Thoughts on Having a Secure Retirement

A new book by Wharton finance professor Richard Marston, Investing for a Lifetime: Managing Wealth for the “New Normal,” dispels some common beliefs about what Americans need to save for retirement. For example, although recent reports suggest Americans should save eight times their income for retirement, Marston argues you should save closer to 15 times. However, there are no hard and fast rules when it comes to investing for retirement. Rather than rely on rules of thumb and folklore for a secure retirement, it’s best to work with an advisor who can construct and manage a portfolio to meet your needs after a careful analysis of your goals, risk tolerance, savings and spending.

That said, in a recent interview with Knowledge@Wharton, Marston shares a motivational example on how to reach your savings goals. He comments, “Choose an appropriate portfolio, and then you have to have the good sense to leave it alone. If you start to play games with that portfolio, you can run into serious problems. I particularly mention this because we just went through a financial crisis where Americans were frightened. Stocks went down by more than 50%. Some Americans panicked, and they pulled out of the market, planning to get back into the market as soon as things look better. Well, now we’re five years into a rally, and an awful lot of Americans never got back into the market. Don’t play games with it. In the book, I do a calculation: I ask the question, suppose that you were unlucky enough to have retired in October 2007 at the peak of the market? The market was peaking, and let’s say you have saved $1 million. I ask the question, what would have happened if you just stuck with your portfolio? Through the worst financial crisis since the 1930s, that portfolio fell very sharply during the crisis. But if you had left it alone, by the end of 2013, you would have been intact with almost exactly the same amount you started with. On the other hand… suppose you had pulled out in the spring of 2009. That $1 million dollars today would be scarcely more than $600,000 because you shifted out of your portfolio and tried to beat the market.”

That’s one important reason why you need an advisor – not only for the expertise to appropriately allocate your assets, but for the discipline to keep you invested through market swings.

Marston also wisely advises to start saving for retirement early to benefit from the miracle of compound interest. For example, if a teenager begins savings 10% of his or her income every year for the rest of his or her life, that multiple of savings will be greater than for someone who begins saving for retirement at the age of 35. The bottom line is that throughout your career, working with an advisor can increase the probability of a successful retirement.

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