Thursday, December 1, 2011

Take Charge of your Financial Future!

I’ll have a lot to say tomorrow about the “Santa Clause Rally” that the markets have recently been experiencing, Europe’s role in it, and my projections for its sustainability, but today I want to begin my weekly “Financial Fitness” column.

Once a week, I intend to discuss financial planning with you. Now, before you get that dazed look in your eyes, consider these old adages, which I think do a great job of summing up the initial stages of financial planning: “Those who fail to plan, plan to fail”; “Pay yourself first”; “Time is on your side”; and “Don’t throw free money away”.

You may not want to believe them, but I can give you scores of examples of why they work.

And I’m going to address each of them in the next few weeks. But today I want to talk about a couple of friends and business acquaintances who have recently shared their personal stories with me, whose situations are a lot more common then you may think: Middle-aged and not much money stowed away for retirement.

Over the dozen or so years I’ve been publicly-speaking about investing and finances, I’ve run out of fingers and toes to count the numbers of people who have shared similar stories with me. They fit into two categories: 1) Folks who have enjoyed the money they’ve made by what I call “outfunning their earnings”—essentially living beyond their means and saving nothing, or very little, for their golden years; and 2) Small business owners who have spent years reinvesting their profits back into their businesses, and socking little away for their retirements.

The first example is endemic of my generation and later. My parents were depression babies and well knew the value of a dollar. But that’s a complex subject, involving societal mores as well as personal habits, and we’ll leave that for another day.

Today, I want to discuss the plights of my friends—both small business owners. Like most entrepreneurs, they’ve toiled long and hard at their businesses, and—whether or not they’ve consciously had this strategy—they’ve considered their businesses their retirement funds.

On many occasions, as you know, that works out really well—someone buys the business when you are ready to sell it, and for a handy profit. And with a small business, that entails not only any employees, products, and rights to its customers, but also its reputation and goodwill in the community. That can add up to a small sum, or millions of dollars, depending on the business and industry. I don’t have to tell you how many technology billionaires exist, mostly as a result of being acquired by another company. Just look at the numbers being floated around for Facebook—a possible $10 billion!

But statistics from the U.S. Census Bureau tell us that a whopping 75% of small businesses consist of self-employed people, with no other paid employees. Those are the types of businesses that are tough to sell. And if they do find a purchaser, the purchase amounts are much more modest than the high-flyers.

But for the majority of these small business owners, a sale never happens. Many businesses just close their doors when their owners retire, with no retirement monies in sight.

That’s why it is imperative that business owners carve a bit of money from their profits and stash it into some form of retirement fund—an IRA, a Roth IRA, a Simplified Employee Pension Plan (SEP) or a Keogh (for more information, see Retirement Plans FAQs regarding SEPs.

I will also address the mechanics of these savings/investing plans in future columns.

But getting back to my friends’ situations…

The first question came from a 50-something very successful small business owner, a pillar in my community, who said: “Tell me how to multiply my money, starting with just a small amount”. My other friend is also a successful business owner—on a smaller scale—and in her 40’s, who has not yet saved anything for retirement. She asked, “How do I get started?”

Although phrased differently, both questions are asking for the same things—capital growth and a security blanket for their retirement years.

And really, folks, it’s not rocket science. It is essentially about taking baby steps, but does require some planning.

Now, I know that many of you are far-advanced from these two situations. You have been saving and investing for years, and you have probably built up nice retirement accounts. If so, you are the fortunate ones. But I also am confident from my interactions with my subscribers that many investors are in the same boat—whether or not they’ve just started, they don’t feel that they have saved enough! And they feel an urgent need to get caught up!

And I think that my responses to both people can give many of you some handy tips to make the most of your financial planning.

Let’s Get Started!

The bad news is: Compounding is the key. The earlier you start, the more money you will have accumulated when your retirement rolls around. Consequently, the longer you put off saving, the less money you will most likely enjoy in your retirement years—unless you can count on a big inheritance or are a really lucky lottery player!

But most of us just aren’t that fortunate. So we need to take charge of our financial futures, and the sooner, the better.

And there is good news: No matter how old you are, it’s never too late to get started! But, I warn you, you are going to have to commit to doing a little bit—maybe a lot—of work in grabbing your financial reins. Don’t worry; you won’t have to be married to your money, spending 10 hours a day, fretting and planning. But planning is the key. And you do need to commit to that.

So let’s talk about how to get my friends—and some of you—started.

Those of you who have known me for years will all agree that I am a huge equity fan and am an investor with a longer-term view than just the next two hours. And for the majority of my readers, I will recommend that you have at least a small portion of your portfolio in equities.

How Much Money will you Need to Retire?

But before we get to talking about specific investment plans, we have to take the first baby, but incredibly crucial, step: You must decide what your savings/investing goals are—retirement, a new HDTV, college education for your children or grandchildren, a world tour, etc. In my opinion, nothing is off limits. You should have a short-term, intermediate-term and long-term plan. But for our purposes here, let’s focus on the long-term—your retirement. And you can then use the same principles for your shorter-term goals.

There are plenty of schools of thought on how much money you need to retire. Until just recently, the common rule-of-thumb was planning so that you could withdraw 4% of your savings yearly for your living expenses, with enough money to last through your retirement.

That is no longer the case for most folks, primarily because we live longer today, on average, and even more importantly, we tend to spend more money in retirement than originally anticipated—sometimes more than when we were working!

