There is nothing quite like tough economic times to bring frugality into brilliant focus. Survival issues drive every decision. Priorities suddenly assume an importance beyond what was ever thought possible. Health issues give way to paying the rent or putting food on the table. The price of gasoline reduces driving a car to when it is only absolutely necessary. Clothes and furniture are now luxury items that must be put off. And then you are reminded of saving for retirement. Surely, that can be put off, too?
Unfortunately, time is not on your side when you put off saving for your future well being. The price for living an older life with dignity keeps increasing, right along with everything else, and probably more so due to the hyperinflation in the medical industry. Social Security may only supply 40% of your desired retirement income. You will need additional savings, and the best time to start is always now, even if economic times are tough.
For example, $1,000 invested at 6% for 30 years will result in $5,700. At 10%, the retirement nest egg could be $17,400 in 30 years. Savings accounts do not pay these rates today, but the stock market has paid out a long-term rate of 10% since 1926. Yes, these rates of return are before taxes, but Congress created Individual Retirement Accounts (IRA’s) to eliminate current tax impacts.
If you have a 401K savings account at your place of work, be sure to take advantage of this benefit. Your employer will match a portion of your contributions, and you may add additional contributions to boost up the overall savings effect. If you do not have an IRA, be sure to open one with your banker or stockbroker. They will instruct you on how to make deposits, how to manage your investments, and when it is advisable to make withdrawals. There are different types, either self-directed or Roth IRA’s. One gives you a current tax deduction for contributions, while both allow for compounded earnings exclusive of taxes until funds are withdrawn
Financial planning starts with a family budget, and the top line of your budget right after your income should be the amount you will save on a periodic basis. These funds should be set aside in a savings account until the timing is right to invest for the longer-term. Yes, you must make a determined effort to save, and there are many saving tips on the Internet to help guide you with this task. The next step is to do a little planning, just as the pension plans do. Your savings need to be allocated between cash, bonds and stocks. For the moment, let’s assume that cash and bonds are one area. You will need between three and six months of income in a savings account to provide for “bumps in the road”, the unexpected events that require immediate cash. Car problems or a lay off from work are examples of these events.
Savings over and above this figure will be invested in stocks through your IRA, if possible, to eliminate tax reductions. The key to prudent investing in stocks is diversification. Diversification means spreading your money around between many companies so that you lessen your risk if any one company fails. The best way to achieve good diversification and minimize overall risk when you have small amounts to invest on a regular basis is through the use of Exchange Traded Funds (ETF’s). The definition of one these from an Internet dictionary is:
“What Does Exchange-Traded Fund – ETF Mean?
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. By owning an ETF, you get the diversification of an index fund, and the expense ratios for most ETFs are lower than those of the average mutual fund.”
Limit your exposure to one ETF, even if the best forex broker you can find asks you to trade currencies. Your investment strategy is to stay focused, invest for the long-term at low risk, and avoid investment frauds. Your trusted broker can also advise you in the most appropriate ETF to use based on your goals and as to the best time to enter the market with a periodic purchase.
Even with a meager budget and tough economic times ahead, it is never too late to get started saving for your retirement. Let prudence and discipline guide you, and have fun with it, too!
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