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The other day, after my "Prepare for a Gruesome Retirement" article ran, I heard from Marc D., who wanted to share some thoughts. He said: "Your article was sure scary, but I have a few recommendations to pass on." He then offered several simple steps to help you secure a comfy retirement. I'll present a few of them below, along with some further thoughts of my own.
1. Get rid of that 30-year mortgage. Do the calculations for a 15-year mortgage and you will get out from under that long term debt with just a little extra each month. In fact, if you are afraid of committing to the larger payment, just continue the mortgage you have, but make the payment based on a 15-year payoff.
This is a very good idea, if you can swing it (a 15-year mortgage typically demands significantly higher payments than a 30-year one). If you're not comfortable committing to a formal 15-year mortgage, just opting to make heftier payments can be very smart. First make sure that your mortgage permits extra payments, though -- some will prohibit you from doing so. (Always try to get mortgages that allow prepayment.) If you buy a $200,000 home, putting down 20% and borrowing $160,000 at 6.5%, you can expect your monthly payments to be around $1,000 for a 30-year mortgage and $1,400 for a 15-year mortgage. If you can pay $1,400 or more each month, you would pay off your home much sooner, build equity more rapidly, and end up paying much less in total interest. If you can't swing a full extra $400 in payments, you might be able to contribute $200 more each month.
Some will reasonably argue that you're losing out on investment gains you can make elsewhere with those extra funds, but permit me to point out that this route will get you a guaranteed 6.5% gain, which is also worthwhile. In stocks, while there's tremendous opportunity, there's also much more uncertainty. A seemingly solid investment, such as Xerox (NYSE:XRX), can end up delivering less than you expected -- over the past decade, for example, it has actually lost ground, though it's up an annual average of around 8% over the past three years. Meanwhile, investors in Target (NYSE:TGT) have more than quadrupled their money over the past decade. It can make sense to try to build equity in your home and stocks at the same time.
2. Stop buying all those big toys, and definitely don't lease your cars. Buy them and drive them until they are no longer reliable.
This is sound advice, too, as cars lose a lot of their value the minute they're driven off a lot. Buying cars that are just two or three years old (only when it's really time to get a "new" car) can make a lot of fiscal sense.
3. When your housing needs diminish as the kids move out, downsize and put the savings away.
This is also a compelling proposition. If you sell your home for $600,000 and buy a smaller $400,000 home, you'll net $200,000, which can be invested for the future. Park it in a broad-market index fund, such as one based on the S&P 500, and it stands a chance of earning the market's average annual gain of 10%, which would turn your $200,000 into more than $500,000 in 10 years. (An S&P 500 index fund will instantly plunk you into 500 big companies, such as Oracle (NASDAQ:ORCL), Halliburton (NYSE:HAL), and General Electric (NYSE:GE).) Or aim higher, via some outstanding mutual funds. The CGM Focus (CGMFX) fund, for example, has averaged 33% annual gains over the past five years, and recently was heavily invested in companies such as Goldman Sachs (NYSE:GS) and Freeport-McMoRan Copper & Gold (NYSE:FCX).
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