the plan for How you invest
1. Run the numbers
To see if you’re on track, put a retirement calculator through its paces (try AARP’s at aarp.org/retirementcalculator).
Even simpler is this handy rule of thumb that Fidelity developed. By age 50 you should have saved four times your current income; by 55, five times. And to retire, you should have eight times your preretirement income.
Among the assumptions behind these figures: You’ll get a 1.5 percent raise and grow your portfolio by 5.5 percent annually, retire at 67 and live to 92. It also assumes replacing 85 percent of preretirement income.
If you’re off track, adjust, says Beth McHugh, vice president of Fidelity Investments. Could you delay retirement? Live on a little less? Work part-time? Find out now. “The closer you get to retirement, the harder it is to close the gap.”
2. Find balance
At least once a year you should rebalance your holdings so that you have the appropriate amount in stocks, bonds and cash (as well as all of their subcategories) for your age and risk tolerance.
This gets more important as you near retirement; should the market stumble, you have less time to make up what you’ve lost. That means you not only want no more than 50 to 60 percent of your assets in stock, but you also want no more than 5 to 10 percent of your assets in company stock (the average for people in their 50s is 9.1 percent). Scale back if you have more than that.
3. Or automate it
If you don’t rebalance, it’s time to stop pretending that you ever will. Put your money in a fund that will do that for you: a target date retirement fund, which automatically transitions from stocks to bonds as retirement looms.
The Employee Benefit Research Institute’s Jack VanDerhei looked at the mix of assets in 24 million retirement plan accounts prior to the 2008 crash and found that 25 percent of people ages 45 to 54 and about 22 percent of those 55 to 64 had at least 90 percent of their assets in stocks, and twice that many had at least 70 percent in stocks. If they’d been in target date funds, they would have lost considerably less.
4. Still need help?
If at this point you’re sensing that your financial life isn’t under control, raise the white flag. A good financial planner can help you determine (a) where you want to go and (b) how to get there. Find one through the Financial Planning Association (FPAnet.org) or the National Association of Personal Financial Advisors (NAPFA.org).
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