What is the most effective saving strategy for retirement?
Great question. "Most effective" is a tricky way to word this. Here's a few thoughts:
1. Are you referring to saving or investing? There's a HUGE difference. Savings involves CD's, money market accounts, some types of annuities and some types of cash value life insurance. Most of these, though not all, would NOT fall in my definition of "most effective.
2. Do you believe that tax rates and your tax bracket will be higher or lower when you retire? If you believe tax rates are going up, then you want to pay your taxes now and look for tax favorable or tax free returns. If you believe tax rates are going down, then you should look to forgo paying taxes now in exchange for paying them later. (No one, and I mean NO ONE believes taxes are going down, yet far too many people still use that strategy.)
3. How much liquid savings do you have and/or how accessible to you want your savings? Many of the IRS Qualified accounts restrict your access to your money until you're 59.5 years old. Most people don't think about this and don't factor it into their decision, but I believe you should. Do you want to be able to access and use YOUR money if you need to or want to? Have you ever heard of someone cashing out a 401k or borrowing from a 401k? If they had access to their money, they wouldn't have to pay penalties to use it.
4. How much risk are you willing to take to get higher POTENTIAL returns. I capitalize the word potential because if you take on more risk, you're supposed to get more return. However, if you look at the last 20 years of the stock market you'll see that it is averaging just under 3%. I believe that's too much risk for 3% when you can get 4% guaranteed, but I digress.
So, what's the "most effective" strategy for retirement? I don't think that I can answer that for you. You have to weigh your options and decide on what you really want.
What am I personally doing for my retirement strategy, as a financial advisor? I believe taxes are going up. I want full access to my money at all times. I don't believe in taking unnecessary risk. Thus, of the total amount I set aside each month, part of it goes into a whole life insurance contract on me and part goes into a similar policy on my wife. A portion gets invested with a money manager in a defensively aggressive taxable account. I don't personally use a government sponsored and controlled account. That's me. I'm sure you'll find different opinions from other advisors and they'll steer you in different directions.
I hope this helps you. Feel free to pose followup questions.
| 08.13.15 @ 22:17
This is an asset / liability problem so you need to frame the equation as follows:
1. Identify your retirement income replacement rate-RRIR (the liability)
2. take inventory of your investment account balances and probably the biggest asset which is the future savings rate or amounts until your retirement date (i.e. salary deferrals into a 401k accounts)
3. How many years to retirement
With this data you can calculate the targeted investment return you need to achieve the RIRR.
4. Then structure a portfolio designed to meet or exceed this targetd return needed to obtain the RIRR.
I realize this may sound foreign. This is why most people need a Registered Investment Advisor who understands Asset/Liability Management and not all do.. This is the tried and true approach used by institutions for decades. An Advisor who talks you through a risk tolerance questionnaire is out of date. Your risk is not your accounts market value fluctuation (volatility). Your risk is not achieving the targeted return needed to meeting your Retirement Income Replacement Rate (RIRR) ! Check out www.LDintelligence.com for more information | 08.14.15 @ 03:59