Don and I live in a mostly-retired community, and are just a few of the neighbors who still work. At least 25% of the folks on our street go to Florida for the winter—either renting a condo or buying a separate residence. Almost everyone goes on extensive vacations, at least two to three times a year. And, oh yeah, they all have at least two, mostly luxury cars.

Very few of them are not what you and I would consider ultra-wealthy, but they have very nice life styles, truly living their retirement years as most of us would love to do. The majority are folks who worked hard all their lives. But the difference between them and my friends (above) is that they always socked away money—even when they didn’t think they had any extra.

My point is this—only you know how much money you spend and if you want to continue that same lifestyle (which you must realize might not be possible) in retirement. So you first need to calculate how much money you will need to start with before you accept your gold watch!

I urge you to be very aggressive in your calculations. Here are a couple of web sites that I have found that feature pretty good retirement calculators:

How much Investment Risk can you Tolerate?

Once you’ve completed that step and have calculated your needed retirement monies, I want you to think about the type of investor you are—aggressive, moderate or conservative. Knowing how much risk you can tolerate (in other words, how much money can you mentally and physically afford to risk, and possibly lose—at least on paper, temporarily) is key to your investment success.

In my previous investment newsletter, we asked our subscribers to take a quick test to determine their risk profile. It was kind of funny, because in my chats with and previous surveys to my subscribers, they almost all said they were “aggressive” investors.

But the actual test results indicated that they were much more conservative than they had thought! Many folks considered themselves aggressive because they wanted to make “quick” money. But, in reality, most didn’t feel comfortable with the possibility of losing some of their investment monies, which, unfortunately, does sometimes happen in the stock market. Consequently, their risk profiles were much more conservative than they thought!

Now it’s time for you to find out what kind of investor you are!

Following is the investor profile quiz that we created. It will only take a few minutes of your time, but I think it will be well worth it!

*Please Note: Survey results are to be used as a guideline ONLY and I encourage you to retake the survey on a yearly basis to reassess your investor type.

  1. I do not need a high level of current income from my investments. I am more interested in their long-term growth potential.

1-    Strongly Disagree
2-    Disagree
3-    Undecided
4-    Agree
5-    Strongly Agree

  1. I am concerned about the effects of inflation on my investments.

1-    Strongly Agree
2-    Agree
3-    Undecided
4-    Disagree
5-    Strongly Disagree

  1. I am comfortable holding onto an investment when it drops sharply in value.

1-  Strongly Disagree
2-  Disagree
3-  Undecided
4-  Agree
5-  Strongly Agree

  1. I am willing to accept a lower return on my investments if I can avoid significant volatility.

1- Strongly Agree
2- Agree
3- Undecided
4- Disagree
5- Strongly Disagree

  1. I plan on using the money I am investing:

1-    Within 6 months
2-    Within 3 years
3-    Between 3 and 5 years
4-    Between 7 to 10 years
5-    More than 10 years from now

  1. My investments make up this share of assets (excluding my home):

1- Less than 25%
2- 25% or more but less than 50%
3- 50% or more but less than 75%
4- More than 75%

  1. My most important investment goal is to:

1-    Preserve my original investment
2-    Receive some growth and provide income
3-    Grow faster than inflation but still provide some income
4-    Grow as fast as possible. Income is not important today

  1. My primary source of income is:

1-    Retirement pension and/or social security
2-    Earnings from my investment portfolio
3-    Salary and other earnings from my primary occupation

  1. The worst loss I would be comfortable accepting on my investment is:

1-    Less than 10%. Stability of principal is very important to me
2-    10% - 20%. Modest periodic declines are acceptable
3-    20% - 30%. I understand that there may be losses in the short run but over the long term, higher risk investments will offer highest returns
4-    Over 30%. You don’t get high returns without taking risk. I’m looking for maximum capital gains and understand that my investment can substantially decline.

  1. If the stock market were to suddenly decline by 15%, my reaction would most likely be:

1-    I should have left the market long ago at the first sign of trouble
2-    I should have substantially exited the stock market by now to limit my exposure
3-    I’m still in the stock market but I’ve got my finger on the trigger
4-    I’m staying fully invested so I’ll be ready for the next bull market

  1. I expect to retire in:

1- 5 years or less
2- 5 to 10 years  
3- 10 to 15 years  
4- 15 to 25 years
5- More than 25 years


11-27: Conservative – As a conservative investor, you are less willing to accept market swings and significant changes in the value of your portfolio in the short- or long-term. Capital preservation is your primary goal and you may plan on using the principal from your investments in the near-term, preferably as a steady income stream. The average level of return you expect to see is 5%-10%, annually.

28-40: Moderate – As a moderate investor, you seek longer-term investment gains. You are comfortable with some swings in your portfolio’s performance, but generally seek to invest in more conservative stocks that build wealth over a substantial period of time. The average level of return you expect to see is 10%-25% annually.

+40: Aggressive   As an aggressive investor, you primarily seek capital appreciation and are open to more risk. Swings in the market, whether short- or long-term do not impact your investment decisions and you have confidence that volatility is necessary to achieve the high return-on-investment you are looking for. You typically expect a 25%+ return, annually, though you do not need your principal investment immediately.

At this point, you may want to go back to your retirement calculator, and see how your investor risk profile may have changed your expected returns, and therefore, your monetary goals.

These are the first steps! They will help you determine how much money you need to be stashing away—starting right now! In next week’s financial fitness column, I’ll discuss what’s next—how to begin to put that money to work for you.

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