SALARIES / MAY. 30, 2014
version 3, draft 3

How to Protect Your Retirement Assets

A new study suggests that nearly 45% of individuals born between 1948 and 1978 won’t have sufficient retirement funds. That’s a rather scary statistic, and it should open your eyes to the importance. Most of us know we need to save for retirement, and most of us are doing something to protect ourselves. But you need to do more than just set money aside...you need to protect your assets. Starting from day one.

NOTE - The best decision you can make for your financial future and security is to speak to a certified and professional financial planner. The advice here is not meant to replace proper financial planning.

Start Early

The easiest piece of advice you’ll ever receive regarding your retirement is start early. The sooner you begin setting money aside, the more you’ll have (that math is pretty easy). Think 20 is too early? Or 15? Think again. The power of compound interest can mean huge differences in a relatively small number of years. Regardless of your age now, if you haven’t already started saving for retirement, start today. Immediately.

Consider Your Options

You should be investing in a Registered Retirement Savings Plan (Canadian; allows an investment up to a certain tax deductible amount each year, and the sum and growth is not taxed until you start making withdrawals), 401(K) (American; employer-sponsored, and allows you to make a contribution on your income before it is taxed, and the sum and growth is not taxed until you start making withdrawals), or equivalent. Most countries have some sort of preferred retirement saving plan that allows you to a) reduce taxable income during your working years, and b) save for retirement at substantial tax deferment and interest rates. Look into your options early on.

Evaluate Your Asset Allocation

At least once per year (but not too frequently), you should calmly assess your retirement asset allocations...where you have your money invested, and at what percentage of the whole. Your investment portfolio will likely be primarily stocks (an ownership stake in a company that rises and falls in value) and bonds (loan offered at a fixed interest rate over a fixed period of time). As a very general rule of thumb, the prevailing wisdom has been to allocate bonds at a percentage that matches your age. So, if you’re 25 years old, your portfolio would be 25% bonds and 75% stocks. The main reason for this guideline is the simple fact that bonds are usually “safer” than stocks, and if the stocks in your portfolio take a dip (or free-fall), you need time to recover. Higher stock allocation has a higher potential for return, but also greater risk. As you get older, you want to reduce the amount of high-risk stocks (you have less and less time to recover if necessary) and increase the amount of “safe” bonds. This rule is falling somewhat out of favour lately, as people are living and working longer, but it is still a good, basic rule.

Buy and Hold

This is another example of prevailing wisdom that has stood the test of time. The greatest return has traditionally been for those who buy a particular security, and hold it. Even through the dips and falls that all stocks will inevitably suffer. Over time, the stock market has shown excellent return on investment, but it does require a great deal of faith. Too many people panic at the first sign of stock price going south, and immediately sell it and switch to another one. Repeat as necessary. This is perhaps the worst way to accumulate wealth in the securities market. Buy. And. Hold. The stock market has historically (i.e. over long periods of time - decades, not individual years) shown remarkably consistent growth.

Plan Ahead (Tax Considerations)

The amount of tax you’ll ultimately pay on your retirement assets, and the amount of tax your children will pay on any inheritance left to them, often hinges on the decisions you make well before retirement. Talk to your financial planner. Check out the website for the tax collection agency in your home country.

Setting up the right kind of retirement plan is crucial, and what works for one person might not work for the next. Consider your available options. Talk to a professional. Read up on the subject. But do it all now. Trying to change something just after you retire may end up costing you tens of thousands (of even more) in penalties and taxes owed.  

Manage Costs

This one doesn’t always get a lot of attention, but it can really eat into your retirement savings and assets if left alone.

Whatever plan you have in place, make sure you’re aware of the fees and costs associated with it. Transaction fees (every time you buy, sell, or move assets around), management fees (for your portfolio manager), and early withdrawal penalties are just a few of the things that could add up to a lot of (your hard-earned) money over a lifetime. Find ways to control and lower them. Investigate the fees associated with different systems and management companies. Basically, do some comparison shopping...we often check out 3-4 different places when making a purchase (electronics, appliances, cars, etc.), so why shouldn’t you do the same for something as important as your financial security?!

Retirement planning needs to start early (as soon as possible...it’s not an exaggeration to say you could start setting some babysitting or newspaper route money aside at twelve years of age), and then keep at least a passive eye on it as you move towards retirement. “Shop” around and compare plans and options. Evaluate your asset allocation at least once per year. Buy and hold...if you’ve done your initial homework on the security, trust that it will eventually rebound (and grow) in the long run. Follow some simple steps, understand at least the basics (it’s your money, after all...read up on it. Start simple, like The World’s Easiest Guide to Understanding Retirement Accounts), keep calm, utilize a professional when necessary, and you’ll most likely be A-OK...and able to enjoy those golden retirement years in the manner you deserve.

