Last month we gave away 30 copies of "Last Chance to Get it Right", thanks to the generosity of the author, J. Thomas Moore. In addition, we received more than 350 letters and many of them raised important issues. This week, Tom and I will answer a couple of them.
Hope this helps!
My wife and I are in our mid-40s. We have $17,000 and add $80 a week to my 401(k). She has $2,000 in a Roth IRA and we keep saying we should add to it.
I try to take the "Put it in the market and forget it" approach, but I keep worrying about the next decline. Perhaps after an attack like the one in Spain. As an alternative to the stock market, I'm also considering buying a home and fixing it up.
Is real estate a better investment? I try to learn more about stocks and bonds but feel like it's putting money into "no man's" land. Help!
Dear "C" —
As Tom Moore likes to say, "Retirement planning is a lot like planning your two weeks of summer vacation. The big difference is how long it will last!" (Probably 30 years.)
To continue this analogy, imagine going on vacation knowing that there will not be any paychecks coming in once vacation is over, that the only money to pay the bills you racked up is whatever you stashed away before you left home.
But I wouldn't panic, either. After all, you've got at least 20 years until the two of you retire; the earliest you're eligible for full Social Security benefits is 67. So Moore suggests you think in terms of a 50-year time frame (20 years until retirement + 30 years in retirement.
The "Rule of 72" says if your $17,000 earned 8 percent a year, it would be worth nearly $70,000 by then. (At 8 percent per year, your money doubles every 9 years.) So imagine how much more you'll have if you continue to add to your existing next egg — and the more the better.
If you're serious about being ready for retirement, start putting some serious dollars into the 401(k) your company offers. $80/week is a start, but that's not going to lead to a secure retirement. By law, you can contribute $13,000 this year. While that might not be feasible, what about committing to $100/week with a plan to increase that by, say, $20/week every quarter? Maximizing your company 401(k) should take precedence, especially if your employer matches the dollars you put in.
Don't let your wife off the hook , either. Instead of waiting until next April 15 to come up with the $3,000 for her 2004 IRA contribution, tell her to set up an automatic investment program, similar to the deductions that come out of your paychecks and go into your 401(k).
Every mutual fund family can arrange a "systematic investing program" and automatically deduct a certain amount from a bank account each month. If your wife contributed $250/month under this type of plan, she'd be socking away $3,000/year and never have to lick a stamp or address an envelope.
And let's face it, when the money is automatically invested for you, you're much more likely to stick with your commitment to save.
Finally, real estate isn't the sure-fire investment most people think it is. Housing prices fluctuate depending upon a myriad of factors — interest rates, a new employer moves into or out of town, property tax rates change, etc. It's just that the price of your home isn't printed in the newspaper every day so you're not aware of its fluctuating value as you are, say, with the price of stocks or bonds. (It's my firm belief that if we could see how the value of our homes fluctuate on just a monthly basis, there would be far fewer homeowners in this country!) The point is, real estate, like other investments, is not without risk.
Furthermore, don't overlook the value of the work you yourself put into the property. "You might end up spending every weekend and several evenings during the week fixing up the house," says Moore. "You could run into unexpected, expensive repairs." If you're not qualified to fix the plumbing, wiring, etc., you've got to hire someone who is. And that costs money.
Finally, as Tom points out, if you own your home, you already have a sizable portion — perhaps more than half — of your portfolio invested in real estate. If the market turmoil of the past four years has taught us anything, it's the importance of being diversified.
$17,000 is a decent start to accumulating your retirement next egg. But now that you're in your 40s you need to buckle down and get serious. Twenty years may sound like a lot of time, but it will be gone before you know it.
Dear Gail —
I need help: divorced/single, and no concept what to do with money I have sitting at [xxx] brokerage firm for 7 years. This is on my list of daily (mostly nightly) worries, but I just listen to the advice of my consultant
there and hope all is well. He has the money invested for me but not sure he has my best interest at heart. Last I heard my return was 4 percent. Am I fine on this path or should I do more?
Worry and fear rob us of our health!
Oh, puhleeeeese! Stop whining. I don't want to sound harsh, but it's your lack of knowledge about your investments that is causing you to lose sleep at night. Get a grip and decide to be an adult about this. There is a wealth of information available on the internet alone. As Moore suggests, find out if there are any basic courses on investing offered at the local community college.
But the first place I'd start is with my financial advisor. Make an appointment and have him explain all of the investments you own and why you own them. In broad terms, investments generally fall into one of two categories: income or growth (appreciation). Why do you have the mix of investments you've got? What kind of total return should you expect from your portfolio? Let him know you want him to be a guide, and not a dictator, when it comes to your investments.
Have you given him discretion over your account? That is, can he buy and sell investments on your behalf without getting your approval first? I've never liked this kind of agreement and not just because it can lead to excessive trading (a.k.a."churning"), which generates commissions for a broker, but can lead to losses for the client), but because it lets the client off the hook.
If this is the kind of account you have, then pull the plug. You can withdraw discretionary authority and require that you be consulted before any changes are made to your portfolio. This will force you to become more knowledgeable about what you own.
If your broker seems reluctant to spend the time you need to fully understand your investments, then, as Moore suggests, "It's time to get a second opinion."
But don't just pick a financial advisor out of the phone book. Ask around — friends, relatives, co-workers. Get the names of three individuals who come highly recommended from people like you. In other words, you want a financial advisor who is compatible with your personality. Your analytical, dissect-it-to-the-nth-degree sister might have a wonderful broker, but he/she could be a disaster for you. (Unless, of course, you're a lot like your sister.)
Then interview each of the three candidates on your list. Ask about their credentials, experience, investment approach, whether they have clients similar to you, etc. Explain what you do and don't like about your current advisor and ask how they might handle things differently.
Once your questions are answered, shut up and listen. A good financial advisor will want to ask you a lot of questions, too. Such as what do you expect from him/her? What kind of investment experience have you had? What are your specific financial goals? This should be a free appointment and should take less than half an hour.
Finally, after you leave, ask yourself how you feel about that individual. Did you connect on a "gut" level? I don't want to get too "woo-woo" here, but money is an extremely personal issue and you've got to feel comfortable with the personal whose handling yours.
You mention that you have only a vague idea that your return was 4 percent. But over what time period? Last quarter? Last year? The average return per year for each of the past three? And what were you invested in during that timeframe? Tech stocks? Government bonds?
Knowledge is power. In your case, knowledge is also peace of mind. We've all got enough things to worry about that are beyond our control. How your money is invested isn't one of them.
To borrow a phrase from Dusty Springfield, "wishin' and hopin' and prayin' " isn't going to get you anywhere. Decide to become an active partner in your financial affairs.
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