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September, 2009


Investing does not have to be nuclear physics, brain surgery, or rocket science, so try these easy steps toward your retirement and financial independence goals:

Set aside about six to twelve months' worth of cash equivalent assets, invested in things like Certificates of Deposit, Money Market Accounts, or short-term bond mutual funds. Depending on one's aversion to risk or how secure or insecure one's job is, this amount may be increased or decreased till one can sleep easily at night knowing that cushion is there. Pending getting new work or other income, this is the stash one may need to live on if one's regular earnings or other revenue sources are lost. One can acquire such an emergency fund gradually, for instance via automatic deposits in a special savings account. One's local bank staff will usually be happy to help get it started.

Invest in income assets, such as real estate investment trusts, relatively safe, high yielding stocks, energy trusts, Treasury bonds, mutual funds or closed end funds that specialize in these type assets, or in annuities to tide one over during longer periods of challenge, such as from one to eight years, perhaps while going back to school to retrain, for instance, or to soften the blow of a severe downturn in stock market or housing equity, or while recovering from a natural disaster, etc. If one's life expectancy horizon is shorter, most of one's liquid assets might be put into this category. But if just starting out as a young investor, one might need only about 20-30% of liquid holdings in income producing financial instruments. Again, with the aid of a good financial consultant, automatic investments can be arranged so that much of the hassle of such allocations is minimized. Mutual fund or brokerage companies such as Vanguard, Fidelity, Schwab, Raymond James, or Ameritrade have representatives who can also assist one in assuring this goal is met with the least difficulty.

The Balance of one's liquid assets (not such real assets as one's home, car, or personal property) will be in common stocks or stock mutual funds, and these can be acquired next. Until about ready to retire, they will generally constitute the bulk of one's holdings.

To determine how large the stocks portion should be, one might become involved in many sophisticated variables and formulae. There are any number of retirement nest egg calculators available online, or one can receive excellent help from a financial advisor. But if an approximate amount will do when getting started, an easy rule of thumb is that one needs about 25 times as much set aside as the income called for, adjusted for inflation. Thus, if one were to retire today and wanted an annual income of $50,000, it would be good to have a total of 25 times that or $1,250,000.

But since most will not be retiring immediately, it is wise to factor inflation into one's calculations. At a 4% annual rate, inflation will reduce the dollar's buying power substantially in the next 30 years. So, to be on the safe side and considering that the majority of retirees will live 20 years or so after leaving the world of work, it may be best for a younger worker commencing a plan for financial independence to simply double the initial figure, i.e. for an annual income of $50,000 inflation adjusted, consider building an eventual nest egg of about $2,500,000. For the typical married couple retiree household, this means planning for a $5,000,000 stash by the time they turn 66 or whenever they arrange to stop metaphorically punching a time clock.

That can certainly appear to be a daunting figure. However, it too is subject to adjustments, downward. From an individual person's needed nest egg of roughly $2,500,000, one may subtract 25 times the annual income one should receive from Social Security. Thus, if one will get 12 x $1500 monthly checks a year or $18,000 annually from Social Security, right off the bat one can reduce the total nest egg requirement by 25 x $18,000 or $450,000. (I do not say to double that again for younger workers, because of the rises in Social Security payments due to inflation, since we do not know if that program will still be inflation-adjusted in the long-term.)

Similarly, one can reduce the needed nest egg further by approximately the amount of one's pension or retirement annuity (through where one has worked), again based on the annual income multiplied by 25. Commonly, a retired federal civil service or state government or a military employee has such an annuity, which then may result in the needed total coming down another $500,000 or more.

In our rough and ready example, then, the prospective retiree who starts saving and investing early may have to assure, on the day she or he retires, a personal set of funds worth around $1.5 million, over and above Social Security or employer annuities.

The good news is that, if past trends were to continue, for every $10,000 in stocks invested in tax-deferred accounts during the first half of one's working career and regularly reinvested, one could retire with around $60,000. So, to acquire the first one million dollars in nest egg waiting upon retirement, it would be wise to set aside and invest about $12,300 a year (or $170,000 total) during the first 12-15 years of one's career. Although there are now the means to set aside many thousands a year in tax-deferred IRAs or 401K plans, it might be necessary to invest a little more each year if some of that amount cannot be protected in an account free of taxes (generally free of taxes, that is, until its distribution after retirement).

Finally, the balance of one's financial independence can be assured via investing one does in the second half of one's career. As in our illustration above, another $500,000 to about $1,500,000 (if no Social Security or employer annuity is anticipated) would need to be built up through savings and investments in the second half of a career. But the average worker is paid the most for her or his services during that period, so, given at least average market conditions, acquiring this balance will be comparatively straightforward in one's peak earning years.

I have mapped out an ideal kind of scenario, and it would be great if most people's lives fit into such an optimistic outlook. The reality, however, is that few of us lead such unadventurous or ordinary existences that we can blithely assume in our younger years that rosy circumstances will prevail until we are able to retire rich. One may theoretically live to be 100 too, but very few of us manage it.

So, to the guidelines above I would add this: it is well to do one's best and to aim high, but also to realize that for most of us a variety of complications will likely interfere, and so we shall then merely have to adjust our goals or our means for achieving them along the way. Many will still be working, though hopefully in jobs they find enriching, after an official retirement age. Others may eventually gain through inheritance the means to leave the workforce. Yet others may find a variety of ways to enjoy far lower income needs than they had expected they might when, perhaps at age 25 or so, first planning for their retirements.

Many things in our working and financial environments, our society as a whole, and even our global climate are in the midst of great change. Those who do best in the years ahead will likely be those who learn early how to adapt. I wish us all much luck and the setting of reasonable investment goals and then hope as well that we have compassion for ourselves and others as situations develop that may make some things we thought of great importance in our youth seem less so as we get older and as we see that, for many if not most of us, getting by in comfort and equanimity can be far more worthwhile than becoming "the millionaire next-door."


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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