Financial ABCs:
A Look at Age, Balance, and Continuity

It is easy for me to say that everyone should contribute to their 401(k) plan or open an IRA and begin that retirement savings program. And maybe you have decided to take my advice and you have called your plan administrator or called one of the big mutual fund companies and asked them to send you some investing information. Maybe you have gone online and tried to search for the best place to put your money.

In many cases, this is where the employee or investor stops cold. This would explain the low enrollment numbers at small companies, the less than stellar participation among large companies, and the scary fact that far too many people, once they enroll, do little to add to their accounts or worse, default to the money market fund in their employers plan.

The choices are amazing and are actually only part of the problem. The information that one needs to consider is often confusing and require a great deal of soul searching, a healthy dose of self examination about who you are, and more than just a little guessing about where you are going, how soon you want to get there, and the ultimate question: how long will you live.

Iıve simplified the process for first time investors and more experienced ones who may not have achieved the kind of success with their retirement plans they had hoped or planned. It is called the Financial ABCs.

The Financial ABCs represent: Age, Balance, and Continuity

Age: Although many of us start our plans later than we would have liked to, age becomes one of the most important factors to consider.

Experienced investors know that investments need time to grow. The markets will go up and the markets will go down. Successful investors know that time - the longer the better - is needed to ride out the slower periods to create real wealth.

While it is ideal to start young, far too many of us do not have the savvy to realize that 25 is the best time to start. Starting in our youth requires the least amount of investment dollars to achieve the greatest amount of wealth. But our youthfulness finds us buying cars and clothes and any of the other toys that post college paycheck will afford. Along with the looming costs of repaying college loans often stops the "perfect age" scenario right in its tracks.

Then along comes a family, a house, and life in general. About midway through, we wake up to the fact that we might live well beyond our working years and begin to wonder how are going to finance those golden years.

With defined benefit plans or pensions coming under increased pressure of late, even financially solvent companies are looking at ways to stop funding their employees with their post-work lives. Instead, they are throwing the ball back into our court more and more ­ with the encouragement of the current administration - and that creates a major problem for many workers who suddenly realize that their retirement is now their problem.

Ideally, you need at least twenty years to create a retirement nest egg. Even better, you need 30 years to ride out those market cycles I mentioned earlier. That means that if you are forty-five years old, working until you are 75 would give you the best return for your efforts and provide you with the best returns.

We always seem to use a million dollars as the target for the perfect retirement. Getting there is often not as easy as it sounds. Even if you start at age 25 and get a 6% return for your investment dollar, you will need to contribute about $500 a month, every month until age 65 to get to that seven figure goal.

Start at age 45 with the same lofty goals and the same retirement age and you will need an annual contribution of $27,184. What a difference twenty years makes!

Starting at age 45, working until 75 with a $500,000 nest egg target ­ that is not counting your home or any other assets, which for many make up the lion's share of their wealth ­ the investor would need to start saving $500 a month ­ and work another 30 years.

Balance: Faced with those age considerations, folks often think that they need to be more aggressive, seeking out riskier investments that have higher returns. No advisor worth their weight would ever suggest that someone starting late seek the highest risk for the best results. Even if it seems the most logical conclusion, adding risk while in a short time horizon is just asking for trouble.

Because you have a shorter investment horizon, balance is absolutely necessary. Unfortunately, balance often means accepting a more conservative approach. One of the greatest investors of all time, Benjamin Graham has a steadfast rule for investors. His 75/25 rule offers the best balance available if you are investing in stocks.

Younger investors aged 25 years or so would have 75% of their holdings in the stock market and 25% in fixed income investments such as bonds. Mid-life investors would, according to his sage advice, hold an even distribution of 50-50, stocks and bonds. Close to retirement investors should be 25% in stocks and 75% in bonds.

Unfortunately, the hardest target to hit is when you will retire, which leads to the question of when is mid-life. Mr. Grahamıs ideas are classic and some may say antiquated but they hold some basic truths no matter how old they are.

The first is risk. The markets haven't changed since he wrote his last installment of his book "The Intelligent Investor". Investors still need to avoid risk and achieve balance. Risk adds the gamble that the upside will be there when you need it the most and the downside will be minimal. It doesn't work that way. Stocks can only defy financial gravity for so long before they tumble back to reality.

To achieve balance, investors in 401(k) and in IRAs will find it relatively easy. Many mutual fund companies now offer asset allocation funds or lifestyle funds as part of their portfolio choices. Recent studies have revealed that these types of funds have actually done slightly better than funds that were actively managed by the investor. In other words, these funds automatically revisit their accounts and rebalance them for you keeping your investments age appropriate. They tend to match where you are age-wise and risk-wise without any effort on your part. While they might not always beat the market, they have proven to be steady gainers for those invested.

Continuity: Dollar Cost Averaging, the method of investing regularly and consistently remains the only way to achieve wealth and the only formula that has worked for investors. By default, it creates discipline and allows the investor to take advantage of the down markets by buying cheap ­ psychologically, investors usually try to sell during these periods - and avoid rushing into the up markets ­ another curious fault investors exihibit.

One more note and another letter in the financial alphabet:D stands for death. If you could easily target exactly when you will die, you could do a better job at figuring exactly how much you would need to survive until that point.

Some key points to remember:

• Take care of your health - it will prove an extremely costly problem for retirees who are not healthy and act as a tax against your savings efforts.
• Start investing now - donıt worry about what age you are starting your savings but do take advantage of lifestyle funds that adjust to your age and risk.
• Be consistent - it is okay to tweak your payroll deduction now and again, but never contribute less than 5% and if you can, increase that number with each raise you receive.
• Adjust your taxes deductions - giving the government more in taxes in the hopes of receiving a large refund is still counterproductive and keeps you from achieving a chance at a good retirement.