No one can predict the future, but there are many reasons to believe that in the coming years, retirees will not be as well off as their predecessors.
Corporations and state and local governments have replaced defined-benefit pension plans with less expensive defined-contribution plans. This trend will continue. Health-care costs for retirees are increasing faster than the inflation rate. Residential real estate prices have fallen sharply from their high points in most parts of the country, and the prospects for appreciation are mixed. Home-equity loans, which typically have the effect of reducing the net assets available at retirement, are used too often.
These are just some of the factors that spell trouble for those who are not saving for retirement at a serious clip.
One of the most important things to do is regularly invest a significant portion of your income for retirement. If you are not saving at least 10 percent of your net pay, you are probably not saving enough, especially if your employer no longer offers a defined-benefit plan.
When you receive a raise, immediately increase your savings. Rebalance once a year. That way, you are taking some profits from your more successful investments, and re-investing in alternatives that are at lower prices.
Do not invest too much of your retirement investments into your employer's common stock. You don't want to be too dependent on the financial stability of your employer.
Take advantage of any available tax-deferred retirement options. Make sure you use the benefits of IRAs, Roth IRAs, 401(k)s, and Roth 401(k)s that you can. If your employer offers a 401(k) match, make sure you contribute at least the minimum amount to receive the maximum employer match. Don't wait until your 50s to start a serious investment program. The earlier you start, the easier it will be.
Don't accept 100 percent of the financial burden regarding college education for your children. It's too expensive. Let your children know well in advance that they must accept a significant part of the financial burden, and encourage them to look for scholarships, grants and loans on their own.
Do not be too conservative with your investment selections. If you are 10 years or more away from retirement, it makes no sense to have any of your retirement investments in low-yielding vehicles such as Treasury bills, money-market instruments or short-term savings accounts.
Select only cost-effective investment vehicles. Invest only in no-load mutual funds, as opposed to commission-based funds. Select only mutual funds and exchange-traded funds that have a history of low costs. If you are many years away from retirement, make sure you have a significant percentage of your investments in some form of common stocks. On a long-term basis, common stocks should provide more growth potential than other investments.
Develop a diversified portfolio, with a portion in bonds as well as stocks. Have some investments in global and international vehicles. You may want to have a small portion of your portfolio in commodities including some gold. However, I would not invest a large percentage in commodities that provide no income. Commodity investments are volatile, and generally produce no or little income. My limit is 5 percent of the whole portfolio's value.
If at all possible, try to go into retirement without an outstanding mortgage. If you can, make extra payments while you are employed to reduce the mortgage, especially if your interest rate is high. You will have a lot more flexibility in retirement if you own your home mortgage-free.
If you are close to retirement, and you believe your retirement income will be insufficient, consider options that will provide you with additional income. If you are considering self-employment options, talk to volunteers at your local SCORE chapter for free counseling and low-cost seminars before you actually retire.
Employers, both in the public and private sectors, continue to introduce policies that make it more difficult for employees to retire in financial comfort. Employees who want a comfortable retirement must take the initiative to improve their own financial future. Individuals who recognize this, and take the initiative early in their careers, can ensure a prosperous retirement.
(Elliot Raphaelson welcomes your questions and comments at firstname.lastname@example.org.)