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Never before have so many people faced so many threats to their long-term financial survival. But no matter where you are on the path to retirement, you can take some simple steps that will get you there a little faster.
Loss of confidence
Over the past several years, retirement investors have been besieged by a bad economy and a stagnant stock market. That has made many people give up on trying to save for retirement. According to the 2010 Retirement Confidence Survey, about half of adults under age 65 have $25,000 or less set aside for their retirement, and more than a quarter have less than $1,000. That may be fine if your idea of retirement bliss is a three-day weekend trip to Vegas -- but if you end up living until you're 90 or beyond, what are you going to do with the other 9,122 days of your golden years?
If you want real financial security, you can't settle for what most of America will end up with. Instead, do these four things and get yourself moving in the right direction.
Step 1: Set the stage
You're not going to be able to retire rich without investing well. But that doesn't mean you should jump right into investing. Many people try to become millionaires before they even get themselves out of the hole.
So first, make sure you've gotten rid of bad debt, including high-interest credit cards, car loans, and other burdensome credit. It also means being smart about managing all of your debt. As plenty of people discovered during the housing crisis, even seemingly "good" debt like mortgages or student loans can backfire if they go wrong. Getting your net worth out of the red is an important milestone toward getting the retirement you want.
Step 2: Save more
Just as important as what you invest in is how much you invest. Smart retirement savers take every opportunity to boost their savings. So if you're fortunate enough to be getting a raise or are supplementing your income with extra hours or a second job, then setting aside a good portion of that extra money can get you to your retirement goals a lot faster.
Step 3: Get the right investments
Once you're out of debt and have a plan to set aside enough cash, it's time to attack a key question: how to invest it. In many cases, you may have limited choices; your 401(k) at work, for instance, may not give you much latitude to pick the stocks or mutual funds you might want the most.
But if you look at the most successful stocks over long periods of time, you'll find that they fall into two distinct categories:
- Some stocks ride the high-growth curve for a decade or longer, giving their early shareholders huge rewards. Cisco Systems (Nasdaq: CSCO ) and Dell (Nasdaq: DELL ) are two great examples. They haven't done investors any big favors lately, as both companies have struggled to find new ways to sustain their long-term growth. But in their day, they brought riches to those who were fortunate enough to single them out. It's those returns that motivate most small-company investors, as they watch upstarts Netflix (Nasdaq: NFLX ) and Green Mountain Coffee Roasters (Nasdaq: GMCR ) post the same type of impressive growth that Cisco and Dell did in the early days of the tech boom.
- Other stocks aren't as explosive but still make their investors rich over time. With yields over 3% and P/E multiples of 15 or less, Altria (NYSE: MO ) , Procter & Gamble (NYSE: PG ) , and Chevron (NYSE: CVX ) are all attractive stocks right now -- and they owe as much of their long-term success to their regular and growing dividends as they do from share appreciation.
Choosing between these two groups depends on your financial resources and your current status. If you're close to retirement and have most of the money you'll need, then sticking with conservative dividend-paying stocks for the stock portion of your portfolio makes a lot of sense. On the other hand, if you have a long time horizon and need high growth, then taking risks is a smart move.
Step 4: Control your outflow
It's easy to figure that if you save enough and invest well, you'll have it made. But you also have to focus on the other side of the ledger: keeping expenses and costs down.
There are plenty of things you can do to make more from less. Being tax-smart about taking out your retirement money is just as important as investing smart when that money's still building. Products like long-term-care insurance can reduce the risk of big medical expenses that can wipe out an entire nest egg in no time. And even just being careful about budgeting and finding bargains can help a limited income go a lot further.
You'll get there
So if tough times have you wondering if you'll ever be able to retire, don't despair. Following these four steps can get you back on track toward putting your finances into better shape.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.