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Terry Savage on Retirement Planning
Terry Savage is an expert on personal finance, appearing as the personal-finance columnist for the Chicago Sun Times and as a regular television commentator on CNN, CNBC, PBS and NBC on issues related to investing and financial markets. She is also the author of four books, including the best-selling The Savage Number: How Much Money Do You Need to Retire and The Savage Truth on Money. Savage reveals her tips on retirement saving.
When you makes the decision to start planning for retirement, what are the first steps you should take to get the ball rolling?
The first step is very simple: Start saving. The earlier the better, but it’s never too late. The earlier you can, the more your money can work for you. Save however much you can. You should also do some research on investments so you know what you are doing. It’s smart to invest, but you need to invest smartly.
How do you start saving? What are the first things you should be checking into as you begin retirement planning?
Start with your retirement plan at work. Even if you’re only in your twenties, it’s worth signing up, especially if your company will match all or part of your contribution. You get a tax deduction, so some of the contribution is money that would have gone in taxes anyway. And the money grows tax-deferred, which means if you make money in the stock-market mutual funds in the plan, you won’t pay taxes on the gains till you take the money out at retirement. The rule of thumb is to save as much as you can, but most 401(k) plans have a limit [currently $15,000 per year] that you can put away. You should try to start with more than you think you can afford, because you can almost always make it work.
What if you don’t have a retirement plan at work?
Open an Individual Retirement Account (IRA) at a place like Fidelity or Vanguard. Fidelity offers actively managed funds, while Vanguard uses passively managed funds. Vanguard and Fidelity differ also in the number of underlying funds they use. Fidelity uses 18 underlying mutual funds and Vanguard uses four. Or my favorite place—for those with only a small amount of money—to start is USFunds.com. They have a program that lets you open an IRA with as little as $100 if you agree to an automatic monthly deduction from your checking account of at least $30 a month. Use their All-American stock fund, [which] they’ll explain to you if you call 800-US-FUNDS.
What can you recommend to do during the first month if you’re closer to retirement age and just beginning to save?
Well, as I mentioned earlier, it’s never too late to start saving. Remember, you’re likely to live well into your 80s or even 90s, and so you will probably have to work longer if you didn’t start saving earlier. Plus, you’ll have more opportunities to save. There are plenty of people who can advise you. You’ll need to save more and figure out how to live on less for the time being.
There’s no easy way if you’re a late starter. You just have to save MORE than someone who starts at age 30. But time leverages money. So money you save NOW will help you many times over in your later years. If you don’t have any “extra” money at this stage, you have to “create” some. I know you didn’t think you’d need to take a weekend job at age 50—but that might be the answer. Every penny you earn, every hour you work now, which you didn’t have before you started that weekend job as a sales clerk, waiter/waitress or using your business talents to work on the side as a computer advisor, tax preparer, etc., means one less day you'll have to spend as a greeter at Wal-Mart when you’re in your 70s. I’m serious about that. You have your most earning power NOW. Take advantage of it while you can.
What mistakes are commonly made during the first 30 days of retirement planning?
A mistake that starts the first month and lasts throughout your life is not saving enough. Another mistake deals with those who are investing in [the stock market]. Don’t worry about the ups and downs of the stock market. Over the long run there has never been a 20-year period where you would have lost money in a diversified portfolio of large-company stocks, with dividends reinvested—even adjusted for inflation. So don’t make the mistake of checking your statement every week and getting scared out of the market when it’s down. This is a long-term investment for your future. Another mistake is cashing out of a 401(k) or IRA before the eligible age. This will result in 10% early-withdrawal penalty, on top of the taxes you have to pay on the withdrawn amount.
What’s something that people believe going into retirement planning that may not be accurate?
Most people are trying to beat the market. You don’t have to beat the market, you just have to be the market—be there on a regular basis, rain or shine. In fact, if you just invest in an “index fund” that tracks the performance of the S&P 500 stock index, you’ll do just fine over the long run.
When starting to plan as a couple, should a husband and wife plan separately or combine everything into one retirement package?
These are called Individual Retirement Accounts for a reason: You are individually responsible for your own retirement. It’s nice if you can both be great savers, but don’t count on the other person being there to rescue you. A lot can happen over the years so you need your own retirement accounts. Where you are as a couple 30 or 40 years down the line may not be the same place you are when you are starting.
What is the belief you personally go to during times of change?
I believe that there is a greater power, that change will bring something positive although it may not be apparent at the time.
The best thing about change is…
…you don’t get bored. And I think that being bored with your life is the greatest sin.
What is the best change you have ever made?
I’ve made so many changes throughout my life, that it’s hard to say. All of them brought me to where I am today—a very good place. I once thought I’d have a necklace made with initials: IDTA. It would stand for “I Did That Already!” It would be a reminder to keep doing different things.
For more information on Terry Savage, visit www.terrysavage.com.