Common questions financial advisors are hearing nowadays are: “What’s going to happen in the market?” and “Will social security still be there when I retire?” but in reality nobody knows, says Juan Carlos Avila, managing director and partner of Toroso Investments.
“The days of the pensions are going away, or are in real danger,” he says. “We need to save for our retirement. It really falls upon us as individuals to take care of it.”
The only thing we can do is educate ourselves to understand our own risk profile and structure an individual portfolio for saving and retirement, which will provide more consistent results with lower volatility. If we can do that, he says we will be well positioned.
Current research by Principal Financial Group shows that Hispanics are the largest ethnic group in the U.S., but only 41 percent of U.S. Hispanic workers say they have saved for retirement, mostly because of low exposure to modern-day retirement concepts.
“People are not talking about this, and this is a little scary,” says Olga Camargo, managing director and partner of Toroso Investments. “People who are working will eventually retire, and if they are not educated to make informed investment decisions, I really feel like there will be chaos.”
Here are some simple tips from Avila and Camargo to make saving for retirement a simpler, and less scary, process for all of us:
1. Getting started. Even if it’s not retirement related, get started in terms of savings. Sometimes we have an obligation to take care of our families, and send money to our native countries, but it’s important to take care of yourself first.
2. Don’t try to figure it out yourself. Look for an independent advisor — someone not selling products, but someone who has an objective outlook. Most retirement plans offer, or should offer, models that shift the allocation more conservatively over time as the employee gets closer to retirement. Look for tools that have models that are risk-weighted and age-weighted to determine if you are a moderate or conservative investor.
There are options for people who work for themselves to build their own retirement plan. The IRS and government reward business owners by allowing them to contribute more than what one might contribute in a 401K plan. Individuals who are not covered by a corporate retirement plan can set up an IRA (Individual Retirement Arrangements). If you are a business owner, you can also set up a SEP (Simplified Employee Pension plan).
3. Increase your savings as your income increases. Use opportunities, such as a promotion, to increase your savings rate. The savings rate is typically at 3 percent, but the truth is, you should be saving 15 to 20 percent of your yearly salary. This is long-term savings that needs to happen — start gradually if you need to. Start off with 3 percent today, and in the next few years you have to get to 10 to 15 percent. You have to think about it as soon as you can, especially if you’re working full-time, because it’s going to affect your family in the future. Also, a lot of retirement plans have an anniversary increase to slowly increase your rate.
4. Let the market work for you. Participate in a retirement plan with your company, because they often make contributions. When the market is down, buy more shares. It’s the reverse of what you feel you should do when the market is down, but that’s when the astute investors call in and see what’s for sale.
5. Use a life-adjusted time horizons. Your mindset should be looking at 3 to 5 year horizons. One of the mistakes the industry does is focus on 30-year horizons. But the reality is, life events happen — you get married, you get a new job, you have children, you buy a home. What we try to do is focus on shorter time frames. This allows people to focus on their goals. As you invest and look at your savings, retirement might not be all you want to save for — your kids might need braces, for example. Life is always happening. Long-term perspectives are great, but when one of these life events happen, you need to be focused on them.