One million dollars in retirement savings used to be the goal for baby boomers, but these days, that financial cushion is most likely not enough to guarantee a comfortable retirement. Financial experts now advise saving enough to finance at least 25 years of retirement, which may require $2 million or more.
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Most people arent coming anywhere close to saving that much. The statistics are shocking: According to a recent Transamerica Center for Retirement Studies survey, just 30% of American workers have saved more than $100,000 for their retirement, and 12% have less than $5,000 saved to support them in their golden years. Thats not enough for one visit to the grandkids! As a result, most people are working far longer than theyd like to be and are worried about making ends meet as they age.
In addition to saving more money, the keys to a comfortable retirement is to invest regularly and more aggressively.
Dont be afraid to take risks
The last several years have been tough on the stock market, and as a result, many investors--even those decades away from retirement--are opting for low-risk portfolios that are heavy on fixed-income bonds and money market funds. A recent survey found that 59% of Merrill Lynch Wealth Management customers between the ages of 18 and 34 considered themselves conservative investors, with a portfolio allocation favoring bonds and money market funds.
These fixed-income investments may be stable, but their potential for growth is extremely limited: The Barclays Aggregate Bond Fund, which serves as a benchmark for the American bond market, yielded just a 6% return in 2009; in contrast, the S&P 500 returned 27%. By tying up your assets in fixed-income securities, you might think youre protecting your wealth--but instead, your aversion to risk could doom you to an extra decade (or two) on the job.
There are some exceptions to the rule such as fixed-income investments with a stock like return. Stable, high-yield, fixed income securities like Consumer Notes are available to investors. With Net Annualized Returns of 9 to 10%, these investments outperform most bond indices with higher returns and lower volatility.
If you are still many years away from retirement, it makes sense to take bigger chances with more volatile equity-based investments. Even if some of your investments lose money, your portfolio will have ample time to recover before you need access to the funds, and these stocks have greater potential to grow substantially.
Determine your portfolio allocation
If youre under 40, experts recommend investing heavily in stocks, with around 10% in more stable fixed-income investments.
Research potential investments carefully to make sure that youre not placing too large a share of your wealth within one asset class or one individual stock. It could be helpful to speak with a financial advisor about your options. Even if you dont have much to invest yet, your advisor can help you determine your savings priorities and plan accordingly.
As you grow older and closer to retirement, you should gradually modify your portfolio allocation so that closer to 50% of your assets are invested in fixed-income securities by the time you retire. With this allocation, your portfolio isnt likely to grow as quickly, but it will be more stable in the event of a stock market downturn.
When you begin investing early and manage your investments with a focus on long term objectives, its quite achievable to comfortably save millions by the time you retire. By saving just a few hundred dollars a month and investing aggressively in growth stocks, youll be well on your way to financial security. Dont be afraid of the stock markets temporary dipsif youre investing for the long haul, youre likely to come out way ahead in the end.
Renaud Laplanche is the CEO of Lending Club. Renaud has appeared in many leading publications including Forbes, New York Times, Washington Post, USA Today and Barrons. Renaud has been featured on CNBC, ABC News and Fox Business Network. Before Lending Club, Renaud was the founder & CEO of TripleHop Technologies, an enterprise software company acquired by Oracle Corporation in June 2005.