2012 Safe Driving Tips for the Road to Retirement

With the first of the Baby Boomers having reached age 65 in 2011, more folks are setting their sites on driving off into the sunset, otherwise known as retirement. Most have come to recognize that to reach their retirement rest stop in style sooner rather than later requires some safe driving along the way. As your personal lifetime journey moves forward into 2012, you may wish to consider the following safe driving tips, and adjust accordingly, to reach retirement on your terms.

Save fuel

If fuel (gas or electricity, your choice) is the lifeblood of your car, cash is what drives your retirement savings. You just can’t coast into retirement on an empty tank and expect to enjoy a life of leisure for very long. So the laboring part of your lifetime journey needs to sustain you not only now but also later beyond your working days. This is where saving comes into play.

By the end your working journey, you need to make your sure your cash tank is full by saving at every opportunity in a fuel efficient manner. Saving in tax-deferred retirement savings vehicles, like 401(k), 403(b), 457, and IRA plans, pays off in two ways:

*You do not have to pay immediate taxes on amounts you defer from pay (within limits) to your accounts and on investment earnings within your account balances. You only pay tax on contributions and investment earnings not already taxed upon eventual distribution of your accounts.

*You may be able to get free money in the form of an employer match on your contributions to an employer-sponsored retirement savings plan.

Savings also builds capital upon which you can increase your take with investment earnings. From another perspective, savings beget investment earnings, reducing your burden for future savings. Of course, you lose any chance of earning a return on your investment if there is no invested savings to begin with. 

If you cannot save the 15 percent of pay (or more depending on your age when you start saving) that financial advisors suggest, save what you can on a regular basis. For each ongoing payroll contribution into a stock account, you would reap the benefit of dollar cost averaging, where recurring deposits at regular intervals in times of fluctuating stock prices have the favorable result of buying more stock when prices are low and less stock when prices are high.

Don’t delay in saving for retirement and expect to be able to go full throttle near the finish line to make up the difference. Fast and furious may make driving more fun, but slow and steady works best for saving. 

Add Some Style

Get comfortable, but don’t fall asleep at the wheel, for the long ride ahead. Contrary to the usual rules of the road, you need to hog the road by traveling in more than one lane, and adjust as appropriate, on the adventurous road to retirement. When one lane jams up in traffic, other lanes may be flowing more smoothly. Similarly, as we have seen in the past, when one asset class like stock stalls, another like bonds may still be lurching forward.

Financial advisors suggest you diversify your portfolio among different asset classes to minimize risk. In a typical retirement savings account, you can allocate your assets among basic asset classes, such as stocks, bonds, and cash. Some plans may also offer other fund options or even a self-directed brokerage link options for more engaged investors.

Then slow down when you get older. Risk is for the hard driving young with a lead foot on the accelerator pedal and time to heal. Conservative works better for the more mature crowd with less time to make up for any potential folly. Investors approaching retirement should tend to prefer certainty that their hard-earned savings will be there when they retire, even if it happens in the middle of a market storm or just plain at the wrong time of a market cycle. 

As you age and approach retirement, gradually shift your portfolio assets away from the risk of stocks and more toward conservative positions in bonds and cash. Consider investing in accordance with the Rule of 100, where you invest a percentage of your portfolio corresponding to your age in bonds and cash and the rest in stock. Whereas a strapping 25-year-old lad would have 25 percent of his portfolio in bonds and cash and 75 percent in stocks, a curmudgeonly 70-year-old would squirrel away 70 percent in bonds and cash and 30 percent in stocks.

A diversified retirement savings portfolio lessens your exposure to risk. Don’t count on your instincts to pick winners or time an often capricious and always fascinating market. Follow a portfolio diversification route with which you are comfortable, and adjust accordingly along the way.

Watch What You Pay at the Pump

Comparison-shopping comes pretty easy when selecting among purveyors and grades of gasoline. Since you know you are getting a pretty consistent product across the board, you can just check signs along the road to pick a station for fueling up. Despite new fee disclosure requirements, selecting investment options for a retirement savings account still requires a bit more work and a lot of faith. You not only need to ascertain the quality of the alternative options but also their costs from researching fund prospectuses or other plan-related materials. Even if you can figure out the amount of fund fees skimmed off the top as a percentage of assets under management, you must then heed the ubiquitous warning that “Past performance may not be an indication of future results.”

Just as a high performance vehicle requires a more expensive, higher-octane gasoline, actively managed funds promising (but not necessarily delivering) higher returns command a premium price. Some actively managed stock funds with their handpicked stocks charge an extra two percent or more of invested assets each year than passively managed market index funds invested in a defined broad market basket of stocks. Unless justified by superior performance, that extra $2,000 per year taken out of a $100,000 investment in an actively managed fund can be a big drag on a retirement portfolio’s investment returns over time. Taking into account the differences in cost and potential investment performance for actively managed versus passively managed funds, many investors with little time, interest, or inclination to research funds options resort to maintaining their exposure to the stock market through investment in less expensive market index funds based on a broad market index like the Standard & Poors 500 index.

Inasmuch as cost represents just one criterion for selecting a fund worthy of your investment, you should also consider other factors such as the fund manager’s background and experience, as well as the fund’s investment philosophy, current holdings, track record, and outlook. 

Pay Attention!

Inertia works as well in driving as it does in portfolio management — it doesn’t. Driving’s stops, starts, and turns change the direction of inertia to accommodate changing traffic conditions. Similarly, conventional investment advice calls for portfolio rebalancing, or periodic adjustments in the direction of investments to accommodate changing market conditions. By buying low and selling high, portfolio rebalancing keeps asset class allocations at target levels through sales of higher performing asset classes that have become overweight and purchases of lower performing asset classes that have become underweight.

For you to be in a position to make changes though, you need to keep your eyes peeled as you drive defensively down the road to retirement. Opportunities await you at every turn to make the most of your retirement savings. A buy-and-hold investment strategy no longer works in a stock market that offers nothing more than volatility over the past 10 years.

If investment insecurity is holding you back as the source of your inertia, simplify your route to retirement wealth. Consider investing your retirement portfolio in just stocks and cash: stocks for the potential pop as the riskiest asset, and cash for its stability as stock’s antidote. Then take portfolio rebalancing to a new more frequent level — daily. Make once-a-day fund exchanges between stock and cash accounts so as to buy stock when the market is about to close lower and sell stock when the market is about to close higher. Taking only minutes a day, incremental purchases and sales of stock set up and capture lasting stock gains that accumulate over time in retirement savings accounts, where trades do not trigger immediate taxes or direct trading costs.

A disciplined 401(k) day trading approach beat the broad U.S. market (as measured by the S&P 500 index) by more than 16 percent over the three-year period ended September 30, 2011. Check out my new book called 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day to see how you can day trade your retirement savings accounts in compliance with the frequent trading restrictions imposed on most stock funds. Then you can drive the stock market’s twists and turns into lasting retirement wealth.

Richard Schmitt, author of 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day. Outside of his appearances on Fox Business News, KCBS, and Business News Talk Radio, he is an Adjunct Professor teaching retirement planning at the Edward S. Ageno School of Business at Golden Gate University.