Planning Retirement? Work Backwards
If you're looking to top off your nest egg in the years prior to retirement, and you're starting with what's hot or, at the other end of the spectrum, what's safe, you may be looking in the wrong place.
Your first step should be to determine your accumulation goal -- how much more money you'll need at retirement. This is the lump sum required to provide you with, say, an additional $2,000 per month for the rest of your life.
Let's say you want to retire at age 72. Assuming that you'll live to be 90, you'll need retirement income for 18 years. If we assume a conservative earnings rate on your investments (after retirement) of 6 percent, you'll need -- brace yourself -- more than $260,000 the day you retire. If you save $2,500 per month for five years, you would have to earn more than 21 percent per year in order to meet your goal. Unbelievable, isn't it?
Try running your own numbers using ThirdAge's calculators. Experiment with different assumptions to find a scenario you feel comfortable with.
The reality of your particular situation should play a critical role in the decision-making process. Should you be asking for a fairly safe investment, or one that's higher risk? Choosing the latter doesn't mean you have to jump into technology stocks, but you might need to consider mutual funds that invest in stocks. The risk may be somewhat greater than alternative investments you have considered, but so may be the reward.
Finally, review your portfolio in its entirety. Don't limit your investment decisions to your current savings plan. Perhaps you can further diversify and reposition existing assets such as your 401(k) to provide for more of your retirement income needs than you currently anticipate.
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To read more from ThirdAge's resident money expert, visit Jeff's online Q&A.