Recs

11

Retiring Well Is Easier Than You Think

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

The most challenging task you'll ever face as an investor is figuring out how much money you need to save for your retirement. There's good news, though: you may not need to set aside as much money as you might have thought to retire comfortably.

What you'll actually need
When you're saving, it's easiest to focus on how much to set aside and where to invest. But the flip side of retirement planning is at least as important: how much you plan to spend when you retire. And that's where some of the assumptions that financial planners make start to come into question.

One study actually took a look at what people spend during retirement. What the study found is that as people grow older, they tend to spend less on just about everything, including entertainment, food, and transportation. The only category of expenses that didn't drop was health care, as you'd probably expect. Yet with Medicare and other programs in place to backstop seniors, even those expenses didn't rise as much over time as you might expect.

Setting the context
The expense study has huge implications for retirement savers. Many who may have thought themselves unable to save successfully for retirement may now be able to do so.

In recent years, prospects for retirement have seemed ever more frightening. Those who are close to retirement and have substantial assets set aside have seen their value plummet in the market's meltdown, and although the rally has restored some of those portfolios closer to full strength, the latest correction has everyone back on their toes again.

Meanwhile, younger investors face the prospect of having to rely solely on their own financial resources to support themselves after they retire. Company pensions are nearly a thing of the past, while even Social Security has issues that may well be resolved unfavorably for those with decades to go before reaching retirement age.

In that context, it's easy to understand why many financial planners recommend that people set aside as much as they can toward their retirement. Given so much uncertainty, they argue, it's better to be safe than sorry. And with many people living long past 65, you have to plan for many contingencies if you want to be certain that you'll never run out of money.

Set the right goals
What the study shouldn't do, however, is give you a false sense of security. To set yourself up on the right track to take advantage of potentially lower expenses, you have to get your financial house in order. Some expenses will naturally go away, such as supporting your kids. But you still have to make sure you eliminate short-term debt, get your mortgage paid off, and make allowances for things like long-term care and Medicare supplemental insurance before you retire.

What it also means is that you may have more latitude to be less aggressive in your investing. Many late-starters feel they have to take on big risks by picking swing-for-the-fences stocks. They might have picked Dendreon (Nasdaq: DNDN  ) in the hopes that it would indeed get its long-awaited approval for its cancer-fighting drug. They might have gambled on the building-intensive Las Vegas Sands (NYSE: LVS  ) and MGM Mirage (NYSE: MGM  ) successfully navigating themselves out of the shoals of potential bankruptcy during 2008's credit crunch. Those bets paid off, but can you count on being as successful for the rest of your investing career?

With less pressure to maximize your returns, you can build a more balanced portfolio. For instance, neither the iShares DJ Select Dividend Index ETF (NYSE: DVY  ) nor the iShares Investment Grade Corporate Bond ETF (NYSE: LQD  ) are going to have your portfolio hitting it out of the park. But they're both valuable resources for diversification and can give you a much smoother ride along the way than you'd get from riskier stocks.

Get it done
Of course, if you've already saved enough to cover all your contingencies, then the prospect of potentially falling expenses makes you even more secure. But the most important thing to take from this news is that you have no excuses not to start saving for retirement. Even if you think you're too late, every dollar you save now will get you a bit further toward your goals -- and those goals are closer than you think.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Don't get the wrong idea: Smart financial planners take falling expenses into account when helping you prepare for retirement. The Garrett Planning Network is offering a limited-time 10% discount for new Motley Fool clients. Just click this link, search your state, and look for The Motley Fool icon to identify participating advisors.

Fool contributor Dan Caplinger hopes his travel spending will stay high throughout his retirement. He doesn't own shares of the companies or funds mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy gives you all the information you need at a price that's right.


Read/Post Comments (1) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2010, at 2:54 PM, wolfman225 wrote:

    I got a question for ya Dan:

    I'm a 47 yr old professional driver. I'm recently divorced. I am currently debt-free but I had to eliminate nearly all my savings to pay down my debts and legal fees for the divorce (which I won). The former marital residence has been put under contract for lease-purchase, with a buy date at the end of the year. (Option to renew)

    By evaluating all new potential expenses as needs versus wants, I have been able to accumulate a contigency fund of 6 months expenses in cash, so I'm in a relatively good position. However, I am only 20 years from retirement, faced with the prospect of having to rebuild. With such a short time horizon, aren't I going to be forced to take on more risk? What's the best way to evaluate risk (smart v simply risky)?

Add your comment.

DocumentId: 1197772, ~/Articles/ArticleHandler.aspx, 4/20/2014 11:01:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 3 days ago Sponsored by:
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 2.54 0.14%
NASD 4,095.52 0.00 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

4/17/2014 4:00 PM
DNDN $2.65 Down -0.04 -1.49%
Dendreon Corp CAPS Rating: **
DVY $74.01 Down -0.15 -0.20%
iShares Dow Jones… CAPS Rating: *****
LQD $117.46 Down -0.68 -0.58%
iShares IBoxx $ In… CAPS Rating: *
LVS $76.46 Up +0.07 +0.09%
Las Vegas Sands Co… CAPS Rating: ***
MGM $23.96 Down -0.26 -1.07%
MGM Resorts Intern… CAPS Rating: ***

Special Offer for Savvy Investors Like You!

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut semper dui vitae molestie venenatis. Suspendisse.

Enter Email Address:



Privacy / Legal Information
Advertisement