Wed. Jun. 24, 2009

3 Simple Steps For A Successful Retirement *

Have you ever read something then paused and said well that’s stating the obvious? Then upon further reflection realize what is obvious to you may not be obvious to others. This happened to me recently as I was scanning some retirement headlines.

I came across Kimberly Palmer’s article titled “The Future of Social Security: Not Good“. My first response was ‘No duh!’  After giving it more thought, I came to the conclusion that my reaction is probably in the minority.

I suspect most people believe that the U.S. government will not let Social Security fail. This is the same government that deemed certain large companies ‘too big to fail’ and dragged other unwilling participants into the fray.  BB&T’s (BBT) Chairman and CEO, Kelly King has been very outspoken on how the government has managed the TARP debacle. And now the government is ‘helping’ the auto industry. Watch out Detroit!

The U.S. government has become too big and too ‘helpful’ to the detriment of its citizens. The government should spend more time providing for the common defense and less time promoting the general Welfare (pun intended).

So, what are your retirement plans? Are you going to rely on the government to print your social security check and the money backing it up, or will you choose to take charge of your future and prepare for it? As it is with most things in life, those that prepare for retirement will find more success than those that don’t.  It is really not that hard when you start young.  Here are three simple steps:

  1. Live on less than you earn. (another ‘No duh!’ statement)
  2. Invest the rest using a sound asset allocation model.
  3. Pick solid, conservative, low-cost investments.

Number 3. on first blush may seem complicated, but it doesn’t have to be. For those that don’t want to make investing their hobby, they can focus on a few good funds like Vanguard’s S&P Index Fund (VFINX) and Vanguard’s Long-Term Bond ETF (BLV).

For those a little more adventurous, a strategy based on an article by Richard Jenkins titled “A simple ETF strategy for beginning investors“ has been quite effective over time. Don’t let the “beginning investors” term scare you away. The goal of this portfolio is to provide diversification over a broad allocation of stocks and bonds by holding five ETFs:  iShares Lehman Aggregate Bond Fund (AGG), iShares MSCI EAFE FD (EFA), Vanguard Total Stock Market ETF (VTI),  iShares DJ Real Estate Index (IYR) and iShares DJ Basic Materials (IYM).

For those comfortable in selecting and holding individual stocks, there is nothing like Dividend Stocks to provide a growing income into the future. Dividend stocks found in many dividend investors’ portfolios include companies such as: McDonald’s  Corp. (MCD) [analysis], Johnson & Johnson (JNJ) [analysis] and The Coca-Cola Company (KO) [analysis].

Finally, you can choose not to prepare. In June 2008, I wrote about a retirement-age couple that would never retire because they chose to live life on the edge and always spent a little more than they made. Over the last year the noose has continued to tighten on Bill and Jackie (not their real names).  Due to the economy and health issues work has been hard to come by. Their house is one step away from foreclosure and on the market with no buyer in sight. Bill needs surgery and the family continues to grow weary of providing for them.

Life is a choice. You can choose how you live, but you cannot choose the consequences of how you live.

Full Disclosure: Long AGG, BLV, EFA, IYM, JNJ, KO, MCD, VFINX, VTI. See a list of all my income holdings here.

3 Responses to “3 Simple Steps For A Successful Retirement *”

  1. Richard says:

    The People Next Door

    It seems easy to understand why the people next door drive a car that must be 14 years old, dress quite plainly and don’t much if anything on landscaping. He is a sell-employed carpenter and she is an assistant in a doctor’s office. Neither has a college education. But, each of their three children went to an Ivy League undergraduate college and then on to an Ivy League business, medical or law school. One of the children mentioned to you how grateful they were to have left school without a cent of debt. When you’ve spoken with either of the parents over the years, they’ve never complained about their children’s educational expenses or indeed about anything to do with money. How can this be? Their combined incomes can’t be over $100,000, yet it seems they may have paid over a half million dollars in educational expense for their children. Your annual household income is $250,000 but you live paycheck to paycheck.

    The main difference between you and your neighbors is that they are sitting on a stock portfolio worth $4 million, throwing off more than $120,000 per year in dividend income. You couldn’t raise $10,000 if you had a month to do it. How in God’s name did this come to be? Neither of the neighbors inherited anything.

    Here’s what happened. In the early 1970’s, when your neighbors and you were in the early 20’s, they realized they would probably not make great incomes so they decided to live beneath their means, utterly to ignore advertising, to buy used cars, stay out of bar rooms, restaurants and malls, and to invest what little they could spare in the stocks of companies that sold things to other people, such as you.

    They bought shares in what was then Philip Morris, and of Johnson & Johnson, Colgate Palmolive, Procter & Gamble, GE, Wal-Mart, Coca Cola, William Wrigley, and Abbott Laboratories. They got into Microsoft in the late 1980’s at 10 cents per share. They had the broker deliver the shares to them so that they could reinvest the dividends and buy more shares without paying brokerage commissions. Over a period of some 35 years, your neighbors invested maybe $200,000 of their own savings plus all the dividend income. While you were going through your considerable income buying new cars, running up big credit card balances shopping at Burberry’s, Barney’s and Brooks Brothers, Neiman Marcus, and Bloomindales, eating out 5 times a week, ordering drinks made with premium priced liquor and leaving money on the tables of Indian-run casinos, your neighbors were reserving against their future obligations and for a time when they might not want or indeed be able to work. While you were unable to separate your wants from your needs, your less well educated neighbors had no trouble doing that for themselves. The result is that capitalism turned your income into your neighbors’ principal. One not so small consequence was that their children could apply to Stanford, Princeton and the University of Chicago without requesting a cent of financial aid. If you don’t think that sways the minds of top college admission committee members, think again.

    Now, your neighbors love their jobs, in large part because they know they don’t need them and could cease working on any given day. You and your spouse hate your jobs because you know you have to keep them and maybe to work until you are 70 or older. You might want to continue to be most cordial to your neighbors’ children. When you end up looking for a job, one of them might give you a reference.

    Oh, wait…you suddenly awaken from the horror of this wretched scenario and discover it was but a dream and a nightmare at that. You are still only 28 and what has been written above is but one possible outcome. Fortune has favored you and given you a second chance. If you are comfortable with the future outlined above, keep doing what you’re doing and you’ll get it. Keep spending all your income on consumer junk and trying to live as if you were a person with money and be sure to plan to work for a high school kid when you are 70, maybe parking cars.

    If, on the other hand, you want to be able to live more or less without financial worry, curb your spending now and begin investing. Sure, driving a flashy car, having $50 lunches and $100 dinners, drinking martinis made with Grey Goose vodka and buying $500 Jimmy Chu shoes seems stunningly enjoyable now, but, I assure you, it won’t come up to having $4 million when you are 60.


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