Building a better nest egg
Having enough to retire on is about more than just stocks
When the high-tech and dot-com hot air whooshed out of the overheated stock market a few years back, the hopes of would-be retirees also went flat. The market's comeback undid some of the damage, but many nest eggs still show cracks. Is it possible to get back on track relatively quickly? Or should people swallow their disappointment and scale back their retirement plans?
Probably some of both, say experts. Those on the cusp of retirement and short of their goal need to determine their shortfall and decide how much of it can be made up within a few years with acceptable risk. Even with an improved market this past year, goals and expectations might have to change: when to retire, whether to move, whether to keep working part time in retirement.
"It's a mistake to think that the only way to save for retirement or to catch up on savings for retirement is by investing," advises retirement columnist Ellen Hoffman, author of The Retirement Catch-Up Guide. "It's important for people to take a broad view of their entire personal financial situation."
That broad view encompasses three major categories of resources. There are your investments--stocks, bonds, and other market assets. There's your home, which usually goes untapped as a source of income. And there's your ability to work full or part time if necessary in order to repair the broken egg.
Your investments
Many retirees and soon-to-be retirees who lost significant sums in the market a few years ago itched to jump back in with both feet when the slide reversed. Bad mistake. "People have a tendency to do what got them into trouble in the past, even if it was painful," says Mark Gleason, a senior financial adviser with money managers Wescap Management Group in Burbank, Calif. But you don't want to turn gun-shy, either, loading up with bonds and other tortoiselike products. "When a market recovers, investors need to be fully invested at that point," says certified financial planner Phil Cook, whose firm, Cook & Associates in Torrance, Calif., has many retiree clients. "That's when you get your greatest appreciation."
So what to do? Pick a decent stock market return, says Gleason--the historical average is about 10 percent a year--and strive to achieve it, allowing for your own comfort level and avoiding past trouble spots. "Diversify, diversify, diversify" is a mantra not only overall but also within your stock basket, to raise returns and cut risk.
Scandal-scarred though they are, mutual funds remain the best way for most small investors to retain a diversified portfolio. Funds are rare that consistently outperform the market, have good growth potential and relatively low volatility, and welcome new investors with low initial minimums. One of Cook's choices is American Funds' Growth Fund of America, a conservative fund of large growth stocks with a minimum initial investment of only $250, and low operating expenses. Gleason, noting the possibility of further weakening of the dollar, suggests Morgan Stanley International SmallCap Fund, which invests in small foreign stocks and has a $1,000 minimum.
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