The Road Less Traveled | The State of Retirement in America and Why You Need To Change Your Investment Approach.

Retirement planning. I always knew I had to put money away for retirement, and I am pretty consistent about it, but I’ve generally done it thinking more about the current tax deduction rather than getting to a secure retirement.Then one day I woke up in my early forties. I was marveling at how quickly those years had flown by (wasn’t I just graduating from high school?) when it hit me; if the past forty plus years went by this quickly then, with only twenty or so years to go, retirement was just around the corner. Was I on the right track? Was I going to be financially prepared? The answer was as scary as it was revealing; I wasn’t sure!

It may be small solace but I was in good company. For most people retirement seems like a distant notion, but for approximately 78 million baby boomers born between 1946 and 1964, retirement is no longer a far off concept but a looming reality. Yet despite the constant message about the need to plan for retirement, an ever expanding menu of retirement account options, and the massive rise of the mutual fund and retail brokerage industry, it is estimated that over 90% of Americans will not have the financial resources they will need to carry them through their retirement years. Compounding the likelihood of not being financially prepared for retirement are factors such as: Americans are poor savers, health care costs are rising rapidly, people are living longer and retiring earlier (though this latter trend is beginning to reverse itself out of necessity.)

The Fidelity Research Institute calculates that the typical household is on track to retire with just 58% of its pre-retirement income, including social security and pension income. And this assumes that all goes smoothly with their investments and expenses, or they will be left with far less. Even more disturbing is that only 66% of American workers report that they or their spouse have any retirement savings at all. Almost half of all workers saving for retirement report savings and investments of less than $25,000 and the average pre-retirement household (55 and up) is estimated to have about $60,000 total retirement assets. Even assuming retirement at 70, and consistent long-term stock market returns of 10.4%, these retirees will fall far short of a financially secure retirement. (Will your plan carry you through retirement?)

So what do you do to fix this? Lets say you still have ten, fifteen, even twenty or more years before you plan to retire; what should you do to make sure you don’t end up a government statistic?

With savings and investments there are only so many levers to pull. You could plan on living very frugally during retirement, but that’s not such an attractive option for most of us. A common rule of thumb is that you will need 75%-80% of your current income in retirement, but many retirees are finding that rule doesn’t fit their thumb. First, it’s more and more common today to still have a significant mortgage during retirement. (“Among households headed by someone age 65 to 74, over 32% had a mortgage on their primary residence in 2004, up from less than 19% in 1992, according to the Federal Reserve.” WSJ) Add in longer lives, active life styles, and spiraling health care costs and many retirees are finding they need at least as much income as they did during their working years.

Another option is to increase your retirement contributions each year. This is definitely a good idea and I strongly recommend it, but the reality is not so easy for most people. Even if you earn a good income; by the time you pay the mortgage, taxes, car loan, take care of your children and pay for their education, health care costs, food and utilities, and the occasional trip or night out, there isn’t much left for savings. The average household is doing well to save $5000 a year.

That leaves us with increasing the rate of return on your retirement portfolio. Sounds logical enough, and certainly a goal we all have, but how? Depending on the source the average long-term returns on the stock market are between 9% and 11% annually. But this is, of course, an average; and an average based on broad stock market indices, not a portfolio owned by the average investor. Most highly trained professionals are lucky to match the stock market averages; how are individual investors expected to do any better?

The best way to improve your long-term investment returns is to diversify beyond the volatile stock market. The overwhelming majority of wealth in this country is not in the public stock markets but in real estate and private companies. More millionaires made their fortunes in real estate than any other source. In the next installment we’ll discuss how adding real estate to your retirement portfolio can dramatically increase your investment returns and help you achieve the financially secure retirement you’re working so hard for.