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Are you winging it when it comes to planning for retirement? Do you have a sinking feeling that something’s not right? Here are five signs you have the wrong retirement plan, and what you can do about it.
It may not sound like a lot, but it is. If you have $10,000 invested, it can either grow into:
Search for the name of your retirement funds, and go to the fee section. Certain funds, including those labeled Class A, B, and C, have fees that can make them prohibitively expensive for the average investor.
The White House released a report in February 2015 criticizing the financial industry for hidden fees, which is costing working and middle-class families $17 billion a year.
Most of us instinctively understand the notion of diversification. So when we’re filling out our 401(k) enrollment form, we think it’s wise to choose several funds. We all know the axiom: Don’t put all your eggs in one basket.
The problem is, we’re often choosing blindly, with limited knowledge of what we are investing in. It could be really risky, too conservative or too expensive.
In this case, it may serve you better to go against your instincts and just pick one – a target retirement fund. This will automatically diversify your portfolio across major asset classes (U.S. stocks, international stocks, bonds). It will also adjust your portfolio as you approach retirement, from an aggressive one to a more balanced mix.
Index funds allow us to own a diverse array of stocks across various sectors, at a significantly lower cost. And remember, lower cost = higher returns.
Index funds are less expensive because they have no need to employ fund managers to select stocks that might perform exceptionally.
Time and time again, studies reveal that active stock pickers underperform the market (index funds just mirror the market). According to the 2014 study by the S&P Dow Jones Indices, more than 82% of U.S. large company stock funds underperformed the benchmark over one-, five-, and 10-year periods.
One caveat is you won’t get a chance to get outsized returns, like what Warren Buffett did for Berkshire Hathaway shareholders. Berkshire’s stock price increased by a whopping 1,800,000% between 1964 and 2014!
I get it. You realize you don’t know anything about investing, and you’ll rather keep it safe than lose your money in a risky investment. Or you can’t stomach the thought of going through another 2008 financial crisis-type loss.
But think about it. If you invested $10,000 in the U.S. stock market in 1950, it would be worth $6.9 million by 2013. That’s despite the Korean War. Vietnam War. Cold War. Oil Crisis. Saddam Hussein. Dot-Com Bust. 9/11.
In contrast, if all these events scared you off and you invested instead in U.S. Treasury bills, your $10,000 would only be worth $406,000. You left more than $6 million on the table.
If you are a recent college graduate, you should be saving about 13% of your gross income toward retirement (including matching employer contributions).
You are on track if you are 28 years old and your retirement account balance is about 50% of your gross salary. For example, if your annual salary is $50,000, your 401(k) should be worth $25,000.
If you’re 38, you should have saved about 2x your gross salary.
If you’re behind on these guideposts, you’ll need to save more than 15% of your gross pay to catch up.
Look for ways to find money in your budget, or use budgeting apps to help you achieve your monthly retirement savings goal.
Image: iStock
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