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Business // Thinking Smart
David S. Chang

Top Investment Rules For Retirement

With people living longer and the future of Social Security uncertain, setting up a financial plan and investing in a retirement account is crucial for financial independence. Here are three top rules to follow when investing in an IRA, 401(k), 403(b) or any other qualified retirement account. * Rule 1: Invest some of your portfolio in the stock market. If you are close to retirement or in retirement, your exposure may be less, but if you are at least 10 years from retirement, you should have a larger portion in equities. When we look at most long periods of time, stocks have given better returns than safer investments such as bonds or money market funds. Mutual funds or ETFs offer the best diversity for exposure to the stock market.

If you had invested $100 a month for the past 10 years in an S&P 500 Index, you would have approximately $20,000 today, with about an $8,000 gain. If you had done the same thing for the average money market account, you would only have about $13,000, and for the average U.S. Government Bond Fund about $15,000.

Even if you had invested in the worst possible time, such as in March 2000, right before the tech bubble, and also had to live through the 2008 Great Recession, you would still be far ahead than just staying in cash or bonds. You would have more than $30,000 in your account for a gain of $13,000! Your results from staying in a money market account over the same time period would be only $18,000 (a gain of $1,000) and the bond fund about $22,000 (a gain of $6,000).

If you have long-time horizons, stocks have been one of the best ways to get higher returns. Even if you are drawing down your account for retirement, with people potentially outliving their money, you should have some exposure to the stock market to keep up with inflation and beat longevity risk. * Rule 2: Don’t let investing expenses lower your returns. If you are paying a commission and have higher expense ratios for your investments, you may be leaving thousands of dollars on the table every year.

If you look at the largest 25 stock funds, only six of the past 10 years have beaten the S&P 500, yet are five times more expensive.

If you are paying a financial adviser, make sure the product is right for you, not just so your adviser will get a commission. Fee-based advisers generally don’t take commissions and take a flat fee. You want to make sure you get what you pay for. Do your homework on the investments you are in, compare your different options and add it up to make sure you aren’t giving away your returns. * Rule 3: The only thing that is certain is how much you invest. The odds of the stock market experiencing high volatility are 100 percent. The prices of publicly traded investments are based on future valuations, and no one will know for sure what they will be.

The best way to increase your retirement accounts is to increase the amount you save. While you can’t control the growth of investments, you can control how much you invest and in what you invest. Visit artofthinkingsmart.com for the updated 2014 retirement account contribution limits.

david@artofthinkingsmart.com

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