Americans, both young and old, ought to be concerned about saving for retirement. For older people, retirement is drawing near, and thus they don’t have very much more time to save before they decide to retire. Their last few years before retirement can be the difference between financial security, and running out of money in retirement. One of the biggest problems in planning for retirement is that as Burton Malkiel suggests in “Random Walk”, perhaps the vast majority of advice about retirement is either bad, incorrect, or bias. Although there is a lot of debate about how a retiree should allocate their assets in retirement to stocks and bonds, there is no debate about this: people need to save more. In this post I will very briefly review what Malkiel has to say, along with other good sources, then give what my retirement strategy will be, and finally return to the woefully state of American retirement planning.
As Professor Kimball stated in class, and the above WSJ article state, investing should start early and risky. Almost all analysts believe that since younger people don’t have to worry about their portfolio running out during a bear market they can tolerate more risk in a portfolio. Over time, this will bring in higher returns, which over time can make an enormous difference. As people get older, they should put more weight into safe assets, like bonds; one rule of thumb is one percent weight for your age. Depending on income levels, you should invest in an IRA and 401(k) to avoid taxes, and thus maximize your profits.
As it stands, my investment strategy will be this:
- Start Early: As soon as I graduate, and have a stable job, I will contribute as much into an employer matched 401(k) plan as possible. An employer matching your 401(k) will help me in two ways. First, I get free money, and second that free money will incentivize me to save rather than spend my money
- Put Equity in the things I Own: Unlike many college graduates, I want to begin investing in a home as soon as is feasible. Although more financially straining at first than renting an apartment, immediately putting money into a home will save me thousands (or perhaps tens of thousands) of dollars by not gaining any equity from an apartment, and also from the appreciation of home prices. I never plan on leasing or buying a new car in my life. I don’t really care very much about having a new car, and I will save thousands over the course of a lifetime.
- Do my research: Unsurprisingly, seeing as I am writing this now, I will be careful about the investments I make. I plan on following the advice of the adherents of the efficient market hypothesis (like Malkiel), and invest primarily in index funds to achieve stable returns. As both Professor Kimball and Malkiel suggest, I will stay away from funds that take an unreasonably high commission. Even .1% or .2% when compounded for decade can add up to thousands of dollars. I plan on investing in an IRA to defer my taxes to a lower tax bracket later in life.
- Be prepared: This is a small step, but I will probably keep a small amount of money (a few months worth) in case of an emergency situation, loss of a job, etc.
The unfortunate truth is that unlike myself, and probably many of you, many older Americans have planned little have saved less, or even nothing for retirement, whether out of necessity, arrogance, or ignorance. According to recent research, the typical home of a 65-68 year old, “had very little savings, no defined-benefit pension plan (one that pays a set sum each month) and only about $5,000 in a defined-contribution plan (such as a 401k) or Individual Retirement Account. Their retirement basically relies on Social Security and the equity in their homes.” I only hope that we, as a class, and as a generation, do a better job than the generation before us.