Sarah Ruef-Lindquist, JD, CTFA
My first post about goal setting might have gotten you thinking about or reinforced your resolve to decide “when do I want to retire?” or “I want to be able to buy or build a house in 10 years, so I need to save for a down payment”. If that is true, then your next thought might have been “Well, how do I go about getting there?” The simplest answer I have for that question is “Discipline; Not a lot necessarily, but some”. Technically, it involves dollar cost averaging. Practically speaking, it’s just intentional saving. Let’s look at an example that applies to most of us: retirement planning.
Say you are 35 years old and your goal is to retire at 65. You are self-employed car mechanic with steady income having built your business up since high school, pay all your household bills and credit cards on time and tuck money away for emergencies, holidays and a vacation, but you haven’t started saving for retirement. You are married, and contributing to social security. If your life expectancy is 85, you have 20 years after retirement at 65 to plan for.
If you are starting at -0- retirement savings now at age 35, you need to start saving 12% ($400 a month, for $4800 a year) in a qualified retirement plan (IRA, SEP IRA, 401(k)) in order to have “sufficient” retirement savings. There are many assumptions about this calculation, like a 2% annual income increase, a low rate of inflation, 90% of your income needed at retirement for living expenses, a 7% rate of return before retirement on those savings invested in the market and 4% after, having shifted assets into more income-producing, reduced-risk securities upon retirement.
But you get the idea: a disciplined approach, putting a predetermined amount into your retirement plan – a 401(k), SIMPLE, SEP or other kind of qualified plan – can help get you where you want to go. One of the reasons is dollar cost averaging, which essentially is the practice of investing an amount over time that tends to allow the investor to average a cost lower than the price of their investments over time. You’d also be taking advantage of the tax-deferral and reinvestment of dividends and income that is possible with qualified retirement plans. But it takes discipline. Not a lot, but enough. Take advantage of an automatic monthly withdrawal from your checking account to your qualified retirement account and revisit it every year as your income, presumably increases, to increase the amount of the monthly transfer, and you will begin on the path to reach your goal. See a financial advisor to help you determine what your retirement plans should include now and as you work toward success in achieving your retirement goals.
This article was first published at PenBayPilot.com