A new study suggests that nearly 45% of individuals born between 1948 and 1978 won’t have sufficient retirement funds. That’s a rather scary statistic, and it should open your eyes to the importance. Most of us know we need to save for retirement, and most of us are doing something to protect ourselves. But you need to do more than just set money aside...you need to protect your assets. Starting from day one.

NOTE - The best decision you can make for your financial future and security is to speak to a certified and professional financial planner. The advice here is not meant to replace proper financial planning.

Start Early

The easiest piece of advice you’ll ever receive regarding your retirement is start early. The sooner you begin setting money aside, the more you’ll have (that math is pretty easy). Think 20 is too early? Or 15? Think again. The power of compound interest can mean huge differences in a relatively small number of years. Regardless of your age now, if you haven’t already started saving for retirement, start today. Immediately.

Consider Your Options

You should be investing in a Registered Retirement Savings Plan (Canadian; allows an investment up to a certain tax deductible amount each year, and the sum and growth is not taxed until you start making withdrawals), 401(K) (American; employer-sponsored, and allows you to make a contribution on your income before it is taxed, and the sum and growth is not taxed until you start making withdrawals), or equivalent. Most countries have some sort of preferred retirement saving plan that allows you to a) reduce taxable income during your working years, and b) save for retirement at substantial tax deferment and interest rates. Look into your options early on.

Evaluate Your Asset Allocation

At least once per year (but not too frequently), you should calmly assess your retirement asset allocations...where you have your money invested, and at what percentage of the whole. Your investment portfolio will likely be primarily stocks (an ownership stake in a company that rises and falls in value) and bonds (loan offered at a fixed interest rate over a fixed period of time). As a very general rule of thumb, the prevailing wisdom has been to allocate bonds at a percentage that matches your age. So, if you’re 25 years old, your portfolio would be 25% bonds and 75% stocks. The main reason for this guideline is the simple fact that bonds are usually “safer” than stocks, and if the stocks in your portfolio take a dip (or free-fall), you need time to recover. Higher stock allocation has a higher potential for return, but also greater risk. As you get older, you want to reduce the amount of high-risk stocks (you have less and less time to recover if necessary) and increase the amount of “safe” bonds. This rule is falling somewhat out of favour lately, as people are living and working longer, but it is still a good, basic rule.

Buy and Hold

This is another example of prevailing wisdom that has stood the test of time. The greatest return has traditionally been for those who buy a particular security, and hold it. Even through the dips and falls that all stocks will inevitably suffer. Over time, the stock market has shown excellent return on investment, but it does require a great deal of faith. Too many people panic at the first sign of stock price going south, and immediately sell it and switch to another one. Repeat as necessary. This is perhaps the worst way to accumulate wealth in the securities market. Buy. And. Hold. The stock market has historically (i.e. over long periods of time - decades, not individual years) shown remarkably consistent growth.

Plan Ahead (Tax Considerations)

The amount of tax you’ll ultimately pay on your retirement assets, and the amount of tax your children will pay on any inheritance left to them, often hinges on the decisions you make well before retirement. Talk to your financial planner. Check out the website for the tax collection agency in your home country.

Setting up the right kind of retirement plan is crucial, and what works for one person might not work for the next. Consider your available options. Talk to a professional. Read up on the subject. But do it all now. Trying to change something just after you retire may end up costing you tens of thousands (of even more) in penalties and taxes owed.  

Manage Costs

This one doesn’t always get a lot of attention, but it can really eat into your retirement savings and assets if left alone.

Whatever plan you have in place, make sure you’re aware of the fees and costs associated with it. Transaction fees (every time you buy, sell, or move assets around), management fees (for your portfolio manager), and early withdrawal penalties are just a few of the things that could add up to a lot of (your hard-earned) money over a lifetime. Find ways to control and lower them. Investigate the fees associated with different systems and management companies. Basically, do some comparison shopping...we often check out 3-4 different places when making a purchase (electronics, appliances, cars, etc.), so why shouldn’t you do the same for something as important as your financial security?!

Retirement planning needs to start early (as soon as possible...it’s not an exaggeration to say you could start setting some babysitting or newspaper route money aside at twelve years of age), and then keep at least a passive eye on it as you move towards retirement. “Shop” around and compare plans and options. Evaluate your asset allocation at least once per year. Buy and hold...if you’ve done your initial homework on the security, trust that it will eventually rebound (and grow) in the long run. Follow some simple steps, understand at least the basics (it’s your money, after all...read up on it. Start simple, like The World’s Easiest Guide to Understanding Retirement Accounts), keep calm, utilize a professional when necessary, and you’ll most likely be A-OK...and able to enjoy those golden retirement years in the manner you deserve.

 

Photo by American Advisors Group

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