You've heard scary retirement stories before -- tales of woe and angst from would-be retirees who fell short of the goal line. You've heard all about how not to plan for your golden years: how to spend more than you save, how to ineffectively draw up your retirement goals.
But how can you retire well instead? Four simple steps will help get you there.
Step 1: Invest along the way.
Planning financially for retirement is a simple yet daunting task, and the plethora of investment vehicles and potential holdings only make it more so. But you don't have to be scared by all of these options. In fact, if you don't have time to follow individual companies on a regular basis, you're better off taking the easy way out and sidling up to some funds instead.
We at the Fool are big proponents of index funds and funds with low expense ratios. They just make sense: The less money you pay to fund managers, the more money you can keep in your investments -- and you can reap greater rewards as a result.
Furthermore, the funds you hold can effectively reflect your personal investing style as well as your stage in life. If you've got plenty of time until retirement, you might consider more volatile -- yet potentially quite lucrative -- funds such as the E*Trade Russell 2000 Index (ETRUX), which holds small-cap companies such as Alexandria Real Estate (NYSE: ARE ) , Hologic (Nasdaq: HOLX ) , and Big Lots (NYSE: BIG ) . If you'd like to play it a little closer to the vest, a fund like the Vanguard Large-Cap Index (VLACX) may be more your style. With known entities such as ExxonMobil (NYSE: XOM ) , Microsoft (Nasdaq: MSFT ) , and Johnson & Johnson (NYSE: JNJ ) , you'll typically endure less volatility while keeping a grasp on winning companies. Not a bad deal!
Step 2: Maintain a list of your retirement goals.
But your investments won't do you any good if you have no plan for how you're going to use them. What do you want to do in retirement? Do you want to move to Maui? Spend your days volunteering at an animal shelter? Buy an Airstream and travel the world? Become a late-blooming barista at Starbucks?
Once you have a list of your goals and dreams -- no matter how big, small, or silly they may seem -- you can plan your finances accordingly. Are you willing to forgo other luxuries when you plunk thousands of dollars down on that RV? Exactly how much would your mortgage be in Maui? Questions like these will help guide your financial plans today.
And if your dreams and goals change through the years, no matter. Keep your list of retirement aims current, and you'll always have your eye on the prize.
Step 3: Keep some cash in short-term accounts.
While you're investing and dreaming, be sure to plunk some money where you can get to it easily. Even though you've got your mind on retirement, life continues to happen, and with it come surprises that you've got to be ready for. By socking some cash away in short-term vehicles such as money market accounts, certificates of deposit, and plain ol' run-of-the-mill savings accounts, you'll be ready for the unexpected even if the market is taking one of its customary naps.
Step 4: Sit back and enjoy the ride.
Once you lay the groundwork for your retirement goals and plans, keep an eye on them -- even index funds and other, more hands-off holdings need attention from time to time. If you find you're going in an unfavorable direction, either with your investment decisions or your long-term goals, then take care to change them. It's your future, after all; no sense in sitting idly by and watching your plans go down the wrong road.
Granted, retirement planning takes time and effort. But the rewards will be worth the investment.
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This article was originally published on Dec. 15, 2006. It has been updated.
Hope Nelson-Pope is online coordinating editor at The Motley Fool. She owns shares of Microsoft and Starbucks but none of the other companies mentioned here. Starbucks is a Stock Advisor recommendation. Johnson & Johnson is an Income Investor pick. Microsoft is an Inside Value pick. The Motley Fool's disclosure policy is building a second home on Maui.