Investors: You Will Get It Wrong Sometimes. Plan Accordingly

Girl before a red questions in fear of the unknown
As baseball great Yogi Berra once said, "It's tough to make predictions, especially about the future." Yet that's exactly what you do with every investment. Will the stock you buy go up? Will the corporate bond you own keep making its payments? Will you outlive your retirement savings or pass on a substantial inheritance to your children?

The answers to all those questions have real consequences for your family's financial future, but by the time you know those answers, it's usually too late to do anything about it. That -- more than almost anything else -- is what makes investing difficult. You're committing significant resources now to prepare for future events that may or may not come to pass in a form anywhere near what you're expecting.

Your One Saving Grace

In spite of all that uncertainty, the one key benefit you have is the fact that money is fungible -- once you have it, you can put it toward any legal purpose you want. If your child receives a scholarship, money you had been saving for his or her education can be deployed elsewhere. If your retirement investments substantially outperform your expectations, you can retire earlier or with a better lifestyle.

The key, of course, is to get the money in the first place. It's far easier to put it to a different use than you originally intended once you have it than it is to initially come up with that cash. Even so, we all face tradeoffs -- none of us has an unlimited source of cash, and every dime we invest is a dime we can't use to support our current lifestyle.

Given those tradeoffs and uncertainties, a great approach is to:
  • Make your best estimate of things to come, your top priorities and their costs by the time you'll need them.
  • Invest your money toward that future, assuming you'll somewhat underperform your targets.
  • Adjust your plan along the way as the future unfolds differently than your original plans.
In a world where you can't be sure what the future will bring, that approach will both help you get started and set you up to wind up somewhere in the ballpark of where you want to be.

Plan Around That Uncertain Future

The largest expense most people save for is retirement. The four big uncertainties around that are:
  1. When will you retire? You may want to work until you're 67, but the reality is that more than half the population is out of the labor force by around 64. If you build your plan to enable you to retire three or four years sooner than you'd really like to, it puts you in the driver's seat. If you reach that age and are either forced into early retirement or decide you'd like to leave the rat race, you'll still be OK. And if you reach that age and still find you love working, then you'll still be set to retire on your terms.
  2. How long will you live? The average life expectancy is around 81 for American women and age 76 for American men. You may live longer or shorter than average depending on key factors like your health, family history and advances in medicine. Make your best estimate, then add a few years to it. After all, it's certainly better to pass away with enough to leave a modest inheritance than it is to run out of money in the later years of your retirement, when you're least able to do anything about it.
  3. What will your retirement lifestyle cost? A reasonable way to estimate your costs of living in retirement is to assume that they will be about what they were before you retired. On one hand, the costs of working go away when you retire, your mortgage goes away once your house is paid off, and your costs of raising your kids stop once they move out. On the other hand, your baseline costs of living will probably go up as you age, as you may start hiring help to handle things you used to be able to do on your own.
  4. How will your investments perform? Over the long run, the stock market has delivered around 10 percent annual returns with dividends reinvested. There are no guarantees in investing, so plan on lower returns. If you estimate you'll receive around 7 percent to 8% percent annual returns for your stocks and 2 percent to 3 percent on your bonds and fund your accounts accordingly, you'll have to save a bit more each month than had you been counting on historic average returns.
Additionally, the market's returns aren't smooth, and you generally can't count on a 100 percent stock portfolio while withdrawing money to cover your living expenses. As a result, you should also expect to achieve lower overall returns in retirement then when saving for your retirement.

You Still Won't Get It Perfect, but That's OK

By building your plans based on these reasonable to slightly conservative assumptions, you still can't guarantee yourself a successful retirement, but you can improve your odds. Just remember, no matter what assumptions you use to build your plans, you should regularly review your progress and make adjustments when needed. If you find yourself off track, the sooner you make corrections to get yourself back on track, the better and cheaper it will be.

Chuck Saletta is a Motley Fool contributor. For more on ensuring a comfortable retirement for you and your family, Motley Fool retirement experts give their free insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.

6 Financial Issues to Tackle in the Fall
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Investors: You Will Get It Wrong Sometimes. Plan Accordingly
For many employers, open enrollment season for some benefits happens in October. This usually sneaks up on some people, who scramble to decipher benefits and make elections last minute. Although you won't be able to see the options until the enrollment period opens, take time now to review your benefits. Are you taking advantage of any 401(k) matches? Are your fully funding your Flexible Spending Account? What about employer offered life and disability insurance? (A fun infographic from the Council for Disability Awareness shows your risks). Maximize your benefits and don't leave any money on the table.
Back-to-school time can be expensive if you're not prepared. Money is spent on clothes, books, supplies and technology -- and that's before the doors to the classroom have even opened. Before hitting the stores, do these two things:
  • Conduct an online search for "coupon code" along with the name of any store you'll be shopping at. Typically you can find some great online deals.
  • Get a list from you class or teacher of specific type of notebook, calculator, etc. required. If you can't get child's "must haves" from ahead of time, buy just the bare minimums until school starts and the list is available.
It's hard to think about the holidays when we're just making it through summer, but now is the time to build up a financial cushion. Set yourself up with an automatic transfer to a separate savings account and participate in the Holiday Fund Money Challenge to build up a savings of $450. How much do you need for the gifts, travel, parties, entertaining, food and other holiday activities you anticipate? Planning will help to ease the stress that comes around the holidays.
In lieu of scrambling at the end of the year to make contributions to retirement accounts by Dec. 31, double-check your contributions now and determine if there's room in your cash flow to allow for an increase to possibly max out by year end.
Summer is a typically a time of transitions. There are weddings, moves to new homes, possibly a new family addition and more. If summer is the time when these events take place, fall should be the time to take stock of how they're panning out. If you're recently married and haven't already, now is the time to have the money talk with your spouse and make decisions about spending plans, merging (or not merging) accounts, beneficiary updates and more. If you've moved, check out how the new location has affected your cost of living spending in terms of activities, gas costs, groceries and more. Ultimately with any transition, you need to review your spending plan and determine what areas (if any) need to be adjusted.
If you're lucky enough to live in one of the states that actually experiences seasons, fall is the time to prep for energy savings by caulking and weatherstripping doors and windows, turning your thermostat back for a fixed period each day and insulating your attic, basement or outside walls.
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