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I’ve find it remarkable that we have to plan our retirement decades ahead of time. With so much information about women, money, and investing, where should you even start? I decided I would think through the experiences I’ve had with women and investing. And three different women stood out to me because their concerns and questions were innocent, and, yet, they were eager to learn.

  1. A woman in her mid-thirties who felt investing was like gambling.
  2. A young lady in her twenties who felt she didn’t need to think about retirement, yet.
  3. A woman who asks “what’s a brokerage account?”

QUESTION: What would you say to each of these women?

Here’s what I said to each one:

1. “It’s natural to feel that way. Most people are like you, fearful of losing money more than they are hopeful of making money. Investing is not gambling. Investing is using your money in the allotted time you have to accumulate something.”

2. “When do you anticipate retiring?”

She responded, “I don’t know. 60?”

I continued on to say, “Great. Where will you get the money?”

She said, “Social Security.”

I replied, “No, full benefits are not until 67, under current law. You have to have enough money accumulated by the time your reach 60 in order to retire. Retirement is on your shoulders. No one else.”

3. An additional account that could help you increase your discretionary income and reduce your income taxes in retirement.

My preliminary goal is to change their perspective or at least shift their mindset. The most important thing when planning for retirement is your perception of it and your mindset.

It is never too late to set up an automatic monthly contribution toward your retirement. Unless you are thinking of retiring in five years and don’t have a dime for it. Then, drastic measures may need to take place—re-strategize.

To make sure you will be prepared for your retirement, you want to keep it simple. Succeeding with your retirement plan will require a long-term approach. The steps I’m going to outline I call it your back-up plan. Plenty of women have aspirations of owning their own business and becoming extremely, financially successful that the steps I’m going to outline will seem elementary. But they are your foundation. Your vision of retirement will be different then the woman sitting next to you. If you’re retiring you need to think about your pension.

1. What do you want your retirement to look like?

If you are like me decades away from retirement, you might not have the entire
answer. Even as a personal finance expert, I do not know exactly what I want my retirement to look like. What I do know is I want financial freedom in my retirement to continue to do the things that I love to do. I do not want to be struggling financially and become another statistic of a woman retiring in poverty who is outliving her money. I know my lifestyle will be more than what it is today. I plan on living a “rich” life. I do know I will need to have funds for possible medical expenses.

Jot down on a piece of paper what you envision retirement to be like for you. You can always add on to it.

2. Know your Asset Allocation Mix

When you don’t have a strategy in place, investing can seem like a gamble—uncertainties and the unknown feed into our own perception of fear. To help mitigate, a great start would be to consider an appropriate asset allocation mix. Taking the long-term approach to investing with the appropriate asset allocation mix (and don’t forget about rebalancing) is a way to minimize your risk. Determining your asset allocation mix—among stocks, bonds, and cash—is a personal situation. Basically you trying to pick an appropriate mix of assets to meet your goal at a level of risk you are comfortable with. Always keep this in mind: if you have more than 10 years to invest, you allocated a higher percentage—80 percent or more—to stocks. If you have 10 years or less until you need to withdraw you money, make sure you take a more conservative approach.

Here are a couple of tools to help you get started:

  • ING has a tool on their site to help you start thinking about retirement. It’s called ING Find Your Number.
  • Try using this Asset Allocation Calculator to help you create a balanced retirement portfolio. My asset allocation mix according to the calculator is:

32% Large cap
23% Mid cap
17% Small cap
14% Foreign Stock
5% Bonds
10% Cash

Truthfully, I have nothing in cash. I have an aggressive risk tolerance with my investment approach. And that’s because I understand I have time to make up any decrease in my portfolio. Also, I’m aware that a certain amount of volatility is important to grow my investments.

Investment tip: The core of your portfolio should be invested in low cost index funds and/or exchange-traded funds. They have low expenses—less than .5% expense ratio—because they are not actively managed.

3. 15% allocated for retirement

Set up a minimum amount of money you will contribute every month toward your retirement. The key is consistency. The goal is, at least, to reach 15 percent of your income toward your retirement. Ideally, you would like to reach 20% or more.

I don’t want to scare you. Start with baby steps. Begin with 5 percent of your income and gradually increase by one percent every 3 months until you reach your threshold. You can always increase the amount as you receive raises, bonus, and promotions.

4. Periodically Rebalance Your Portfolio.

Rebalancing is extremely important because it will help you maintain your target asset allocation. By periodically rebalancing, no more than once a year, you can reduce the tendency of what’s called “portfolio drift.” Potentially, you can reduce your exposure to risk relative to your target asset allocation. In other words, you can sleep better at night!

5. Participate in a/Open a Retirement Account

The easiest way to set a retirement account is by participating in your employer-sponsored plan, such as a 401(k) or 403(b). If one is not provided or you would like to make sure you have multiple sources of income, open a IRA: Roth or Traditional. I prefer a Roth IRA because of it’s tax-free withdrawals.

If you are a businesswomen, please make sure you establish your own retirement account, such as a SEP IRA. The contributions you make are tax deductible.

It’s always a smart move to have multiple accounts set up for retirement. Basically, each type of retirement account or investment account is taxed differently. Therefore, you may end up paying less in taxes. Setting up a brokerage account (taxable account) means that at retirement you will be taxed based on a long-term capital gains tax; instead of taxed at your ordinary income like in a 401(k), SEP IRA, Traditional IRA, Spousal IRA, etc.

Quick breakdown on the tax withdrawals at retirement:

401(k), SEP IRA, Traditional IRA, etc (tax-deferred): withdrawals are taxed based on your ordinary income

Roth IRA, Life Insurance Policies (tax-deferred): Tax free withdrawal.

Brokerage Account (taxable account): withdrawal are based on long-term capital gains tax.

The key things to remember about retirement planning are getting started, remaining consistent with monthly contributions, and keeping the core of your portfolio in low cost index funds.

 

What other steps are you doing to make sure you have a well funded retirement?

 

Ornella Grosz, CFEd® is financial expert, keynote speaker, author of Moneylicious: A Financial Clue for Generation Y, and member of the National Financial Educators Council (NFEC) Financial Literacy Curriculum Advisory Board. Emerging as the optimistic financial voice during a turbulent and uncertain economy, is an advocate for young adults, women, and beyond (she doesn’t discriminate) to view money differently. She blogs at Moneylicious adding a little spice to money matters. Join her @OrnellaGrosz.

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