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When it comes to planning your retirement, some things are easy. Figuring out where you stand right now is as simple as looking at your latest brokerage statement. Determining how much you'll need when you retire takes a bit more work, but you can make a good estimate without too much effort. The hardest part is finding the right path to get you from here and now to that last day of work years down the road, and then through the rest of your life.
Nothing lies like a straight line
A lot of retirement advice you read makes it sound as if traveling that path is easy. You can get a good idea of what average return you'll need to earn in order to reach your ultimate goal. Take a financial calculator, enter in how much you think you'll be able to save and what returns you'll achieve, and it'll happily spit out the exact amount you'll have on your 65th birthday, down to the penny.
In real life, however, things don't work that way. You'll earn more or less than you expected, or suffer higher expenses than anticipated. And you'll almost never see a year in which your portfolio rises by that often-heralded 10% figure that corresponds to the long-term average annual return for stocks. As your circumstances change, you'll need to make some course corrections to keep you on the straight and narrow.
What you can control
The frustrating part of investing is how many things are beyond your control. Even when you're convinced that you're right about a certain stock pick, it doesn't always cooperate on your time schedule. General Motors shares, for instance, still trade above $0.60 despite assurances from the company itself that they will soon be completely worthless.
And more often, what you might think of as a "sure thing" turns out not to be certain at all. Those who thought that betting against the amazing comebacks in stocks like Las Vegas Sands (NYSE: LVS ) , Sirius XM Radio (Nasdaq: SIRI ) , and Citigroup (NYSE: C ) was a guaranteed path to riches can certainly attest to that now.
There are, however, a number of things that you do have at least some control over. They include:
- How much you save.
- How much risk you take with your investments.
- What types of assets you invest in.
- When you retire.
- What standard of living you want during retirement.
By adjusting these factors, you can deal with whatever happens in the years to come -- even if it ends up being a lot different from what your financial calculator predicted.
How to stay on track
Right now, many people don't have as much money as they thought they'd have by now. If you were counting on stocks to return 10% or more for you, then the S&P 500's negative overall performance over the past decade has likely created a big shortfall.
But you can choose how best to respond given your current situation. If you're in a position to boost your savings, then you might be fine keeping exactly the same investments you're making now. If you can't, then shifting some of your cash and bonds to conservative dividend-paying stocks such as Procter & Gamble (NYSE: PG ) and PepsiCo (NYSE: PEP ) could help you add a bit more growth potential to your portfolio.
On the other hand, if you've invested well, you might actually be ahead of where you expected to be. If big investments in high-reward, high-risk growth stocks like Apple (Nasdaq: AAPL ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) have paid off for you, then you don't need to take the chance of leaving that money on the table any longer. Riding your gains may sound good, but remember that many people passed on taking big profits from Internet stocks in the late 1990s -- and sacrificed a fortune during the ensuing tech bust.
Stay focused on the goal
Change is inevitable, but it doesn't have to derail your plans. If you can filter out all the turbulence and noise and focus solely on reaching the goal you set for yourself, then you'll be able to stay on the path to true wealth.