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San Clemente Journal

Comfortable Retirement - Making it Reality

Feb 05, 2006 12:13PM ● By Don Kindred

by Michael Vandenburg, CFP®

Retirement means something different to almost everyone, but there is one common theme across the board. You will stop receiving a paycheck for the work you do all week and start living off of your investments. The more you planned and saved for this part of your life will determine how well you live during those years. Whether you are a few years from retiring or just entering the workforce, here are 5 simple steps you can take to help secure your retirement. 
- Don’t put off planning ahead. The earlier you start saving for retirement the better. In fact, for every five years you put off saving you will need to almost double your monthly contributions to achieve the same results. If you have waited too long to start saving don’t let another year go by. Even the IRS knows most Americans aren’t saving enough for retirement and now offer catch-up provisions in IRA’s for people over 50 (an extra $1000 for 2006). Unless coupon clipping is a hobby for you, don’t plan on spending less during retirement. What you don’t need for business expenses will most likely be spent on travel and recreation. 
- Use tax deferral as much as possible. There have been a lot of changes to retirement savings laws recently and for the most part, they are in your favor. With the introduction of Roth IRA’s a few years ago Americans now have a way to save tax-free for retirement. If your company has a decent 401(k) or other retirement plan you should be putting as much as possible into it every year. If you own your own business, are an independent contractor, or self-employed you can save up to 25% of your income a year in a tax deferred account and still deduct your contributions from current taxes. There have never been more choices for retirement planning than there are today. This is a wake-up call from the government telling America that we are not saving enough to retire. Please take advantage of these programs and secure your own retirement. I doubt social security will disappear, but it is becoming less and less a primary source for retirement funds. 
- Diversify your portfolio. Even if you think health care or tech stocks will drive the next market cycle, don’t bet your retirement on it. Properly diversified portfolios give you more consistent returns and less volatility during turbulent markets. For those of you that want a more aggressive portfolio you can still achieve it and be properly diversified. It is much easier to diversify your portfolio using mutual funds and professional managers as opposed to individual stocks. Unless you have the time to research and follow 150 – 200 stocks from around the world you are better off using professional managers that specialize in one specific area of the market. The most seasoned professionals in this industry can’t be an expert in every sector, asset class and foreign market. That would be like going to your family doctor and expecting them to be able to perform brain surgery. Sometimes you really are better off with a specialist, and within the financial industry, access to the best managers is sometimes just a mouse-click away. 
- Keep your mind on your goals…not what the market is doing this week. Looking at the big picture for your financial goals will help you through tough market cycles. In fact, if you are a long ways away from retirement and the market is down, you should take advantage of the opportunity and put more money in while you have the chance. If you are closer to retirement your portfolio should already be positioned to weather out those markets and you need to stick to your plan. The market will always have up and down cycles… your financial plan should determine how you react to them. 
- Watch your expenses. Most people don’t really know how much they pay for their investments, but if you know where to look, you should be able to figure it out. If you own mutual funds you can check the annual expense ratio and look for 12-b1 fees, which are for marketing expenses. Some funds also have a front or back-end load, which pays a broker a commission to sell the fund in addition to the other expenses. If you have read my articles in the past you already know how I feel about loaded funds. They are usually much better for the brokers that sell them than they are for you. If you are trading stocks your only fees should be commissions on trades, so the more you trade, the higher your expenses and taxes. 
If you can keep these five simple steps in mind the next time you are going over your finances, you should have a better understanding of what you need to do going forward. Don’t let another year go by without taking control of your future. b