Among the welcome improvements in investment accessibility is the capacity to purchase small dollar amounts of ETFs (exchange-traded funds), individual stocks, and some mutual funds. The ability to put together a diversified portfolio at a low cost is a real advantage to those just starting out investing or those who happen to have a smaller account (a 401(k) plan at a new employer, for example). Some available ETFs and mutual funds invest in a diversified array of stocks and bonds within one fund. The best-known and most popular of these “all in one funds” are target date funds.
A target-date mutual fund offers a mix of securities and asset classes (typically equities and fixed-income securities) and continually adjusts its blend as the fund’s target date approaches. An individual’s need for income changes as they approach retirement age. A long-dated target date fund has a high percentage of stocks, which declines and becomes more conservative with an increase in fixed-income securities as the target date nears. Several target dates are available within a fund company’s lineup, typically in five-year intervals (e.g., 2025, 2030, 2035, 2040, etc.)
One for the money? How about four for the retirement money?
Whether you’re 24 or 64, here are four matters to keep in mind as you plan for your retirement years or, for that matter, if you’re already retired:
1st – Ensure your investments are well-diversified so that you can earn attractive lifelong returns despite the occasional bumps in the road.
2nd – Make the most of your home. Paying off the mortgage by the time you retire can be enormously beneficial to your retirement prospects. Also, consider the possibility of eventually downsizing your domicile to free up money for retirement purposes.
3rd – Prepare an estimate of your retirement budget. You may be able to retire on a lot less money than you have been led to believe. But don’t forget to include the inevitable “budget busters” in your budget, like car replacement, home maintenance, and the dreaded major medical or dental bills.
4th – Decide where and when you want to retire. Retiring to a less expensive locale can work wonders on your budget. Delaying retirement may have a very positive impact on your retirement lifestyle as well. For example, delaying retirement by just three years can increase your lifetime retirement income by nearly 25%.
Smart Money Tips
- Sleep tight with an emergency fund. Recent studies indicate that a high percentage of the populace would have difficulty coming up with $1,000 to pay an unanticipated bill. Yet unanticipated bills arise all the time. This is where an emergency fund can help while allowing you to sleep more soundly. Start small with $500 to $1,000 in a bank or credit union savings account or brokerage money market fund. Then, gradually build up the fund to the equivalent of four to eight months spending, ideally one that pays some interest. Only tap into the money to meet a financial emergency. Resist the temptation to spend some of it on fripperies. Just because something you desperately want goes on sale, this in no way constitutes a financial emergency.
- Manage your home equity loan like a business. If you’ve tapped into your home equity credit line, do you have a plan for repaying the loan over an appropriate period? It must be human nature, but whenever a homeowner obtains a home equity credit line, previously unrecognized opportunities to spend large sums of money become immediately apparent. Before you take money out of your credit line, you should have a timetable for paying it back. Take a cue from well-run businesses that borrow for short- and long-term purposes and pay off those loans accordingly. If you’ve used your credit line to buy a car, for example, you should pay off the loan within two or three years. Home-equity lines that are accessed for longer-term purposes like home improvements or college tuition can be paid off over a longer period, say a decade or so. What you want to avoid under any circumstances is a situation where you are simply increasing your borrowing with no end in sight. Actually, there is an end in sight for home equity loans because most of them mature in ten years, which means you will have to begin paying interest and principal each month, like a mortgage. It is important to note that most home equity loans have a variable interest rate. During times of rising interest rates excessive borrowing can create a burden on your family finances.
Food for Thought
It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time.
-Winston Churchill
Money Can Be Funny
A miser is the proof that not every fool and his money are soon parted.
-Anonymous
Word of the Week
larging – The wasteful spending of money received through an inheritance, loan, or gift.
Origin: Unknown
Spending it all before you die will alleviate any concerns you have about your heirs larging it up after you are gone.