Retirement Serenity Prayer
“Please grant me the serenity to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference..” Reinhold Niebuhr
Reduce your pain and confusion
When you look at all the moving parts involved in planning your retirement income, it’s easy to get overwhelmed by the complexity of it all. Complexity and confusion cause emotional pain, and we are pain-avoidant creatures. So it’s tempting to mentally put the whole “how much do I need to retire?” question aside in your head. and return to those activities that bring pleasure. Unfortunately, like it or not, retirement income planning is a “must do” job. Providing several decades of retirement income is not something that “just happens.” You must do it yourself or hire a financial advisor to help you.
The serenity to accept the things you cannot change
A good place to start your retirement income planning is to recognize those things that you have some control over and can change, and to recognize those things that you cannot control or change. You cannot control or change the world stock market, inflation, bank interest rates, increases in health care costs, or the cost of gasoline. So acknowledge its existence and how it affects your plans, get over it, and address what you can control.
The courage to change the things you can
Two very important things you can control are the tax efficiency of your investment holdings and your investment costs.
You can control tax efficiency
Bonds, bond funds, real estate investment trusts (REITs), high-dividend stocks, and high-dividend stock mutual funds generate taxable ordinary income. Unless you need the income, there’s no point in paying taxes on income you don’t need. Whenever possible, put your ordinary income-producing investments in tax-free or tax-deferred accounts, such as Roth IRAs, tax-free or tax-deferred IRAs, 401k, 403b, or fixed or variable annuities. This way, you don’t pay taxes on ordinary income you don’t need. Not only will that reduce your current tax burden, but you’ll also make money on the money you now send to federal and state tax authorities. Tax deferral is a very powerful long-term savings boost, and it also takes the tax burden off of your Social Security income.
You can control your investment costs
Actively managed stock mutual funds charge you fees that can eat up to about 6% of your total fund balance each year! Not so, you say, the annual expense charge is much lower. Well, all purchases and sales made by these funds (the turnover) incur trading costs which are deducted from your account. There are explicit and implicit trade costs. Explicit trading costs are simply what you pay the people running the trades (the spread), implicit costs are what the exchanges do with the share price of what is bought and sold in large blocks (bid and ask ). These trading costs can double or even triple your annual expense ratio, especially in small-cap and international funds, and the amount of money you are charged is not disclosed anywhere on your monthly or annual statements!
Find out how much you’re really paying for your stock mutual funds. Do the research yourself or ask your broker for a full audit of all the investment costs you’re paying. Saving about 4% of your total stock mutual fund account expenses is a HUGE boost to your retirement income plans…and something you can control.
