Saturday, May 18, 2013

Saving for Retirement and Its Challenges

We all know we need to save more for retirement and that we need to pay more attention to what we do save and how that savings is invested.

That said, most of us fall short -- way short -- when retirement comes. At that point it's too late.

But why do we fall short, other than perhaps the all too human 'time inconsistency' behavior that spending on the pleasures of today is always more enjoyable than is saving and deferring the enjoyment of those pleasures until later in life?

Well, one hugely important factor now and for the next several decades is low interest rates. That means 'this time IS DIFFERENT because of the 401(k) plans taking over from the guaranteed pensions of yesteryear.

In fact, even pension plans need to revise their investment criteria to adapt to the new world of low interest rates.  In a nutshell, bonds won't work during a period of low and rising interest rates, and that exactly where we are today and will remain for years to come.

Why Retirement Savings Are Falling Short has the facts:

"It’s not just the recession that has set back Americans’ retirement savings, a new survey from Ameriprise Financial says.

Asked about events that have “derailed” their retirement plans, many said personal events had affected their ability to save.

One fourth, for instance, said they were supporting a grown child or grandchild, and an equal proportion said their pension was not worth as much as they’d thought or had been discontinued.

“Expecting the unexpected is clearly more important than ever in preparing for retirement,” Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial, said in a statement. . . .

The vast majority of older Americans who have saved at least $100,000 toward retirement have experienced some sort of “derailer,” whether an economic event or a personal one, that has affected retirement saving goals, the survey found. . . .

The most-cited events were recession-related. For instance, nearly two-thirds of participants said low interest rates had affected the growth of their investments. More than half said their savings were significantly lowered by market declines, and a third said their home equity was going to contribute less to their retirement than they had expected.

As a result, only a third of participants said they were fully confident that they would be able to afford an unexpected expense, like a large home repair, in retirement.

When asked what they would do differently, more than half say they would have started saving earlier."

Summing Up

Hindsight is 20/20.

That said, saving and investing for retirement is not rocket science and it need not be a mystery or exercise in futility.

Beware of investing in bonds in either a low or rising interest rate environment.

Start saving early, invest in stocks in lieu of bonds over a long period of time, don't spend lots of money on expert advisers trying to beat the market, and let time and minimal cost outlays work to your long term advantage.

After all, by definition, the so-called pros can't beat the market's performance, because they are the market. And besides that automatic averaging effect, the 'experts' also charge us fees for their unsuccessful efforts at trying to outperform the market.

So to the middle age and especially younger individual amateur investors out there, be confident. You will be able to provide for your retirement needs by following a few simple rules, and one especially.

Just take what the market gives over time instead of getting fancy or greedy, and you'll be a happy camper in the end.

That's my take.

Thanks. Bob.

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