It was bound to happen: My own mother and father are contemplating full-time retirement. By all accounts they're both excited and anxious about what they see in their crystal ball.
When my father says goodbye to his classroom and office for the last time (after 30 years with his school district), he'll join my mother, who retired from banking several years ago. The two of them will begin their next adventures in style nonetheless, which for them will likely mean more time for "fun" work as well as time to simply bask in the peace and quiet of their little South Georgia town.
But at least they don't have to worry about their finances, thanks to decades of personal planning. That planning has prepared them for whatever retirement might bring their way, and it can be distilled into five lessons.
Lesson No. 1: Start saving decades ahead of time.
Yes, decades. In a nation where instant gratification has been elevated to an art form, this sort of long-term savings is often forgotten until far too late in the game. If you don't save early, you'll miss out on years of compounding, which will significantly reduce your bottom line.
Even when my father was a lowly grad student/teaching assistant and my mother was filing checks for a living, they managed to save as much as they could for their future plans -- a house, or car repairs, or other necessities along the way. As they continued saving, they found they were able to focus on long-term goals -- including an eventual comfortable retirement.
So as soon as you graduate from high school or college, start socking away money in whatever vehicle you find appropriate. Keep some in an easily accessible account for emergencies, perhaps in a money market account or certificates of deposit.
And while you're saving, why not earn a little return? ING, for example, offers plain-vanilla savings accounts with an annual percentage yield of 3.8% and CDs with yields up to 4.7%.
Of course, these savings vehicles won't reward you nearly as heartily as the riskier, more volatile styles of retirement savings will. And that leads us to.
Lesson No. 2: Diversify your holdings.
When my parents entered the workforce, traditional pensions were the name of the game. But as years and decades passed, they branched out along with their companies' options, taking advantage of new retirement plans as they became available.
Today, the responsibility for a successful retirement has been shifted to the individual. From 401(k) plans to Individual Retirement Accounts (IRA) to the brand-new Health Savings Accounts (HSA), more and more Americans are participating in equities for the sake of a secure future. So it's worthwhile to know some ways to effectively allocate your money and achieve diversification. If you have too many eggs in one basket and that basket breaks, well, you won't be left in a good place.
Index funds are one simple way to achieve diversification and gain exposure to the long-term wealth-building power that the stock market offers. For instance, the Vanguard 500 Index Fund holds a wide range of companies (indeed, the expanse of the S&P 500) -- from Altria (NYSE:MO) and American International Group (NYSE:AIG) to Johnson & Johnson (NYSE:JNJ) and General Electric (NYSE:GE). And the historic market rate of return -- 10% to 11% -- is a huge step up from the 3% your bank's money market account will give you. Although that return has been flat for the past few years, equities historically remain the surest way to build wealth (as finance professor Jeremy Siegel demonstrated in Stocks for the Long Run).
You can also add a little zip to your portfolio by devoting a portion to a small-cap index like Vanguard Small Cap (NAESX). The top holdings there include $3.8 billion Activision (NASDAQ:ATVI), $6 billion MEMC Electronic (NYSE:WFR), and $3 billion Reliant Energy (NYSE:RRI). But make sure your portfolio fits your timeline -- small caps tend to be much more volatile than S&P 500 stocks.
And the sooner you start participating, the better off you'll be. As my mom and dad say, it's never too early, because "too late" comes in a hurry.
Lesson No. 3: Don't bite off more than you can chew.
When I was growing up, mom and dad were already well on their way toward saving for retirement. And while we never lived in the biggest house on the block or drove sports cars to the grocery store or softball games, I never found myself envious of kids whose parents did make those kinds of purchases. We vacationed in the mountains and went to baseball games in Atlanta, and in my eyes "frugal" never strayed too far into the "cheap" territory. But because the savings vehicles were in place already, and because we never put much emphasis on super-big-ticket items, we were able to do a lot of fun things in their stead -- for a lot less money.
Even if you're settled in your career, consider yourself comfortably afloat, and have enough disposable income to make some really ostentatious purchases, refrain when it's not necessary -- or when the value of the item isn't worth the money you're putting into it. Don't buy the fanciest car, biggest house, or most expensive wardrobe just because you can. Likewise, resist the urge to carry the maximum on your credit cards.
Lesson No. 4: Keep your options open.
That is, don't view retirement as a one-trick pony. For instance, my father -- an educator and administrator throughout his 30-year career -- will be able to pursue his longstanding writing, editing, and photography career with much more ferocity now that he'll have the time to do so. My mother, on the other hand, has graced the classroom as a teacher in her retirement and is currently embarking on interior design projects for friends and neighbors.
In other words, once a teacher, not always a teacher; once a banker, not always a banker. Keep your options open and you'll feel the freedom to traverse many new avenues. And if you play your cards right, you could earn a paycheck for your talents, too.
Lesson No. 5: Keep one eye on the future and one on the here and now.
Planning for retirement requires a lot of looking ahead -- often anticipating what you'll need some 30 years out. Do you see yourself lounging on the beach under an oversized umbrella, sipping a pina colada? Or do you see yourself hiking the Appalachian Trail? The answers to questions like these will help you plan for your future needs.
But if you keep both eyes too far down the road, you might miss -- or worse, hit! -- what's right in front of you. While you're planning for tomorrow, keep watch over today. If you sacrifice too much now for the sake of your future, you'll have had no fun by the time you get there. And what's the sense in saving for the retirement of your dreams if you're too stressed or starved to enjoy the end result?
It's a fine balance, admittedly. But it can be done. The biggest lesson Mom and Dad have taught me is that you don't have to be rich, or "cheap," for that matter, to enjoy today and the opportunities that tomorrow might bring. You've just got to plan ahead.
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This article was originally published on Oct. 28, 2005. It has been updated.
Hope Nelson-Pope is online coordinating editor at The Motley Fool and would like to take this time to say hello to her parents -- and assure her mother that yes, she's wearing her jacket on cold days. She owns none of the securities mentioned in this article. Activision is a Motley Fool Stock Advisor recommendation. The Motley Fool has adisclosure policy.
