An understanding of simple math is enough to start investing.
By Tom Sightings
There’s a storm of information and opinion that swirls around the Internet and the financial press concerning your retirement savings, and how to make sure you’re financially secure after you leave the workforce. To cut through all the wind and noise, consider these ten questions. If you have them covered, you’re probably going to be OK.
1. Investing is so complicated. How do I make the time? No time? No expertise? No problem. Invest in stock and bond index funds. They usually do better than managed funds. Many financial institutions offer both mutual funds and exchange-traded funds that index stocks and bonds.
2. Everyone says I should be diversified. How do I know if I’m diversified? If you own an index fund, chances are you are diversified. However, if you work for a private company with profit sharing or equity bonuses, make sure you don’t have too much of your retirement savings tied up in your company stock.
3. Investing is too difficult. How am I supposed to do all that math? Sure, some whiz-kids have developed sophisticated computer models to predict future stock prices, but don’t let them intimidate you. All the math you really need to know to invest is the concepts most people learn by the time they’ve reached 9th or 10th grade. You do not need to solve quadratic equations. You just have to understand percentages and ratios and be able to add and subtract.
4. I have a pension. I don’t have to worry about retirement, do I? Most pensions are well protected for a number of reasons, including various forms of insurance as well as strong political pressure. However, it is not unheard of for pensions to be cut if a company or a government entity runs into serious trouble. A pension is a good, strong leg to your retirement stool. But it’s dangerous to rest on one leg. Social Security makes your retirement finances stronger, and a decent-sized IRA, 401(k) or other retirement investments gives your retirement finances three solid legs to stand on.
5. When do I apply for Social Security benefits? Most people apply for benefits early. There are certainly cases when it makes sense for some people to start benefits early. But make no mistake: For most people, it pays to wait at least until 66 and probably even until age 70.
6. Should I get a reverse mortgage or trade down to a smaller house? Your home can be used to help fund retirement. Just remember that selling your house and then moving costs a lot of money. There are also significant fees involved in applying for a reverse mortgage. So, do your homework before you decide.
7. I need income. How do I get income when the bank offers me less than 1 percent interest on my CD? Generating income from a retirement portfolio is a challenge in these days of ultra low interest rates. You can get more income from corporate bonds, municipal bonds, preferred stocks and high-dividend stocks. But keep some money in the bank, no matter how low the interest rate, just in case.
8. How much money can I use each year after I retire? One rule of thumb suggests withdrawing 4 percent of your savings every year. For people who have reached age 70 ½, the IRS helps you decide, since it has rules requiring a minimum distribution from your IRA or 401(k) plan. For example, if you have $275,000 in an IRA, at age 70 ½ you must withdraw at least $10,000 every year to avoid severe penalties.
9. Do I have to worry that I’ll run out of money before I die? People who worry about their money are actually less likely to go broke than the people who don’t worry about money at all. Still, when all is said and done, there are three ways to make sure you don’t ever run out of money: plan ahead, make the most of your pension and Social Security and live below your means