I suspect an awful lot of people who set a New Year’s goal of getting their finances and retirement plan in order are glad they didn’t also decide to quit drinking in 2015. A good stiff belt is what most folks are going to need when they realized how far away they are from hitting their retirement goals.
A financially secure retirement is going to require a seven-figure account balance and the average 50-year-old in the U.S. has less than $50,000 put away, according to the studies I have seen. Clearly, some changes are in order.
First, we have to make the painful choices to cut back spending and pick up the pace of our saving and investing. Most folks will be surprised to see how much money they can save without really giving up too much of their quality of life.
As an example, I am a voracious reader and sports fan. Simply by switching to an e-reader instead of my preferred physical book, I saved a ridiculous amount of money. As did watching more games at home and fewer at the stadium.
Track your expenses and make all the cuts and cutbacks you can without being miserable. Odds are you are wasting more money than you realize.
If you have a 401k or other savings plan at work, max it out. Most companies are far more concerned about costs and risks when putting together a 401k, so most of them have pretty tepid fund choices. You are probably best served by a generic 60% stock-40% bond mix in an employer-provided plan.
Three Ways to Invest for Retirement
Now let’s take the amount you can save a month by cutting out the excess spending. I want you to mentally divide the money into three parts.
The first part each month goes into a growth and income fund. I suggest the FPA Crescent Fund (MUTF:FPACX) managed by the incomparable Steven Romick. His go-anywhere approach to the markets has led to years of solid returns with low volatility. He has had two down years since 1993 and in 2008 was off about half the markets’ rate of decline.
He has a philosophy of winning by not losing that is close to my heart. One third of your monthly savings should go right into this fund.
The second part of your monthly savings is going to be directed into one of two mutual funds. First, pick a small cap growth fund — I like the T. Rowe Price New Horizons Fund (MUTF:PRNHX), but other funds like the Harbor Small Cap Growth Fund (MUTF:HASGX) will fit the bill as well.
Just make sure you pick a top-performing small cap growth fund that has been around a long time.
Now are going to pick a deep value mutual fund. Here, I like Aegis Value Fund (MUTF:AVALX) as it has a focus on price-to-book value that is similar to my own investing style. The Undiscovered Managers Behavioral Value Fund Class A (MUTF:UBVAX) managed by Fuller and Thaler Asset Management is also a solid choice for the value portion of the portfolio.
Each month, the second part of your money goes into whichever fund has performed the worse in the preceding month. This will allow us to benefit from the findings of Cliff Asness at AQR Management, who found that value and momentum work better together and that a portfolio of the two styles beats the market with reduced volatility over time.
The third part of your monthly investing is going to go right into what I am going to call the Hetty Green fund. Green was considered the richest woman in the world in the 1800s because of her investing approach, and was dubbed the “Witch of Wall Street.”
“I buy when things are low and no one wants them. I keep them until they go up, and people are crazy to get them.”
This is the part of your retirement catch-up plan that will have the biggest impact on your eventual lifestyle during your golden years.
If you look back through market history, every five years or so we get a touch of panic on Wall Street that is a superb buying opportunity. Some are worse than others, but all offer a chance to buy quality companies at very low prices.
The key is to have cash ready and waiting to put to work when the bear does finally strike.
Max out your 401k. Cut expenses and eliminate budget waste. Invest regularly using both value- and momentum-based growth funds. Have a bear fund of cash to use when the markets sell off.
Taking these steps should allow your retirement nest egg to catch up to your retirement dreams.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
More From InvestorPlace
- 5 Senior Housing REITs With Growing Dividends
- Here’s How to Play Starbucks Earnings
- Netflix: No Cash Flow … No Problem?