If you want to retire soon but you're not sure you can, here are three strategies that may help you leave work safely behind within a short time -- without sacrificing financial security.
Strategy 1: Reduce risk through diversification
As retirement approaches, many investors get conservative with their investment portfolios, placing more assets in fixed-income investments and staying away from the stock market. That can be a big mistake.
"The greatest risk you bear in your investments is inflation over the long term,'' says Reed Fraasa, a Certified Financial Planner (CFP) with Highland Financial Advisors in Riverdale, New Jersey. "A portfolio based on conservative assumptions and largely fixed income in composition may not provide inflation protection over a 20- to 30-year retirement."
Rising prices for just about everything means the cost of most items will probably be higher when you retire and in the years after, so you have to make sure your money can grow and keep pace with inflation.
If you retire at 50 today, you may live to be 80-plus, so "you really have over 30 years to keep this portfolio going," says Mark Podolsky, a CFP with Financial Solutions Associates in Dedham, Mass. "That's a long time, so given this perspective, you might want some growth or a little bang in the portfolio, especially if you are going to draw on it for income.''
The investment strategy many financial planners recommend is diversification - spreading the risk among a large variety of asset classes. The theory is that when one investment in your portfolio is doing poorly, another investment will probably be doing well.
Podolsky suggests that pre-retirees invest about a third of their portfolios in non-traditional, higher risk assets such as real estate, hedge funds, and commodities. Then add stocks and bonds; the allocation should depend on your risk tolerance and your need for income or growth.
"And because your retirement will probably last for decades, you do need some growth, even if it makes you a little uncomfortable," he says. "If you sleep well at night because your nest egg is safely tucked under your mattress, or in a simple savings account, you're making a mistake. Inflation will eat away at the value of your savings."
Think about your overall portfolio and time horizon, he adds. You're not going to need all of your savings at once, so these "riskier" investments have plenty of time to ride the ups and downs of the market.
Strategy 2: Don't miss savings opportunities
One of the best ways to supercharge your portfolio is to save more. And there are plenty of new opportunities to take advantage of. For example:
- Max out on your 401(k) or other employer-sponsored savings option before investing elsewhere. Not only will you benefit from tax-deferred growth, but you'll also lower your overall tax burden. The contribution limit for 2006 is $20,000 if you're over age 50.
- Open a Roth or traditional IRA for additional tax benefits. The $5,000 limit for people 50+ in 2006 and 2007 increases to $6,000 in 2008. After that, contribution limits will rise again in increments of $500, depending on inflation.
- Set up a direct deposit into an investment or savings instrument. This might be a monthly transfer from your checking account or payroll into your brokerage account or mutual fund.
If you have a small business or you're self-employed, you have even more options to save - "a defined benefit plan, providing high deductible contributions -- from 30 to 70 percent of income -- plus a Roth 401(k)," says Fraasa.
Strategy 3: Ask for help
When you're building a new home, you hire construction experts. When you're designing your retirement, it makes sense to get an expert to guide you, or at least to provide an unbiased opinion on your plan.
"Investment planning - and retirement planning in particular - is a combination of art and science,'' says Fraasa. "Whether you are self-directed or working with an adviser, you should develop some knowledge about what you are doing and invest some time in your own planning.''
Podolsky agrees, adding that you should avoid taking advice from commission-based sales people who will make money each time you buy or sell something, regardless of performance. Instead, he recommends using a CFP, whose background you can look up on an SEC, NASD, or state securities division Web site.
However, if you decide not to use an adviser, Podolsky says, "Diversify your portfolio and don't forget international, commodities, real estate, and hedge funds. Use the lowest cost no-load mutual funds and discount brokers, and match your portfolio to your own tolerance for short-term fluctuations.''
Above all, both Podolsky and Fraasa caution, do not attempt to make up for a savings shortage by making high-risk investments that throw your portfolio off balance. Sinking your life's savings into one "hot" stock or other investment opportunity is the fastest way to get further behind.
Resources
Financial Planning Association
National Association of Personal Financial Advisors
Mutual Fund Investor's Center
