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Retire With Wealth: Pay Yourself First


These days who can really expect to retire anyway? We are bombarded by media reports of soaring health care costs and a Social Security Trust fund that is set to run out of money in about 20 years. It can all be very overwhelming. Often the easiest thing to do when you are overwhelmed is to just put it off.

While many current retirees had the benefit of pension plans from private corporations that has virtually all but disappeared from the private sector today.

"All of a sudden the American people have been told: 'you are in charge' yet we've given people no tools whatsoever. We've thrown people into making these decisions and people are afraid. Behavioral finance tells us when people are afraid of something they run away from it," says Gail MarksJarvis, author of Saving For Retirement (without living like a pauper or winning the lottery).

"Why are people so afraid of investing?" MarksJarvis asks. "Because no one has ever taught them."

A simple rule of thumb is 12 times your last annual salary.

That probably sounds like a big and possibly unattainable number. However, instead of running away from the issue, MarksJarvis says "don't be discouraged by the huge amount you think you must save but do what you can to put small amounts away to invest in simple diversified portfolios I suggest." In her book, she outlines simple and easy to understand steps that anyone can implement.

"People get discouraged because the numbers seem so massive. Don't think about that and put aside what you can now. If you are contributing 3% [to your 401k plan], up it to 4%. Then, put it on your calendar. If in three months you are paying your bills and having a little fun, up it to 5%," she recommends.

Many individuals, busy and proficient in their own careers and areas of expertise, simply haven't had the time or the education to understand the investing world. A look at the various fund choices offered by your employer's 401k plan can be confusing.

"I think the biggest challenge for people isn't money. What really is the case is that they haven't put the small amounts of money to work in a way that they could. It's really our psychology more than our money that gets in our way. People get the savings down, but they shoot themselves in the foot by investing badly, or because they are scared of investing," she said.

"My goal [with this book] was to give people the basics they needed to end up at retirement with the money they needed," MarksJarvis explained.

Bottom line? The important part is not just saving, but investing properly to maximize the return on your investment.

In her book MarksJarvis explains the logic behind diversification, defines index funds and for those looking for a no-brainer approach, she outlines a retirement saving strategy using target-date funds. "I show people how the power of compounding small savings really adds up. For the no-brainer approach you can set up a truly diversified portfolio with stocks and bonds. You do lose money, but cycles change and you eventually recover," she said.

Part of the problem is that we Americans, as a culture, are not savers. After all consumer spending drives nearly 2/3 of our gross domestic product. What is a typical weekend outing for many? A trip to the mall.

"Some people have painted Americans out to be a nation of hedonists. I don't think we are a nation of hedonists, but we are a nation that is ignorant about money. Let's face it, what's more fun going to a store and buying some new gadget or technology tool, or sitting down with your 401k?" asked MarksJarvis.

"We have our thinking backwards, we pay for our houses, our cars, our vacations and then save whatever is left over. We have to turn that thinking upside down. If we are going to buy a car, buy a house can we save 10%? The saving 10% has to come in at the front end of those decisions," concluded MarksJarvis.

Looking ahead at our nation ridden with debt on both the federal and personal level, a shift in thinking may be needed. Many experts do believe that for our country to pay down the current $16 trillion federal debt that we as citizens will ultimately be seeing higher taxes and fewer services for those taxes for perhaps decades to come.

She pointed to estimates for health care costs ahead. "Medicare doesn't cover all health care costs [even] now. People have to buy supplemental insurance," she warned. Looking ahead, she highlights estimates for a couple living into their 80's will need $200,000 to cover health care costs not covered by Medicare and a couple living into their 90s will need $400,000.

"Every taxpayer is eventually going to be paying more in taxes and we will see less services. There will be cuts in Social Security and Medicare. Save as much as you can. Push yourself to save as much as you possibly can," she advised.

When it comes to savings, the rule has to be: pay yourself first.

With simple investing tools, such as target-date, funds even those who are not financial market savvy can hit big number long-range retirement goals. When you've got 20, 30 or 40 years of planning, time is on your side. Don't run away, just start now.

[Editor's note: What are your challenges and successes with retirement planning? We'd love to hear your comments below. What are the benefits of using a financial advisor? Do you have any questions for Gail? Post a comment below. ]

