In Search of a Secure Retirement by Robert Stammers, CFA

Confusion about how to save and invest is the biggest impediment to effective retirement planning. Understanding some common principles and practices can be invaluable.

A significant fear for many people is not having enough money to live throughout their golden years. Since 2001, the Gallup Poll has reported that the biggest financial concern for most Americans is not having enough money saved for retirement. This suggests the apprehension is constant and remains in both good economic times and bad.

However, the worry about outliving one’s assets has not been enough of an impetus to get people to analyze their retirement needs and to save enough to cover them. According to a recent study conducted by the Employees Benefit Research Institute (EBRI), 57% of the Americans surveyed had $25,000 or less saved and only 46% had tried to determine their potential retirement liabilities.

People that are not appropriately preparing for retirement are not lazy, nor are they ignorant of the potential consequences of their inaction.

Their anxiety surrounding retirement planning doesn’t develop solely from unfamiliarity with financial concepts and uncertainty about their investing proficiency, but also from inertia. They are unsure how and when to start saving and investing.

A Global Issue

These same issues are evident and equivalent in many parts of the world. This is because retirement security is not an American issue but a global one that affects people of all nations and from every walk of life. In fact, the US and Great Britain have some of the world’s lowest savings rates and pension systems that are only rated average in comparison to other jurisdictions (according to the Melbourne Mercer Global Pension Index), demonstrating that advantages in retirement planning are not a question of developed vs. emerging market or rich vs poor.

Even countries with well-constructed and, in very rare cases, well-funded public pension systems don’t expect to cover 100% of their constituents’ retirement needs, putting the onus on individuals to cover the difference with employer sponsored or private savings and investment plans.

In an attempt to introduce consumers to some principles and best practices in retirement planning, the CFA Institute Future of Finance Team has created the “Essentials of a More Secure Retirement”. This document is meant to help people become savers and then grow into investors. It provides the knowledge and advice necessary to build wealth over the long term.

A New Approach

This document focuses equally on forging a fiscal discipline and building investment acumen. Many products take the opposite approach and place disproportionate focus on investment products and expected return. This is a mistake. Capital preservation and financial willpower are essential to achieving a secure retirement, because reaching one’s financial goals is not all about the return on capital but is also about managing risk and optimizing the amount of capital one can save continuously over the long term.

More simply stated, a key to retirement planning is systematically marrying the best ideas in personal finance with those in investment management.

In the keynote address at this year’s CFA Institute Annual Conference, Carl Richards, author of the “Behavior Gap” and master of using simple diagrams to explain complex financial concepts, presented some pragmatic ways to edify individuals about financial concepts and their finances.

One is to talk about money in a way that does not always frame the discussion around finance and investing. Although money is means to accomplishing our dreams and goals, Richards argues that people are highly emotional and often fearful when discussing their finances which can cause them to avoid speaking or learning more about it altogether. This suggests that in order to engage people in thinking about their finances, we should focus on a specific problem dear to them.

Richards also advocates “talking about the right things”. So much of the financial information available is noise which can be overwhelming, making it even more difficult for people to determine what is important. For this reason, it is necessary to concentrate on those topics or issues that really make an impact on people’s finances and lives.

Practical, Accessible Advice

Unlike a lot of financial education material, the Retirement Essentials is conscientious about meeting readers where they are and consequently abstains from using, an undue number of technical examples or industry jargon. It strives to explain some complex financial concepts in a simple, easy-to-understand manner that does not overwhelm but instead provides the reader with practical insights that can be acted upon.

Individuals that are not sure where to start and what to do in relation to their retirement, can use the retirement essentials as a guide to point out the principles and behaviors most likely to help them achieve their retirement goals. Links to additional content on specific practices and retirement themes provides investors with added clarification on saving and investing tools.

By following the instructions, individuals will be better suited to meet the challenge of providing for themselves in retirement, or as the document says, to “Get Started, Keep it Going, Invest Wisely, and Retire Well”.

If you enjoyed this post, visit the Retirement Essentials page and consider subscribing to Inside Investing via Email or RSS.

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This was previously published on Inside Investing at the CFA Institute.

Copyright © 2008 – 2014 Robert Stammers, CFA
All Rights Reserved.
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Robert Stammers, CFA, is director of Investor Education at CFA Institute, which includes management of the Inside Investing Blog. Previously, he was the principal for his founded company A2O Consulting where he consulted to aide real estate owners, lenders, and syndicators, develop and analyze structured real estate investments. There, Stammers developed strategy for obtaining debt and preferred equity capital as well as created finance-related marketing materials and research papers for various clients. He has written more than 100 articles on various financial and investment topics for several investment periodicals, such as Forbes and Investopedia.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.