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February 19, 2011

Lessons learned from shortfall of “boomers” 401(k)s

An article in the Weekend Wall Street Journal (Feb. 19-20, 2011) highlights some of the reasons that many baby boomers retirement plans are nor adequate.  As a result many people are postponing retirement, moving to less expensive homes, reducing expenses and adopting more aggressive (risky) investment styles. 
One reason given is that people did not have adequate competent advice.  Without dwelling on the events that caused this situation, lets look at some lessons everyone should have learned from the current situation.
The sooner people start to save, the better off they will be.  This provides the opportunity to maximize the power of compounding.  The sooner savings are invested the sooner income and/or gains can be reinvested to increase their investments.  Savings should be increased when income increases, when bonuses are received, when investment gains are recognized, etc.  Adequate liquid reserves should be maintained for unanticipated events.  The reserves can be used rather than being forced to liquidate investments when the markets are down or in stress. 
Contributions to qualified retirement plans is a good way to save.  By stretching to contribute more, the power of compounding is increased, as the income and gains are not reduced by income tax.  With all the advantages of retirement plans, investment assets outside of retirement plans will be needed.    
A proper mix of investments is needed so that it is not necessary to trade or make frequent changes.  A properly constructed portfolio will loose less in down markets and recove faster.  This should help provide the strength not to get out of the market when it goes down and get back in when it goes up.  Investors that sell generally miss the time to get back in before the market recovers.
Another cause was not recognizing that there are financial needs throughout life.  Before sending children to more expensive colleges or repaying student loans people should provide for their retirements.  

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