Paying for retirement

The goal is to keep control of your financial destiny

It wasn’t long ago that retirement meant receiving a monthly pension from the company with which you spent most of your career. In the last 40 years, however, retirement has taken on a much different bent. The advent of the 401(k) has fundamentally altered the retirement landscape, with workers now bearing the responsibility of not only saving for retirement but also figuring out how to invest for it — a daunting task for most. 

What are the primary considerations in saving for retirement? Start early in your career, put away as much money as possible. Albert Einstein once remarked, the most powerful force in the universe is compound interest — the earlier you start saving, the more you accumulate. 

When it comes to saving for retirement, what are your choices? Let’s settle on stocks, bonds and cash. On average, stock funds return almost 10 percent a year (before fees), while bonds realize an average annual return of 5.5 percent. Keeping funds in cash results in losing buying power because cash lags the rate of inflation. 

Ponder this: while the average return for an investor in a stock mutual fund is 10 percent a year, the average return for investors is more like 4 percent. Why? Because many individuals move money in and out of the market or switch between different funds to chase returns. And what is the difference between a 10 percent return on $100,000 over 10 years compared to 4 percent? $259,374 vs. $148,024 — a sizeable difference.

Both stocks and bonds play a part in financial planning because diversification is key to any investment account. Bonds act as a ballast for a portfolio and are typically less volatile than stocks and positive most years. In a bad month, stocks can drop 15 percent or more while a poor month for bonds might result in a loss of say, 2.4 percent, which is what happened in November 2016, the worst month for bonds in a decade. The percent allocated to each depends on your risk tolerance, but placing 60 to 75 percent in stocks and the remainder in bonds and cash makes sense. 

Why hold cash at all? In your early years of saving, an allocation to cash isn’t necessary, but as you approach retirement, you should consider your cash needs in a year-plus — you don’t want to be selling stocks to generate cash when the market goes down.

What investment vehicles to consider? Simple is better. You don’t need five or six funds. One is sufficient, if a broad index option is available — that is, one including U.S., international, large, medium and small companies. 

Second, you don’t need high cost mutual funds, annuities or actively managed funds. After fees, the majority of so-called actively managed mutual funds underperform their indexes. If your company plan does not offer low-cost index funds, ask it to do so. 

Do you need a professional money manager? Once you retire and get in the range of over $500,000, a professional may be able to add value in terms of meeting your particular situation, with advice managing cash needs, portfolio rebalancing and financial planning. 

The type of professional is something to consider. Some are so-called brokers, with the legal responsibility to offer “suitable” investments. Others are registered investment advisors, with the legal responsibility to act as a fiduciary, meaning placing your needs above his/hers. 

The point is be in control of your financial destiny, and it doesn’t need to be complicated. 

Mark Connolly is a registered investment advisor and principal of New Castle Investment Advisors LLC, Portsmouth.