When I first started in financial planning, this would be back in the 1980’s, investing for your retirement was simple. When you were young, the theory went, you dutifully started putting away a little bit of your salary each month. The amount was as high a percentage of your income as you could manage. It was supposed to be a sacrifice. Give up something now to have something later.
You invested in the stock market, of course. Equity returns were the way to go and you had plenty of time to ride out cyclical fluctuations. Your risk return profile indicated a higher acceptance of risk.
You also bought a home. This was more a place to live than a retirement investment. Still, it increased your net worth.
As you got older you still kept investing something every month. Only now, as your risk profile changed because of age, you moved out of equities and started purchasing safe corporate bonds. You still had your home. Perhaps you had up-sized your house and/or purchased a vacation cottage. Either way your net worth kept increasing.
As the day for your retirement arrives, you put all of your investments into a 100% safe money market account. This includes the proceeds from the sale of your home after the kids left and you downsized.
It was all so simple then…
The Great Fall-Out:
Then along came 2008!
For many, 2008 was the year that wiped away all of our sacrifice for retirement and changed the rules for retirement investing forever.
In 2008 we learned that our retirement savings in the stock market could be reduced by 50% nearly over night. Years of sacrifice were rendered meaningless. Many homes and other real estate investments went under water and still have not recovered and one money market, Reserve Primary Fund, broke the buck, challenging the perceived safety of money market funds.
Investing for Your Retirement the New Way:
So now what are we to do? How are we to plan and invest for retirement? We all did what we were supposed to, followed expert advice (my own included) and sacrificed our today for the future, only to have that sacrifice negated. Should we continue to play by the very rules that violated us?
Further, if we choose to play by those rules, where should we invest? The stock market, thanks to quantitative easing and the Federal Reserve, is hopelessly overvalued and due for a massive correction. Corporate bond yields as well as money market interest rates are so low that it costs more to go to the bank than you make on your returns.
Real estate? Don’t get me started!
To my mind there is only one solution to the retirement investment dilemma. But you need to have an entrepreneurial mind set to do it. That answer is to develop a large number of diverse passive income vehicles. Only with income coming in from different sources, none of which require your effort, will you really be able to retire.
I recognize that no passive income opportunity is ever truly passive or work free, so following this advice you will not ever really retire. But then, the world has changed a lot since 2008 and I’m not really sure that the classic definition of retirement is still a reality anyway.
The only other option is to go old school.
Put a little bit of every pay check into an investment portfolio and pray that the economy does not tear itself apart again. Your investment type should be determined by your age. The amount, a constant percentage of your income.
If you are going to follow this path there are two things that you have to do. First, diversify. Then diversify some more. Put your eggs into as many baskets as you can. Then pray that traditional financial principles will apply and that as one sector crashes another will skyrocket, leaving you with your principle intact.
Second, watch your investments, like a hawk. Back in the good old days you could let someone else, like a mutual fund manager, watch your investments. Those folks proved themselves to be useless pack animals, so going forward, it is your responsibility to watch your investments.
Everything has changed. Nothing is as it was. New approaches and ideas are demanded. You have not only to think outside of the box but realize that the color, size and shape of the box has changed. This is true in retirement investing as well as most other areas of finance.
Good luck with investing for your retirement and building that nest egg.
Brad holds an MBA, is a former financial analyst and Wall Street Executive. He regularly contributes to http://www.howtosavemoney.guru, a personal finance website dedicated to helping people save money and find financial freedom.
- My ULTIMATE Plan for Becoming Financially Independent – December 2013 Update
- What To Do When You Retire Early – Here Are My Plans
- The Ultimate Guide to How to Have a Tax Free Retirement
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