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Join In on this conversation, post a comment below.
Visitor - BKL: Good article. Always important to be reminded of the importance of saving for retirement. I especially liked the estimated supplemental Medicare cost for couples living into their 80s and 90s.
Visitor - Ray: Target-date funds have not lived up to the sales pitch. Lots of good low fee alternatives. Investing is not as complicated as you think. You can LEARN to do it yourself.
Visitor - Bernie : Excellent, well written and very informative. Information that is very important to me in my life at present.
KateStalter: Kira, this is spot on. In my work, I see many people -- particularly women -- who take care of others first (or buy toys) and have little or nothing put away for their golden years. It's a very worrisome phenomenon. Thanks for some very practical, common sense tips!
Visitor - Debbie: Paying yourself first, living below your means, whatever you call it, that's really the only sure-fire way to build wealth. But it's slow and boring so people don't want to do it. Rather they want to hit it big by thinking they'll buy the next Apple when it's near pennies. It generally doesn't work out that way. Good piece, Kira.
AnnMinnium: Paying yourself first is indeed the key. Regular saving from a young age is usually more important than choosing the right investments! Thank you, Kira, for highlighting this critical point. Diversification among brokers is important, but I agree with some of the others who say that it can be complicated and expensive. There are many choices out there for your retirement funds. All are not created equal. There are firms like Merrill and JP Morgan that trade for their own accounts and there are firms like Vanguard, where the funds own the company and "profits" are returned to investors through lower fund costs. I worry more about the former than the latter.
Visitor - Jerry Verseput: Kira, I think that the complication and potential confusion of trying to spread money across multiple custodians out-weighs the danger of a failure at a major broker that is a member of the SIPC. Schwab and Fidelity (also not to pick on these guys) are different animals than investment banks like Lehman. I agree you can never say never, but sometimes risk mitigation can lead to over-complication, which in turn leads to other problems.

I could argue with MarksJarvis about target date funds providing a no-brainer approach that result in a "truly diversified portfolio." Advisors are ethically and lawfully required to inform investors that past performance does not guarantee future results, but then try to convince investors that the market always comes back because it's done so in the past. The Japanese market has shown that market recoveries are not a divine right, and even if you do eventually recover from large loses you may have lost a huge chunk of your investing timeline. I do agree that anyone who adopts a no-brainer investment strategy must be willing to accept large losses, but I don't believe that any investment strategy should be left on auto-pilot.
KiraBrecht: Thanks Jerry for your excellent comments and great point on the Japanese experience. Let's only hope the US doesn't end up with a Lost Decade like they did. Retirement planning can seem very complicated, even for those who are in the industry. Is the answer to use a financial advisor?
Visitor - Al M: Great interview. We had the pleasure of atttending one of Gail's seminars a couple of years ago; I feel she is very knowledgable and easy to understand. I do however have the same question as you Kira; I presently have a retirement portfolio with one of the 'big box' firms but was wondering if a 401K balance still with a former employer should be moved over to them or another firm for diversity. I'll be checking in for answers.
Visitor - : People are often encouraged to move money from 401(k) accounts to IRAs at brokerage firms when they retire. But there is no need to do that if you like the blend of funds in your 401(k) and fees are low. Often 401(k) fees are lower than what you will get if you try to manage your money in an IRA instead. As for the safety of a brokerage firm, there is SIPC insurance. Here's one of my Chicago Tribune columns on the topic:

Visitor - Julie: Great story!
JoeSouhlakis: "Pay Yourself First" is great advice and should be drilled into all of our heads from a very young age. great article Kira
AndrewThrasher: A comment on the article - in my opinion, one of the larger public mistakes is the idea that you need this big number to retire, that if you have XYZ in your retirement account then you're set. Life doesn't work that way, retirees interests and hobbies change, the ability to help children and grandchild change, lifestyles change, and even residency can change. A 'set it and forget it' approach won't work for many, it's something that must be addressed well before and during retirement to see if the person is on the right path.

But I agree with MarksJarvis in that people are more focused on the present in spending now rather than thinking about the future and having money to spend then.

Kira, about your question on brokerage firms (sorry this got a little long): There are definitely big differences between a bank and a brokerage firm. While banks have FDIC coverage (which is a gov’t entity) brokerage firms can have membership to SIPC, a nonprofit that is supported by its members. Brokerage firms also have to maintain certain liquidity and capital requirements set by the SEC. If a brokerage firm fails, SIPC covers up to $500,000 per account and cash accounts are limited at I believe $250,000 unless they are in a money market mutual fund, then they get the $500,000 limit. There are other exceptions like futures accounts, and forex, etc. While SIPC can step in if a broker fails, they don’t recover assets because they were lost in value or if a broker sold a bad investment.

That's off the top of my head, hope that helps. More info can probably be found at SIPC's website.
Visitor - Ken Shreve: Nice comprehensive piece, Kira. Saving can be tough, yes, but the 401K option of having a specified percentage of your pay withheld (pre-tax) is great . Those who aren't doing that should be. Adds up quickly.
KiraBrecht: A question that I have wondered about is how "safe" brokerage companies are these days? I, like many other people, were shocked when Lehman Brothers went down. When individuals put money into a company (like Schwab or Fidelity….not to pick on those guys, just an example), that retirement money is not FDIC insured. Do financial advisors recommend "diversifying" retirement savings among brokerage companies in case some unexpected implosion occurs at one specific brokerage company? After 2008, maybe a lesson is "never say never."

About the Author

Kira Brecht is managing editor at TraderPlanet. She has been writing about and analyzing the financial markets for twenty years. Posts during her career include managing editor at SFO magazine, Chicago bureau chief at Futures World News and technical analyst at MMS International. She has passed Level 1 and 2 of the Market Technician's Association CMT exams.

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