With the volatility of the markets and how much has been lost since 2008 in 401(k)s, IRAs, and other retirement options that were staked on the markets, many have lost faith in using the stock market to fund retirement.
I’m not a big believer of the average consumer playing the market for the purpose of funding retirement. That’s because the average consumer doesn’t know how, even though they have been made to feel that they do through participating in a 401(k) and “investing” in other market-related funds in an effort to get ready for retirement. While a market portfolio can be a very important part of a retirement plan for a skilled investor who has spending under control and no bad debt and who has direct knowledge and experience playing the market, I think the average consumer should not assume this is the best and only way to go about funding retirement, especially if your employer is no longer offering matching 401(k) benefits.
Many financial advisers believe in the strength and resiliency of the markets and believe they can be a tremendous buying opportunity. That’s true for someone who knows his/her own risk tolerance and has the means financially to lose money playing the market. Most people who are just trying to build up a retirement nest egg do not have that kind of money to lose. They therefore need to be looking at all of their options in terms of planning for retirement.
Smart consumers will get out of the “herd mentality,” jump off the “401(k) as my only source of retirement income” bandwagon, and begin taking the advice of the real experts:
1. Get organized. The first thing to do is organize your life around goals and priorities, then everything else will fall into place.
2. Get spending under control! Get your spending under control by setting up a Spending Plan (go to www.moneymastery.com and select the Basic free package for access to software that lets you do this), then track your spending according to that plan; my clients who do this find an average of $300 a month they are wasting.
3. Learn how to accelerate down your debt. My clients use that $300 and apply it to debt, along with other techniques I teach them, and get out of all debt, mortgage included, in under 10 years (this is true for anyone regardless of your debt load). If you are in debt, keep in mind that most 401(k) interest does not keep up with high consumer debt interest, so even if you’re trying to put money in a 401(k), if you’re in debt (especially credit card debt), what it makes cannot keep up with what you’re paying out in debt.
4. In debt? Back off on 401(k) contributions. If you are in debt and your employer is not providing matching contribution to your 401(k), consider backing off on contributing anything to it at all until more of your debt is paid off.
Once you have done these things, then it’s time to look at other options for funding retirement (in addition to playing the market if you have all your ducks in a row):
- Consider setting up a small side business; this could grow and become a viable source of income at retirement. Yes, it’s a risk, but unlike putting money into the markets, you are more in control of what happens to this investment.
- Consider getting into real estate. Many people live off the rental income they collect from tenants who live in their apartments, basement space, or duplexes.
- Consider what resources and money you already have that could be put in motion to create more money. Are you sitting on a piece of property that could be rented out? Do you have equipment you could lease? What other resources do you possess that you could put to work to make a perpetual source of income for retirement?
For more ideas on how to fund your retirement outside of the stock market, call me: (801) 292-1099, ext. 1