Retirement Planning: The Four Tenets

The primary long-term financial goal of most working people is to retire with dignity and with the financial security to live out their years in comfort. The following four tenets of retirement planning will help you achieve this goal.

1. Save diligently.

Many people rely solely on their employer-sponsored retirement plans and social security benefits for their retirement savings. This is not a good idea. Only by supplementing your qualified plan with personal savings can you be assured of an adequate nest egg at retirement. We recommend traditional or Roth IRAs for some people and private taxable accounts for everyone. A good rule of thumb is to save 15% of your pre-tax income for investment purposes. By adopting a "pay yourself first" rule now, you can assure your financial security in the future.

2. Invest regularly.

The best approach is to establish an automatic monthly deposit into your investment account. Even if you have an irregular income stream, there should be some minimum monthly deposit that is feasible. You can always increase your contributions when you have extra money. By investing regularly, you take advantage of dollar cost averaging and avoid the temptation to time the market.

3. Stay diversified.

Diversification allows you to reduce your investment risk without diminishing your expected returns. This has been called the only free lunch in financial economics. We favor globally diversified portfolios with a tilt toward small cap and value stocks, which have historically outperformed the other asset classes on a risk-adjusted basis.

4. Be aware of investment costs and tax liabilities.

The only investment earnings that count are those you actually keep. Excessive fees and tax liabilities can have a huge impact on portfolio performance over the long run. The best way to minimize investment fees and taxes is to be aware of them. Any mutual fund with a sales charge or an annual expense ratio over 1.00 percent should be avoided. Tax-efficient investing is a little trickier due to the complexities of the ever-changing tax laws. Working with a tax-smart financial advisor can help maximize your after-tax returns.

October 2003

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