Expert Interview with Miron Lulic on Planning Your Retirement the Right Way
Miron Lucic always thinks ahead. On his blog SuperMoney, he’s constantly on the cutting edge of retirement planning, among other financial topics.
He laid out for us how to plan for your retirement while balancing your other financial needs.
What are some mistaken beliefs about retirement planning you often see?
Probably the most common misconception is that “Retirement is a long way off, I’ll just start saving later.” People assure themselves that they will save more later in life, when they have more income. The reality is that when they do get a raise, they just end up spending more money!
A good tip here is to adopt a strategy that will automatically nudge you into the right direction. For example, many companies have adopted “save more tomorrow” retirement savings options into their 401(k) programs. This allows employees to make a commitment today to allocate a portion of future salary increases toward retirement savings.
Every year you put off investing makes your retirement goals more difficult to achieve. In fact, the amount of capital you start with is not nearly as important as getting started early. This is due to the power of compound interest. Time is the primary ingredient to the magic of compounding. The sooner and more aggressively you start, the more powerful the result.
How should younger workers save for retirement, and why?
Because of compounding, a dollar invested in your 20s is far more important in building a long-term nest egg than a dollar invested in your 40s or 50s.
Beyond establishing good savings habits, the key elements of investing don’t change much over time:
1) Diversify broadly across and within asset classes
2) Keep your total costs as low as reasonably possible
3) Rebalance your portfolio over time
If you get these right, then you will be well ahead of the majority of investors.
A good way to get started is with your employer’s 401(k) plan. If they offer a match on your contributions, make sure to max out the match contribution limit. If you do not max out on your employer match, you are leaving money on the table – never turn down free money!
If your employer doesn’t offer a 401(k), open your own IRA or Roth IRA. Traditional IRAs are tax deferred, meaning you’ll pay taxes on the contributions when you withdraw money in retirement, and you get a tax break on your income tax return today. Roth IRAs are a bit different – they offer tax-free growth. While you won’t earn a tax deduction now, you also won’t pay any taxes when you withdraw the money in the future. Think about that. If your retirement account is worth $500,000 when you retire, you won’t have to pay any taxes on your withdrawals. You pay a little bit today to save a lot tomorrow.
How should you balance retirement saving and other financial needs? What comes first and why?
To put it plainly – pay yourself first.
Too many people treat savings as the bonus money that comes after you’ve paid your expenses. They should instead treat it as the first priority and work their budget around it.
Take some time to find out your long-term retirement goals. When you determine how much you should be saving, you should then make sure you are automatically deducting this amount to fund a 401(k) or other savings vehicle. Find ways to reduce your expenses so they can work around your savings, and make sure you pay yourself first!
How much risk is too much in retirement planning?
If your retirement plan includes regular trips to the casino, you’re taking on too much risk. In general, it all depends on where you are in your plan. Someone in their 20s can safely take on a lot more risk by investing heavily in higher risk allocations like equities which, over the long term, have better growth potential. Someone in their 60s will be less concerned about value creation and more concerned with value preservation. This borrower would likely be more interested in allocating their portfolio into investments such a fixed income annuity.
Risk tolerance and time horizon have an inverse relationship when it comes to retirement planning. Generally speaking, the longer your time horizon, the more safely you can take on greater degrees of investment risk. Similarly, if you need the money in your account as a source of retirement income within a few years, you’ll want to look at more stable investment options.
How can you tell if a particular investment is risky or not?
Looking at an investment’s beta score is one way. The beta score is a relative measure of risk as compared to a benchmark, such as the S&P 500 Index, and this can be an indicator of which stocks or mutual funds are riskier and which are less risky. A beta score of one means that the investment is in line with the market, or index, used for comparison. If the beta score is higher than one, this indicates that the investment is riskier than the market. A beta score less than one means that the investment is less risky than the market.
Diversification is key to reduce risk in regards to retirement planning. A well-diversified portfolio will allocate assets among different asset classes and market sectors.
Should we consider getting professional help, or do this on our own?
I’d recommend doing both. I’ve personally learned a lot from professionals, but I have also learned a lot by doing my own research and implementing strategies on my own accord.
If you do seek help from a professional like a Certified Financial Planner, I’d recommend working with someone whose earnings are based off fixed fees instead of those who rely heavily on commission based income. The latter may push you into purchasing products that may or may not be ideal for you.
There is a wave of new technology companies like NewRetirement, Motif or WealthFront introducing innovative technology-based self-service solutions for investing. I personally believe this new paradigm is the future, and I’m excited to see where it takes us.