5 Ways to Win the Race to Retirement
Runners, take your marks!
Your heart pounds as you anxiously await the starting gun.
With your fingers touching the ground, you get your legs in position ready to spring out of the gate.
You’re ready for the race of your life.
You hear the sound of the gun and get a good jump!
Your early lead seems to be holding. You kick it into full gear – there is no one in front of you!
Yes! You pass the 100-yard marker and begin to slow down. You did it! You just won the biggest race of your life!
With your arms raised in the air and your eyes closed you celebrate this great moment.
And suddenly you feel other runners passing you.
Get out of the way!!
What’s going on? You ask one of the judges what is happening and he informs you that this is not a 100-yard sprint, this is a marathon.
Embarrassed and completely winded you start to run again, but it’s hard to get back on track.
Ok. So this is an unlikely scenario, but when it comes to retirement there are many folks who are doing this very thing.
They start out of the gate early with good intentions of saving and investing for their retirement goal, but fail to keep up with the plan after a few years.
Some get a good jump by investing aggressively without knowing their risk tolerance thinking they will make a lot of money only to have their hopes dashed by a market correction.
The retirement race is a marathon – not a sprint.
Marathon runners pace themselves for a long distance – sprinters shoot out of the gate with a blast of speed for a short run.
Here are 5 ways to win the marathon race to retirement:
1. Save Early and Save Often
The sooner you get started with saving for retirement the better off you’ll be.
With a good mix of investments and compounding interest working, your accounts should grow very well for you over time.
This takes the pressure off of having to make up for lost time by taking on too much risk for your investments and exposing yourself to a potential downturn.
2. Dollar Cost Average
Dollar cost averaging (DCA) is a simple investing strategy that invests equal dollar amounts on a regular basis over time.
For example, saving $100 monthly into your Roth IRA is dollar cost averaging. By doing so you buy more shares when prices are low and fewer shares when prices are high.
The result is a lower average cost per share in the investment over time. Although there is debate on how well this strategy works in a rising market, it’s clear that in a volatile market it is difficult to know when to buy in.
DCA is a way to take the worry and stress out of trying to time the market for the short term and rather focus on regular savings over time.
3. Diversify, Diversify, Diversify
A lack of a properly diversified portfolio is one of the common mistakes people make with their investments.
Why? Because we don’t know what goes up or down from one year to the next, so spreading your investments over various asset classes is key to a long-term retirement strategy.
Finding a good model portfolio within your risk tolerance will help reduce the risk of exposure to a poor asset class or security in a given year.
4. Don’t Borrow From Your 401k
Your 401k should be the last place you get money from if you need it.
Many people think that it’s not such a bad idea. After all, you are paying yourself back with interest right?
Theoretically yes, but the opportunity costs and the risks are too great.
First the opportunity costs. You may pay yourself back with say 6% interest, however, if the market goes through a great stretch like we’ve just seen from March through September 2009 where the S&P 500 is up over 50% you not only lose out on that loan money earning interest, but also the compounding affect that could have been helping you.
The risks associated with a 401k loan are too great as well.
If you lose your job, quit or retire while the loan is still outstanding you are required to:
- Pay back the loan in as little as 30 days, or
- Pay income tax on the borrowed amount at your marginal tax rate
- Pay a 10% penalty if you are younger than 59 1/2
A 401k loan can ruin your momentum for the retirement race.
5. Define Your Goals and Review Them Regularly
You can’t just set it and forget it when it comes to retirement. Face it, economies, situations and goals change.
It’s important to define your goals so you have something to shoot for. After all, you can’t hit a target when it doesn’t exist.
Secondly, you should review those goals regularly so that you can make any tweaks and adjustments as necessary along the way.
With some discipline and hard work you too can win the race to retirement!