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By
Scott Lummer
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One problem with writing a weekly column is that I get tired of hearing my own ideas (which means readers must get tired of them as well). I spend a lot of time talking about investing strategies that hypothetically will work and have worked in the past. This week, I wanted you to hear from a successful retirement savings investor. The Get-rich-slow Request A few weeks ago, I requested responses from readers who've been investing in 401(k) plans for several years, and considered themselves successful. Although I received several e-mails, I wanted to focus on one person in particular. "Brad" wishes to remain anonymous (he doesn't really, but I always thought it would be really cool to write about someone who wished to remain anonymous and name him Brad). He and his wife are in their late 40s with three daughters in their late teens and early 20s (and yet he still appears to be sane). He has funded all three girls' college educations. Here is what Brad has done, expressed in his own words (I've done a bit of editing, so as to make his writing style as muddled and dull as my readers have come to expect). Brad's Story I've been in my company's 401(k) since they started the plan 15 years ago. I even volunteered for, and got appointed to, my company's Employee Investment Advisory Committee. I consider myself successful. My wife and I now have well over ten times our annual gross income as net worth. Our retirement savings is set up equally among three products: 401(k)s, IRAs (including 401(k) rollovers and traditional), and taxable accounts. We max out our 401(k) and IRA contributions every year. My current 401(k) is valued at over $500,000. My wife's 401(k) account is less because she worked part-time while raising our children and has changed jobs more often. Unfortunately, my company has never matched any contributions. I look longingly at our accounts' total value and dream of how much it could have been with a company match. I have a variety of stock funds available to me that respectively focus on equity income, equity growth, growth opportunities, and international. There are also fixed-value funds and a balanced fund that I've never used. I've tried to keep a relatively aggressive asset allocation, while staying diversified. I use the tax-favored IRA and 401(k) to make the most of asset allocation adjustments, and I try to not get hit with capital gains each year. Right now, my tax-favored accounts are heavy into international and small-cap areas, where I am underweight in taxable accounts. Overall, the portfolio is balanced. I haven't done much in tech areas, even though I work for a tech company. (I've seen many a tech company go out of business or out of favor.) Maybe I've missed some spectacular gains, but I've been happy hitting a lot of singles and seeing my net worth rise steadily. I believe strongly in the strategy, "Pay yourself first." For the past 15 years, I have had money taken directly from my checking account each month and applied toward mutual funds. At one point, my goal was to have $1,000,000 by the time I was 50. It looks like I will double that. As far as retirement goals, I expect to leave my job in a few years, and then pursue starting up a small business. My family has always lived pretty well below our means, and I anticipate that we will spend less than half of our current income per year in retirement. The Color Commentary So what's Brad's secret? Several factors have led to his success.
Success factor No. 1: Investing early Brad started investing early in his career. Those monthly investments he made in the mid-'80s have been earning lots of compounded returns.
Success factor No. 2: Conservative spending practices I see too many consumers who are earning decent salaries and spending nearly all they make. Brad's lifestyle is one he is comfortable with but is also one that has allowed him to invest a lot of money and put three children through school.
Success factor No. 3: Modest expectations This factor is certainly related to spending practices. Brad isn't planning on outlandish expenditures throughout retirement.
Success factor No. 4: Steady asset allocation with periodic rebalancing Notice that Brad was aware that his allocation to smaller company and international stocks would be underweight unless he adjusted the IRA and 401(k) portion of his plan.
Success factor No. 5: A lack of reaction to so-called hot and cold sectors Our get-rich-slow investor hasn't become overly enamored with tech stocks (and I would like to point out that Brad originally wrote me before the NASDAQ debacle of the past four weeks). This strategy has surely served him well. And, Brad was investing during some big crises: 1987, early 1994, and more recently, the past few months. I'll bet he didn't panic while others ran from the market. So Brad has made it. He will be able to fund a very nice retirement for himself and his wife. For the next few years, he will continue to save more and watch his existing balances appreciate. Then, he will be able to start that business and not need to contribute a lot to his retirement plan. And, of course, if that business takes off, he will be able to enjoy an even nicer retirement. You may get the feeling that Brad is a modest guy. It's likely he isn't the one at a cocktail party talking about what great funds he bought or complaining about the import levies on caviar. Yet, you also sense in his writing a bit of well-deserved pride — the kind that comes from knowing you did a good job. |
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The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan. |
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