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Taking Control of Your Finances Now

According to a recent survey sponsored by Charles Schwab roughly 40 percent of Americans aren't currently saving for retirement and, despite market losses, 60 percent of Americans haven't adjusted their thinking about their retirement age.

This is shocking for two reasons. First, we're in a brave new world, financially speaking. Starting somewhere in the mid 1980s Americans lost the will to save money. We all assumed that stock market (or home price) appreciation would make saving for our retirement a snap.

To put some numbers around this phenomenon, in the 1980s and 1990s stocks returned an average of roughly 18 percent. For example, if you put $50,000 into the market and it grew at 18 percent a year for 20 years -- presto you're a millionaire, sitting on $1.4 million without ever having to save another penny. That all came to a screeching halt at the end of 2007, with the onset of the bear market and housing slump. Put simply, we're all going to have to grow our net worth the old-fashioned way - saving more and spending less.

The second reason these survey results are so shocking is that it drives home the point that the time to invest in your future is now. Today, the stock market is back to the same level it was back in 1997. One of the powerful forces in financial markets is regression to the mean. That's fancy-schmancy speak for when things are going great, be scared. And when things look bleak, be brave.

Right now by most accounts, prices in the stock market are reasonable. This means that if you start saving diligently for your retirement today you're likely to see brighter days ahead. No one knows when the economy or the stock market will turn for sure. But history has shown us that the price for procrastination is high. If, for instance, you're in your early 30s today and you choose to save $5,000 a year for the next 35 years and it earns 7 percent a year, by the time you are 65 you would be sitting on a nest egg of almost $700,000. However, if you wait until you're 50 to start saving, you'd have to save $28,000 a year. The power of starting to get on top of your finances now is incredible.

If you feel confused about where to begin (and given the sea of investment options out there, confusion is a logical feeling) we remain fans of low cost target-date retirement funds and our absolute favorite... broad index funds.

Target-date funds are essentially the financial version of the chicken rotisserie -- you set it and forget it. They have funny sounding names such as "Target-date 2035 or Target-date 2015." The idea is to pick a fund whose vintage year is closest to the calendar year of which you will turn 65. Then, contribute money every year to the fund, and as you get closer to retirement, the fund company managing the mutual fund will gradually reduce your exposure to stocks and increase your exposure to bonds to make your mix of investments more conservative.

If you're up for slightly more effort, you can recreate your own "target-date" retirement fund using a broad-stock-market and broad-bond-market index.
A rough rule of thumb to keep in mind is that the maximum percentage of your portfolio that you'd want in stocks is 100 minus your age if you're male and 110 minus your age if you're female (women need more stocks because we live longer). 

The most important rule of thumb of all is don't invest anything in stocks that you know for sure you have to spend in the next 5 years, as that money you want to protect against inflation in a savings account, money market fund, or certificate of deposit. For more on this keep-it-simple approach on investing, we recommend that you read Part B of our book, "On My Own Two Feet."

To learn more about improving your personal finances, visit Military.com's Banking and Saving channel.

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