Thursday, January 29, 2009

Failed Financial Beliefs and Time Tested Truths: Post 3

This is the third of a four post series that reviews retirement planning beliefs that have been shattered by a failing economy and then revisits a time-tested financial planning truth we can expect to be championed again.

Failed Belief No. 3: Invest regularly in your 401(k), and it will take care of your retirement.
This is another unquestioned idea. Over the couple decades financial advisors have come to believe that if we invest regularly in our 401(k) and maintain a well-balanced retirement portfolio with choices of mostly stock mutual funds, we will certainly achieve a financially comfortable retirement. But the stock market losses of the past year have scuttled a lot of retirement plans.

Even worse, a report from Boston College’s retirement research center examined scenarios where workers had done everything right: Contributed 6 percent of pay to a retirement plan for 40 years, invested in a target date fund, and never touched their retirement savings until it was time to retire, the portion of their pre-retirement income that these savers could replace in retirement still varied dramatically depending on when they retired. Those retiring in 1948 could replace 19 percent, 1999 retirees could replace 51 percent, and 2008 retirees could replace 28 percent. Notice that none of these percentages is anywhere near replacing 100 percent of their pre-retirement income.

Time-Tested Truth No. 3: Make paying off debt and building your savings a priority.
Make eliminating your debt and building your savings a central goal of your monetary life. For example, encourage any client who has a debt other than a mortgage to set a goal to have it all paid off within a year. If your client makes that a priority, chances are he can do it. If your client has a mortgage, he should set a goal to have it paid off within 10 years.

Once your client is totally debt free, he should set a goal to add a particular dollar amount to his retirement savings every year. Whatever the financial goal is, if it is a high enough priority for him, he is very likely to achieve it. After he meets the first financial goal, you will have instilled in him a very good habit, so it will get easier.

Check out Post 1 and Post 2 in the series, What to Do When the Financial Experts Don’t Know Anything, which discusses financial risk and guarantees.

Our next post will put buying a home and controlling risk in perspective when considering financial security.

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