Rest here, distress'd by poverty no more.
-- Samuel Johnson
Press the fast-forward button with us now, and let's see what the second half of this movie is all about. America has seventeen spacestations in the ether, with more than 450,000 year-round inhabitants up there in the great beyond. Michael Jordan is still the greatest basketball player in the universe, after nine rounds of genetic engineering. Einstein has been exhumed and cloned. And the average life expectancy of a newborn babe is 173 years.
So what have you been up to?
You've been faithfully investing new savings every three months into Rule Maker and other Foolish stocks. What does life have in store for you now... a few decades hence? As Robert Sheard has demonstrated on numerous occasions, it's not very hard to pile up a lot of money from decades of steady investing in superior businesses. While many investment advisors would have you risk your money in the short-term on underdog companies, we are suggesting that you invest your loot primarily in the overdogs, focusing on a lifetime of no-commission, low-capital-gain-tax investing.
Given that, we believe that the two words that will best describe Foolish retirees are:
The first is a wonderful aim, the second -- yes -- a little bit crass. But we're assuming that as you add more and more profit from your savings money, you'll methodically give of yourself to those around you. And not just give money! Give of your imagination, your knack for telling a good story, give your time to your grandkids, give jumpshooting lessons to your local high-school hoops team, and also make contributions to charitable organizations that can show you what your donations will provide. Accumulating wealth doesn't mean that you will or should lock yourself up in a 215-bedroom mansion 25 miles south of Los Angeles. No, accumulation can actually lead to some good in your life and those around you!
So, this 10th step is designed to cover preparing for the rewards of Rule Maker investing. Let's start with the obvious.
Planning for Retirement
In order to determine when you can retire, you need to know two basic items:
- How much will I spend each year?
- How much do I need to provide this annual amount?
One of the best ways to approach this is to examine how much you are currently spending. A personal finance software package, such as Quicken or Microsoft Money, is a great way to get a handle on this. For about $60 and 5 - 10 hours of your time, you can set up one of these software packages and begin monitoring your spending, analyzing where the money goes and how much you need. A good program will also make it easy to incorporate savings into your budget. Once you have the thing up and running, it'll probably take three to six months of actual spending to build up a database that will make the spending analysis credible.
The nice thing is that once you've carried out the analysis, you can create a budgeting model that is grounded in reality and that endures. Another nice thing about these programs is that they make retirement planning very easy once the budget is in place. They'll project your assets through your lifetime, and they'll allow you to add how much annual income you expect from Social Security (May we suggest $0.01?) and any defined-benefit pension plan your employer provides. Depending on your job and age, you may be tempted to put in zero for both items, but at least give yourself that penny!
Now comes the fun part. The program projects your assets to retirement and it tests to see whether your money will last throughout your lifetime. You should be allowed to put in your own estimate of portfolio performance, and a good program will allow you to drop the estimated return once your retire (more on that below). With the value of time and compounding at Foolish return rates, you may be very pleasantly surprised to see how much will pile up, and how long it will last. In fact, you may find that you can drop your expected retirement age considerably and still accumulate enough for a bungalow in Fiji.
Preparing for Retirement
One of the things you must be sure to assess as you approach retirement is your portfolio allocation. Fools have oft spoke these words (and they'll be spoke again soon enough), "None of the money that you plan to spend in the next five years belongs in the stock market." Ideally, ten years. Even better, fifteen. Not only does time reduce your risk, it compounds growth - which will have you earning far more in the 10th, 11th, and 12th years than you earned in the first three. Only invest your hard-core savings.
As you approach retirement, you should gradually become more conservative with the money that you'll need in cash in your remaining years. You'll need some funds as income, and your great-grandson Jesse is going to want that cool, new, expensive Jet-Builder Kit . So, be conservative with what you'll need. But, on the other hand, there's a good deal of danger in being too conservative. Most people live 5-10 years longer than they ever expected to - our Foolish scientists haven't had the time to quantify that claim, but our intuition has us agreeing. Thus, if you all of a sudden climb into your shell and get overly-conservative as a retiree investor, your savings growth might not catch up with your spending needs.
We stand by the idea that when you see major expenses coming in the next five years, you begin lightening up on your stock portfolio and moving that money into CDs and guaranteed-return investment vehicles. Avoid the temptation to speculate on the short-term performance of the market. Eventually, that'll come back to snakebite you.
What awaits you
In retirement, you should be able to enjoy:
1. Frequent vacation trips to the climate of your choice - may we suggest Bali?
2. Time away from the treadmill corporate grind to:
- spend time with your children and grandchildren;
- pursue hobbies, like skeetshooting and genetic engineering;
- exercise, sleep late, and help out others;
3. The Motley Fool, with full-motion video, crystal-clear audio, and a couple million Fools around the planet!
If you can compound double-digit annual growth on your hard-core savings, most likely you'll be able to retire early, if you so choose. There's nothing like choice!
Sharing the wealth
Unfortunately, many of your friends may not be so lucky. Too many will not have found Fooldom, will not have preserved capital for investment, and thus will head toward retirement anxiously. Still others who have saved might have deposited savings in a bank account or dropped them in one of the many consistently-underperforming mutual funds. They won't have had the good fortune of amassing the kind of returns capable from Rule Maker investing - from analyzing businesses rather than listening to gurus chirping on about stock prices.
So, naturally, we ask you to consider sharing some of this good fortune along the way, and to be especially generous in your retirement. This can take many forms:
- Devote as much time as possible to catching people early in life. Pursue
opportunities to speak before students and other young people on basic investment
concepts. Volunteer to conduct a high-school workshop on personal finance.
Encourage your local schools to begin offering classes on both subjects.
Being an educator on the subject quite probably will add more value to people's
lives than being an annual-drive giver.
- Make all of your friends and family aware of the Fool, where they can
get answers to every financial question under the sun. Drop that link
www.fool.com into any email you can (this has been brought to you as a
self-serving public service from The Motley Fool, Inc.). Really, that wasn't
intended as self-promotion. Just a belief that these ideas will prove helpful.
- Buy someone Quicken or Microsoft Money for Christmas. Offer your assistance
in setting up the program as well.
- Yes, be a charitable giver to organizations that support your ideals.
- Keep the Foolish Discussion Boards humming with your insights.
True Fools at least aspire to have a great time in retirement, with enough savings to enjoy the many gifts out there on the ole planet earth. We think you ought concentrate on giving a hand to others who have not been as fortunate and making sure that the next generation will have just as great a time down the line. It doesn't always have to come in the form of capital. Teach your family and your community about savings and investing. Give what you can. And, enjoy the moonlight over the Pacific Ocean, Fool.
Step 11: Where to Get Answers »