Question: What is the single most important thing to for a financially secure retirement

Ask Bud

Bill’s question: “What is the single most important thing to for a financially secure retirement?”

(The following is a paraphrase of an email conversation with a financial reporter earlier this year.)

Answer: Make an annual plan that projects the future. Involve your spouse. Keep a file with previous plans. See how you did vs. last year’s plan. Redo the plan every year so it’s consistent with the savings you’ve accumulated to date.

Question: OK, now that we’ve got you rolling, what are the next most important things to do?

Answer: Well, one of these has to be using automatic paycheck deposits to retirement savings. There are lots of benefits especially if part of your deposits are matched by your employer. But even beyond that, dollar-cost-averaging may add almost one percent to your return each year if you continue the process for a decade or more.

Question: So what would be third on your list?

Answer: I’d say they are the things that you normally write about, namely intelligent allocations and low costs.

Question: Why isn’t this first on your list?

Answer: I put this third because you first have to have an idea how much to save and then actually make the savings. If you don’t have anything to invest, or the amounts are negligible, allocation and costs are academic because you’ll have all of your money in checking accounts or owe big credit card bills.

Question: Have you ever made any bad investment choices?

Answer: Oh my gosh yes! When I was very young, I believed the advice from my broker. Practically everything he recommended lost value after I bought. I think he was paid to get rid of the dogs in the brokerage’s own account. But later on I made bigger mistakes investing in a number of real estate partnerships. I learned the truth of the story that at the beginning of the partnership, the general partner has all of the knowledge and the limited partners have all of the money. When the partnership is finally dissolved, the positions are reversed so that the general partner has all of the money and the limited partners end up with the knowledge.

Question: I know that you recommend that people have money set aside for emergencies, but can you quantify this?

Answer: I think that the least a person should set aside is ten percent of whatever are the current investment balances. Unfortunately, people not yet retired with little investments should probably set aside a larger percentage of their investments when working to support three to six months of unemployment. Retirees often face even larger surprises because the costs for helping aging parents or adult children in financial trouble can wipe out savings entirely. Or they have to replace a roof or vehicle which would be much better financially if they could fund these things from investments instead of loans.

Question: So could part of my savings in a retirement account be considered emergency reserves?

Answer: It would be very unlikely that I’d take the money from a retirement account even if I wasn’t going to be penalized by the IRS as you would if you were not net 59 1/2. Few people realize how dependent they are going to be on their savings for the last thirty or so years of their lives. So the answer is that you should start saving as much as you possibly can and part of it should not be in a retirement account. The more that you can save--and the further that you can get from having to borrow money--is one of the biggest differences between those who are poor and those who ultimately get rich.

Question: You are getting a lot of press recently from your website article “Doing Better Than Your Peers.” (See www.analyzenow.com.) Isn’t that one of the main points that you make there?

Answer: That’s true. Unfortunately, the vast majority of people aren’t saving enough money to keep the economy going in a decade or so as the population ages and the reliance on savings increases. Those who start saving significant sums now while things are really humming will benefit from decent returns. Then, when things slow down, and tax rates get high again, they not only will have money to spend, they may well buy at relatively lower prices.

Question: You also believe that tax rates and inflation will both increase in the future. Why this pessimism?

Answer: This is a combination of several things: First is the lack of savings for the last twenty years. Next is the demise of traditional pensions which raises the amount that we should be saving. And last are the incredible levels of record debts at all levels: international, national, state, industrial and personal. The government’s major debt is the unfunded Medicare and Medicaid liability which even dwarfs social security’s problems. The government has several ways of dealing with this: Increase tax rates, reduce benefits and let inflation increase. The last is the easiest and is very effective. The government will pay for its debts and future benefits with very cheap dollars. Unfortunately, this will wrack severe damage on retirees.

Question: So you thing the answer to all of this is to increase savings?

Answer: Increased personal savings are the best insurance for the few who will listen. The population as a whole will continue to spend because they are unable to resist the unflagging consumerism that’s encouraged by the government, industry and financial services. You can’t save money if you always have to have the latest in electronic equipment, get the most recent media services, provide your children with every modern device, buy large houses, have easy access to cheap credit, and so on. Saving will initially put you behind the Joneses, but you’ll ultimately far outstrip them. It’s just like the tortoise and the hare.