For those of you who missed it, here's a summarized, paraphrased representation of last night's forum:
What's the biggest mistake people make in saving for retirement?
Janet Gibson: Carrying too much debt. You can't build wealth when you're spending your money paying off credit cards. Revolving debt (credit cards) is the worst, because cards have high interest and they carry forward month after month. You need to have strategies to pay off debt. The money you have needs to be working for you.
Ralph Bovitz: It's a good idea to never let small items that you buy stay on revolving credit (credit card) longer than its "natural life." Pay them off as quickly as possible. And pay down bigger items.
Ralph Bovitz: Another mistake is being unwilling ... or maybe not having the ability ... to put money into 401(k) Plans and IRAs. People should try and put 10% of income into investments or a 401(k). They need to look out for themselves first so they're not a burden on their children.
How should people go about investing?
Janet Gibson: It's a good idea to have 3-6 months of income ... or the money you need to survive the next six months ... in an emergency fund. The money should be easy to get to, in a money market or savings account.
Ralph Bovitz: People should get educated about their finances. They should know how mortgages work, how credit cards work. A good resource is aicpa.org ... On that website there's a pig character called Benjamin Banks who headlines a program about financial literacy. It's designed for kids and teenagers, but it's good for anyone.
What should people invest in for retirement? How much should they save for retirement?
Janet Gibson: Planning for retirement, you have to figure out what your baseline needs are: Will you need $40,000? $60,000? More? Figure out where your money is going to come from. You'll probably get some from Social Security, some from Pension Plans, some from your 401(k). I think that most retirement money you save in 401(k)s and IRAs should be in mutual funds, in places where the money won't go away and there won't be big losses.
Ralph Bovitz: Janet likes actively managed funds. I think index funds work best. Modern Portfolio Theory says that having assets allocated over different types of investments (asset classes) works best. It's as much art as science. You can keep your money in ultra-safe bank Certificates of Deposit, but for growth you'll need stocks. Your purchasing power declines over time if you just keep money in lower-yielding bank deposits. It's good to remember that stocks go up and down. Often it's one step forward and one step back, even though assets grow in the long term.
Janet Gibson: Dollar cost averaging is a good way for people to go. It's what everyone does in a 401(k), put money into different mutual funds on a week-to-week schedule. I think, outside of 401(k)s, people should add to investment accounts on a monthly basis. Monthly works well for my clients. David Bach talks about putting your investing on auto-pilot in Automatic Millionaire.
Ralph Bovitz: The newer investment literature I've read says that portfoilo performance is determined by asset mix and the design of portfolios. The latest thinking in portfolio design is to have more diversified equities and less cash (for better longer term performance). An investor can always move some investments into cash as needed.
What about opening ROTH IRAs for kids?
Ralph Bovitz: Your son and daughter has to be earning money to have money put into a ROTH IRA. Only earned money can go into a ROTH.
What does somebody do in times like these, when jobs are tight and markets are going up and down, but mostly down?
Janet Gibson: If you're in your twenties or thirties, in the front part of your career, a bad market is a great time to be investing because you're buying stocks or mutual funds at a discount, and that's good. You guys are artists, and you've got skills you can use to start your own businesses. You need to develop multiple streams of income in your life, and I think a good allocation of assets would be:
25% real estate
25% in your own business
What about paying off a house when you have a lot of equity in it? Wouldn't it be better to use the home equity elsewhere? For something else?
Janet Gibson: There's freedom in paying off a house, but I don't have strong feelings about paying it off or not paying it off. Sometimes its good to use home equity for other things. But I have clients who bought houses durin the UP market, and they don't have a lot of equity.
Ralph Bovitz: I think it's a personal choice, and depends on an indvidual's circumstances.
Hulett: That covers most of the major items discussed. There was lively back and forth about the kinds of investments people should get into. Ralph Bovitz favored diversified index funds, Janet Gibson liked managed funds. (I fall in the middle and said so, noting that index funds usually outperform managed funds during bull (UP) markets, but under-perform managed funds in bear (DOWN) markets.)
There was general agreement that people need to devise investment plans and have the discipline and focus to stick to them. Doing nothing is really not an option.