Once you have completed the first level [solving bad debts] in the financial free game, you will enter the second level - retirement plan. There are many things to consider when developing a retirement plan. At this level, we will only cover the cumulative portion of the retirement plan, not the allocation phase [which will occur when we retire]. To develop a retirement plan, there are three main factors to consider: the goal, the number of years remaining before retirement, and tolerance for risk. The goal of this initial process is to set an average downturn path to determine how donations and appreciation will accumulate enough funds to convert you into income when you retire.
When I started my retirement account, it was 1998 and I think Rose IRA has just been established. So, I went through the whole process with a financial consultant, he is also my neighbor. I want to retire at the age of 65, I want $3 million, and I have a high tolerance for risk. I always believe that any opportunity to get a huge reward requires high risk. I don't think so anymore! When the "dot com" bubble broke out in 2000, I felt a new feeling for my "high risk tolerance". After paying all the brokerage fees, I think I lost about 50% of my investment that year. Because of this loss, I was forced to reassess the significance of having high risk tolerance. I already know that you don't have to take high risks to get a good, stable return. In fact, it is best not to do this.
Many people seem to have not got a satisfactory answer to these three planning questions. Therefore, I want to explain the main purpose of determining the target, time frame and risk tolerance is to set the asset allocation of the portfolio. Your asset allocation is a combination of various asset classes [such as stocks, bonds, and real estate] that you will represent as a percentage. Higher risk tolerance allows for higher volatility. As stocks are more volatile than real estate and bonds, higher risk tolerance will create a portfolio with a higher equity ratio. Lower risk tolerance reduces volatility and targets more fixed income in asset allocation.
How does asset allocation work? It has two functions. One way is to diversify. Because asset classes react differently to changing environments, diversification produces better knots over time. Why? All investments are affected by four main factors:
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1] Commodity prices as input prices, especially oil,
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2] Interest rate as the cost of borrowing,
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3] Inflation [or deflation] as a combination of federal policy, monetary policy and general pricing, and finally,
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4] Economic growth [business and economics].
Investment is affected by the nominal number of each of these four factors and the rate of change. For example, you can have low interest rates, but if these rates suddenly start to rise rapidly, the market will begin to discount this change. Rate of change can greatly affect market pricing and volatility. Keep in mind that the ultimate goal is that the market is a future discount on profits, and any significant change in any of these four areas will greatly affect calculus.
The second way to configure assets is to "rebalance". Rebalancing allows for the purchase of low-cost and high-priced system processes. Rebalancing your assets at the set point throughout the year, for example twice a year, allows you to sell asset classes that are already greater than their target allocation percentage and purchase asset classes that are already below their target asset allocation. This provides a process to automatically and systematically purchase low prices and sell high prices.
Now, why do we talk about this in the secondary-retirement plan? This is because I suggest you find a service that can do all of this work for you as cheaply as possible. I recommend looking at the "robot consultant" - WealthFront, Betterment or Personal Capital. These companies guide you through planning issues, set a risk tolerance number of 1.0-10.0, and then set up a portfolio based on your profile. They allow you to set up automatic contributions and they will handle rebalancing according to the set schedule. The important point is to put all of this in an automated system so you don't even have to think about it. You can also purchase the Index ETF directly at a brokerage firm such as TD Ameritrade, free of transaction fees. They offer 100 free index ETFs. But remember, ETFs are not as automated as robot consultants. I will start with a robot advisor account and then optimize and improve as you start to do better in investing skills.
Therefore, to reach Level II, you need to set up a retirement account and automatically provide 10% of your income. I usually stay away from 401k's plans unless they provide a match. If they offer the game, then this is free money, you can start the second level by setting your 401k, but only reach the amount the company will match. why? Because the 401k program has a lot of hidden costs, and the management costs are high. Most people who get rich in 401k land are providers, not participants.
Also, how do you know that you are retiring? I will use these very general statements. You want a "four-digit" 20-year-old, so that you can reach the "five-digit" one day at the age of 30. You have done this, you can get "six digits" sometime in the 1940s. If you do this, then you need to get "seven digits" sometime in the 1950s. If you want extra credit, then you will reach "eight digits" sometime in the 1960s or 1970s. If you are 27 and you have $4,000 in your retirement account, then you are normal. If you are 38 and you have $55,000 in your retirement account, you will usually be on the right track. If you are 44 years old and you have $145,000 after retirement, then you are on the right track.
The point here is that you need to have a "four-digit" portfolio before you have a "five-digit" portfolio, and so on. Moreover, the retirement portfolio will use the power of compounding and long-term time to generate large returns. This is a very common rule and does not apply to everyone. In addition, this does not allow someone to skip the "target" part of building risk and investment profiles. It should be used as a general rule of thumb. I will give another rule of thumb in a follow-up article. For now, I hope that you have found this to be helpful and inspiring in how to win the second level of financial free games - building retirement accounts and investment processes.
So, are you ready to complete Level 2 - Create a retirement account and save 10% a year? You can complete the entire level in one step - create a Wealthfront account and set up automatic monthly donations in the traditional or Ross IRA. Alternatively, you can set up 401k in the company as long as they have a generous matching policy. Alternatively, you can set up a TDAmeritrade account, set up monthly automatic donations and invest with their free indexed ETF. All of these methods will put you on the path to retirement investment. You can improve it later. The goal is just to start and then manage it automatically.
Orignal From: Develop a retirement plan (financial freedom level 2)
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