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How To Build A Simple Retirement Plan


So many people fret and stress about how they should be investing their retirement savings. This leads many people to hire a financial advisor and pay high fees for the advice, which can actually be a mistake. Some financial advisors even put them into high fee funds, which erodes the portfolio over time. It is a lot simpler than most people think to save and invest properly for retirement.

Saving money is the most important way to prepare for retirement. The sooner one starts saving, the better. Here are few simple ideas that help with saving that you might have read about previously:

  • Have savings taken directly out of your paycheck. Out of sight out of mind they say.
  • If your employer has a 401(k) plan, use it. Make sure you at least get the maximum match if there is one.
  • Don’t carry a credit card balance and pay high interest rates on it. This is a sure-fire to get into a debt spiral.

Investing For Retirement

But what about investing? We know that many 401(k) plans don’t have a lot of choices, but more and more are offering target date funds. These funds are great options because they match up your retirement date with the level of risk. Are you retiring in 30 years? The fund will automatically dial up your risk by placing your investments more into stocks and emerging markets. Are you retiring in 5 years? The fund will automatically dial down your risk so you have more bonds, which are safer and less volatile than stocks.

These target date funds are also generally low-cost and do not have active trading. They invest in index funds, which have lower fees than actively managed funds.

What if you don’t have a 401(k) plan and instead use an IRA? The good news about having an IRA is that you will have access to pretty much every mutual fund and Exchange Traded Fund (ETF) that is available. This means you can find the lowest cost index funds that are out there. Vanguard is known as the lowest cost provider of funds and for good reason. They really do have the best choices at the lowest cost. Besides their low-cost target date funds, they have the following ETFs that have annual expense ratios generally below 0.10%.

Fund Ticker
Vanguard Total International Stock Index Fund VXUS
Vanguard Total Stock Market Index Fund VTI
Vanguard Total Bond Market Index Fund BND
Vanguard Inflation-Protected Securities Fund VIPSX

Investing For Dividends

Investing for a solid stream of dividend income in retirement is also a great way to ensure that you have enough income in retirement to cover expenses. Finding the best dividend payers out there and building a portfolio out of them is one way to go. You can look for great companies that have never cut their dividends, such as Exxon, Procter & Gamble, and Johnson & Johnson, and build a portfolio out of them. The problem is that you need to find enough of them to diversify so that if one of them goes bankrupt or cuts its dividend, it won’t be devastating to your portfolio.

Retirement Plan

Another option is to buy the Vanguard Dividend Appreciation ETF. This fund generally finds great companies that have a growing dividend over time. The ticker symbol for this fund is VIG.

Figuring Out If You Are On Track for Retirement

How do you know if you are on track for retiring by a certain age? How do you know if you will run out of money in retirement? Guessing is certainly not the way to go. Some people use spreadsheets to try and figure it out, but spreadsheets can only do so much. There are a lot of free retirement planning calculators out there, but they are oversimplified and can therefore give very misleading results.

This is why we use WealthTrace to run retirement projections. It is pretty easy to use and is very detailed and accurate.

Retirement Plan

I built a quick and simple retirement plan in the software and was able to run what-if scenarios on variables such as my retirement age, how much I save, my annual returns, when I take Social Security, and even my asset allocation. I was even able to run a “bear market scenario” that showed me what happens to my retirement portfolio and overall financial plan if we have a market downturn like we saw in 2008 and 2009.

It’s pretty powerful stuff and I can now feel good about never running out of money. I like the Monte Carlo analysis as well, which showed me the probability of never running out of money. It basically looked at my investments and tied them to historical performance and volatility. From this the program ran 1,000 different scenarios and told me what percent of the time I ran out of money.

There are a lot of good tools and tons of great information on the internet now when it comes to saving and investing. For many of us, we can now be our own financial advisors.

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