg.  And, in many cases, your employer will match a portion of your savings.  Almost 85 percent of them do.  Most financial planners say there is no excuse for not saving as much as your company will match. 

Principle #3:  Make stocks or mutual funds your number one investment.  Most of the experts recommend that you take advantage of the wealth generating power of stocks.  Even though they have greater risks and price fluctuation...over time, they out perform other types of investments and they also compensate for inflation.

Stocks or stock funds offer the best potential for long term growth.  Historically they have outperformed every other type of investment and outpaced inflation.  They are the only asset category with the potential to deliver double digit returns.  For the past 70 years, stocks have generated an average return of about 11 percent, more than 5 percentage points better than bonds.  Treasury bills returned almost 5 percent.  Inflation was a little over 4 percent.

Principle #4  Where you choose to place your savings is where you will allocate your assets and asset allocation is very important.  When you make a choice among asset classes...stocks, bonds, short-term reserves and other specialized categories such as real estate, you are engaged in asset allocation. 

In our search for the best, top performing investment vehicles .the hottest technology stock, the best growth fund, the CD with the highest yield, we sometimes overlook the issue of asset allocation. 

A time tested method to build your nest egg is to diversify your assets.  When you spread your assets among basic asset classes, you help cushion your dollars against the ups and downs of different financial markets. 

Principle #5  Carefully consider the saving and investment advice you receive.  Understand the investments you purchase.  If it sounds too good to be true, it probably is. 

There are a good number of competent, qualified investment and financial advisors.  Selecting the right advisor for you can be as difficult as finding the right doctor or attorney.  Talk to people you trust---your friends, your attorney, your accountant.  Ask them for their recommendations and speak face-to-face with a couple of promising candidates. 

What kinds of topics should you be discussing?  Their credentials, knowledge, experience, range of services, the time they can devote to you, their fee structure.  Do you really understand the information they are presenting to you?  Are they good listeners?  Do they handle themselves in a professional manner?  Are you comfortable with the person?

Sometimes, developing and implementing your saving and investment plans is like trying to hit a moving target blindfolded.  Understanding these five basic principles is easy. Putting them into practice is the tough job.  In Web Column #2, we’ll look at the four basic concepts.