Financial advisers often encourage people to save aggressively for retirement and invest in stocks for the long term, but many people struggle with retirement saving and investing.
USA TODAY asked Fidelity Investments executive vice president John Sweeney for his insights on this topic.
Q: What is the biggest retirement investment mistake people make?
A: Being too conservative with their portfolio. People think, "I've accumulated this much," and their inclination is to put it in stable investments — cash or bonds, but they run the risk of eroding their purchasing power.
Their essential expenses will increase in retirement — taxes will go up on their property, health care will go up, the cost of food will go up — so they need an equity portfolio that is growing so it maintains or increases their purchasing power in the future.
Q: What if you have been reluctant to invest in the stock market since the Great Recession?
A: Some people are concerned about the volatility of the equity market. They have seen the ugly performance of '08 and '09, but since May of '09, we have had five very positive years.
You have to look at the equity market over the long term. You should be less focused on the one-year numbers and the quarterly numbers. People may have been burned in '07, '08 and '09, and they don't know what to do now.
Others may have put cash on the sidelines and are wondering if it is time to get back in now or should they wait for some pullback. It's about time horizons.
If you are five to 10 years from retirement, that's a long period of time over which your portfolio can grow so you should be thinking about an equity portfolio that will outpace inflation.
Your other choices are cash, money markets, bonds. In today's environment, bonds are not allowing your portfolio to grow at a rate that exceeds inflation.Equities are higher risk but have higher expected returns and a growth that exceeds inflation.
If you have a sum of money and are worried about investing it all today, take portions of it and invest it over a period of time so you are getting an average rate, buying more shares when they are less expensive and fewer shares when prices rise.
You could invest it each month for the next six months or invest one quarter of it every month for four months.
Q: What investment advice do you have for retirees?
A: Retirement investment doesn't end at age 65. You should be planning for a retirement that could last into your early 90s. About half of your portfolio should be designed to grow and outpace inflation.
For our Freedom Funds — target date retirement funds for people retiring in 2015 — about 55% of the portfolio is in stocks.
The remainder is in fixed income and some short-term instruments like conservative-income funds and money-market funds. If you have all your money in cash, and it's earning next to nothing, and if inflation is 1 1/2% or 2%, your purchasing power is being eroded.
Q: What percentage of Americans are going to be able retire comfortably?
A: We did a retirement savings assessment and found 55% of working Americans are in fair or poor condition when it comes to being able to completely cover essential living expenses in retirement, including housing, health care and food.
Many current retirees have figured out how to survive in retirement. They are more likely to have a pension than the younger investors.
But given the trajectories that many of today's workers are on, they may have to think about adjusting their expenses in retirement to cover essential expenses.They may have to downsize their house and take some cash out of it.
Q: How much will most people need to live comfortably in retirement?
A: Exactly how much you'll need for retirement is complicated because there are so many variables, including your essential expenses (housing, food health care) and discretionary expenses (travel, clothes, entertainment, dining out). Everybody's situation is going to be a little different.
People often underestimate how long they are going to live. A quarter of us will live into our early 90s, so we are really planning for a retirement that could last 30 years.
Fidelity offers this rule of thumb: Save at least eight times your final salary to help increase the odds that you won't outlive your savings during 30 years in retirement.
This amount assumes that you'll get some money from Social Security and that your expenses after you retire will be lower than when you were working. Higher net-worth folks usually need to save more than eight times their final salary.
Q: How much should people be saving for retirement?
A: We recommend putting 10% to 15% right into retirement accounts, because a lot of our retirement savings is going to be up to us. While that may seem like a daunting amount, if you set it up early, you can learn to live on the amount that's left.
By investing in a 401(k) or 403(b), or an Individual Retirement Account (IRA), you can reduce your taxable income. You are saving money because you are paying taxes on the lower income level. If your employer offers matching contributions in your workplace savings plan, take it.
usatoday.com
USA TODAY asked Fidelity Investments executive vice president John Sweeney for his insights on this topic.
Q: What is the biggest retirement investment mistake people make?
A: Being too conservative with their portfolio. People think, "I've accumulated this much," and their inclination is to put it in stable investments — cash or bonds, but they run the risk of eroding their purchasing power.
Their essential expenses will increase in retirement — taxes will go up on their property, health care will go up, the cost of food will go up — so they need an equity portfolio that is growing so it maintains or increases their purchasing power in the future.
Q: What if you have been reluctant to invest in the stock market since the Great Recession?
A: Some people are concerned about the volatility of the equity market. They have seen the ugly performance of '08 and '09, but since May of '09, we have had five very positive years.
You have to look at the equity market over the long term. You should be less focused on the one-year numbers and the quarterly numbers. People may have been burned in '07, '08 and '09, and they don't know what to do now.
Others may have put cash on the sidelines and are wondering if it is time to get back in now or should they wait for some pullback. It's about time horizons.
If you are five to 10 years from retirement, that's a long period of time over which your portfolio can grow so you should be thinking about an equity portfolio that will outpace inflation.
Your other choices are cash, money markets, bonds. In today's environment, bonds are not allowing your portfolio to grow at a rate that exceeds inflation.Equities are higher risk but have higher expected returns and a growth that exceeds inflation.
If you have a sum of money and are worried about investing it all today, take portions of it and invest it over a period of time so you are getting an average rate, buying more shares when they are less expensive and fewer shares when prices rise.
You could invest it each month for the next six months or invest one quarter of it every month for four months.
Q: What investment advice do you have for retirees?
A: Retirement investment doesn't end at age 65. You should be planning for a retirement that could last into your early 90s. About half of your portfolio should be designed to grow and outpace inflation.
For our Freedom Funds — target date retirement funds for people retiring in 2015 — about 55% of the portfolio is in stocks.
The remainder is in fixed income and some short-term instruments like conservative-income funds and money-market funds. If you have all your money in cash, and it's earning next to nothing, and if inflation is 1 1/2% or 2%, your purchasing power is being eroded.
Q: What percentage of Americans are going to be able retire comfortably?
A: We did a retirement savings assessment and found 55% of working Americans are in fair or poor condition when it comes to being able to completely cover essential living expenses in retirement, including housing, health care and food.
Many current retirees have figured out how to survive in retirement. They are more likely to have a pension than the younger investors.
But given the trajectories that many of today's workers are on, they may have to think about adjusting their expenses in retirement to cover essential expenses.They may have to downsize their house and take some cash out of it.
Q: How much will most people need to live comfortably in retirement?
A: Exactly how much you'll need for retirement is complicated because there are so many variables, including your essential expenses (housing, food health care) and discretionary expenses (travel, clothes, entertainment, dining out). Everybody's situation is going to be a little different.
People often underestimate how long they are going to live. A quarter of us will live into our early 90s, so we are really planning for a retirement that could last 30 years.
Fidelity offers this rule of thumb: Save at least eight times your final salary to help increase the odds that you won't outlive your savings during 30 years in retirement.
This amount assumes that you'll get some money from Social Security and that your expenses after you retire will be lower than when you were working. Higher net-worth folks usually need to save more than eight times their final salary.
Q: How much should people be saving for retirement?
A: We recommend putting 10% to 15% right into retirement accounts, because a lot of our retirement savings is going to be up to us. While that may seem like a daunting amount, if you set it up early, you can learn to live on the amount that's left.
By investing in a 401(k) or 403(b), or an Individual Retirement Account (IRA), you can reduce your taxable income. You are saving money because you are paying taxes on the lower income level. If your employer offers matching contributions in your workplace savings plan, take it.
usatoday.com
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