If Americans have had one thing drilled into their heads about retirement in the past decade or so, it's the scary fact that millions of our fellow citizens are dangerously unprepared for it. We've all seen or heard about the studies that warn that wide swaths of our population haven't saved enough for retirement and probably won’t be able to, given the shortening time spans until their hoped-for retirement date. And while recent market turmoil hasn't helped out a whole lot when it comes to rebuilding ravaged retirement portfolios, new data show that our nation's level of retirement readiness may actually be improving.
Light on the horizon
A recent study from the Employee Benefit Research Institute shows that fewer Americans are at risk of running out of money during retirement than they were in 2003, when the EBRI conducted its first such survey. According to the numbers, 47% of households in which the oldest member is 56 to 62 are at risk of not having enough money to meet basic household expenses in retirement. That's not great by most measures, but it is a big improvement from the 59% figure back in 2003. Risks also have dropped for households whose oldest members were 36 to 45 as well as 46 to 55.
The EBRI attributes much of this decrease in at-risk households to the rise of automatic enrollment plans, in which employees are automatically signed up for their employer's 401(k) or other retirement plan. Such "forced" savings gives employees a helping hand in getting started or continuing to save for the future.
While this is certainly encouraging news, the fact remains that almost half of households nearing retirement simply won't have the resources to sustain themselves. If you want to make sure you're on the right side of these statistics, there are several steps you can take now to increase your own retirement readiness.
Save early and often
First of all, there simply is no substitute for saving money. While saving may be harder now, thanks to job and salary reductions implemented during the recession, saving for retirement should always be a line item on your budget. I would even argue that if it comes down to a choice between savings for a child's college education or your retirement, padding your retirement nest egg should come first. Too many folks put off saving for their golden years until after other financial obligations are met. By then it may be too late to build up adequate assets.
Next, make sure you formulate an appropriate asset allocation plan. In my opinion, having an asset allocation that is appropriate for your age, risk tolerance, and projected years until retirement is even more important than what you actually invest in! Investors should spread their money across domestic large-cap, mid-cap, and small-cap stocks, as well as foreign developed and emerging market names. An appropriate international allocation could be 25%-30% for more aggressive investors and 10%-15% for folks in retirement.
Bonds should also be a part of everyone's portfolio, even the under-35 set. While the young'uns may want to aim for no more than 10% of their overall portfolio, those in retirement will obviously want bonds to make up a majority of their assets, somewhere from 55%-65%, not counting shorter-term liquidity needs. Remember, even retired folks need a hefty dose of equities to make their portfolio last over their increasingly long lifetimes.
Taking stock of tech
I still believe mutual funds and exchange-traded funds are one of the best and most appropriate tools for retirement investing. They offer wide diversification and a long-term focus that retirement-minded investors need. But once you've gotten your basic asset allocation down and your mutual fund investments set for the long run, there may be room for some individual stock picking in your portfolio.
One sector that looks promising in the near future is information technology. As I've highlighted before, tech companies should be in a good position as tech spending rebounds after drastic cutbacks in recent years. Intel
While a robust economic rebound is highly unlikely, tech spending is likely to increase in the coming months. That means industry leaders with wide market share such as IBM
If you're looking for more of a growth play, Apple
The bottom line is that while we as Americans are in a better position to retire now than we were six years ago, we've still got a lot of ground to cover to get everyone more prepared for their golden years. By making retirement saving a priority and investing in top-quality investments for the long run, we all stand a better chance of getting our own retirement back on track.