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Average Joe can retire rich
Old 12-21-2005, 10:26 AM   #1
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Average Joe can retire rich

How Average Joes can retire rich?

Great fund picking?

Brilliant market timing? Nah, the secret to a cushy retirement is simpler.

December 16, 2005: 4:52 PM EST
By Walter Updegrave, MONEY Magazine


NEW YORK (MONEY Magazine) - Listen to advisers and the financial press blather on about the importance of picking top investments, and you'd expect a grim retirement unless you're a mutual-fund-picking wizard.

Tune out that static. You needn't be an investing genius to retire with a big 401(k) balance.

In fact, when it comes to the three main choices you have in your retirement account -- how much to contribute, how to allocate your money between stocks and bonds and which funds to choose -- a recent study by Putnam Investments shows that investing prowess isn't what matters.

It's how much you sock away.

In other words, saving more leads to, well, more savings. Not exactly a revolutionary idea, true, but it's surprising how big a bang you get by upping the percentage of salary you put in and how slight the payoff is from being a fund savant.

The story of Average Joe Putnam created Average Joe, a hypothetical 28-year-old who made the least of his 401(k) between 1990 and 2005. He contributed too little ( just 2 percent of his pay, starting at $40,000), invested too conservatively (only 30 percent of his assets in stocks) and owned funds that ranked well below their peers.

Putnam then measured how different moves would have increased Joe's balance.

It turns out that picking better funds and adopting a more growth-oriented strategy would have led to modest improvement. But by raising his contribution from 2 percent of salary to 6 percent, Joe would have tripled his 401(k) balance, nearly an $80,000 increase.

That's even if he remained invested in underperforming funds. Superior fund picking alone would have netted him a mere two grand.

"It pays to focus on what matters most, which is how much you're putting in your 401(k) for the majority of your career," says Putnam research chief Peter Chiappinelli. "You can have the greatest funds, but it doesn't mean much if you have only a small amount of money in your account."

I agree, with the caveat that you shouldn't take this study as license to pick funds by throwing darts at your 401(k)'s investment menu. In later years, performance matters. As your 401(k) bulks up, better returns can mean more than bigger contributions because those returns are on a much larger balance.

Fortunately, in real life you can do more than one thing to improve your 401(k) results. But this study gives you a sense of how to set your priorities.

Save, then allocate The first step is to salt away as much as possible. Contribute at least enough to get the full match -- anything less and you're leaving money on the table.

If you can't manage that all at once, increase your contribution by a percentage point a year. Eventually you want to be contributing at least 10 percent of your salary and, if you can, the 401(k) maximum of $15,000.

Next, focus on your mix of stocks and bonds. A number of landmark studies show that asset allocation has a bigger impact on returns than the specific funds you hold. (For help, check out the Fix Your Mix tool.)

As for funds, look for ones that have low fees and consistent investing strategies, like those in the MONEY 50.

Feel free to take the easy way out by opting for index funds. Or for an even simpler solution, go with a targetdate or life-cycle fund (offered by nearly 40 percent of plans), which gives you a diversified portfolio appropriate for your age.

Then, the next time some expert rattles on about his foolproof fund-picking system, just slip in your iPod earplugs.


http://money.cnn.com/2005/12/16/reti...ex.htm?cnn=yes
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Re: Average Joe can retire rich
Old 12-21-2005, 10:55 AM   #2
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Re: Average Joe can retire rich

I agree with the strategy (at least, it's more-or-less what I've done), but I disagree with the "rich" part.* At age 55, Joe will have maybe $500,0000 (in current dollars), at age 65 maybe $1,000,000.* Not rich, but certainly not shabby.* To make it to $2 mil, Joe's got to have something extra: put away a bigger fraction, get bigger returns, earn more, (or best) a wife who saves like him.* The latter technique is the one I recommend the most -- it worked for me!* I used to think I was frugal, until I met my wife.* She likes to shop until she drops -- about 30 minutes max, once a month.
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Re: Average Joe can retire rich
Old 12-21-2005, 11:50 AM   #3
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Re: Average Joe can retire rich

Quote:
She likes to shop until she drops -- about 30 minutes max, once a month.
Yeah, but does she have more energy for... well... other things. : Mine is high energy on both
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Re: Average Joe can retire rich
Old 12-21-2005, 11:51 AM   #4
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Re: Average Joe can retire rich

Good advice.

Save at least the matching amount for free $$.

Save the max. if you can to defer taxes on the gain and make your money grow faster.

Invest in a mix of assets and investments.

Let time be on your side.

Pay now....enjoy later.

Sounds about right to me.
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Re: Average Joe can retire rich
Old 12-21-2005, 03:05 PM   #5
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Re: Average Joe can retire rich

I agree. Everyone claims that "time in the market" is the key, but you need to have as much in the market as possible in order to maximize your returns. For example, I was just running some retirement simulations and found that increasing my savings rate by only 5% (i.e. from 45% to 50% of my gross), I could my time to FI by one-third! (allowing me to reach FI in my late-30s rather than my early-40s).

In an attempt to inflict wholly unnecessary pain on myself, I calculated FI from age 25 (rather than my current age of 35) and gave myself nothing in terms of initial savings (no taxable or retirement savings -- starting from $0) but kept the rest of the variables the same (e.g. 50% savings rate). The result was staggering. I could have been retired by age 33 with over $1.2 million!
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Re: Average Joe can retire rich
Old 12-21-2005, 06:00 PM   #6
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Re: Average Joe can retire rich

i read this article a few days ago and i didn't think it added any novel ideas on how to save/invest/increase wealth.

it basically said that if you want more money when you retire, you better save more when you're working.
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Re: Average Joe can retire rich
Old 12-21-2005, 06:43 PM   #7
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Re: Average Joe can retire rich

Quote:
I used to think I was frugal, until I met my wife. She likes to shop until she drops -- about 30 minutes max, once a month.
She got a sister?
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Re: Average Joe can retire rich
Old 12-22-2005, 08:19 AM   #8
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Re: Average Joe can retire rich

Quote:
She got a sister?
An only child.* Some cousins, but in Poland.* (I didn't mention my wife is an immigrant, did I?* 25 years ago she came to go to grad school, ... , what a long strange trips it's been -- but good.)
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Re: Average Joe can retire rich
Old 12-23-2005, 12:54 PM   #9
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Re: Average Joe can retire rich

Quote:
Originally Posted by gravesend

it basically said that if you want more money when you retire, you better save more when you're working.
It says a heck of a lot more than you have indicated however, if one does not salt away money over the long-term, there is no way to make an adjustment when retirement looms in the near future other than increasing your contribution rate to 121.25% of current annual income.

Many folks would find this a difficult task.
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Re: Average Joe can retire rich
Old 12-23-2005, 01:18 PM   #10
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Re: Average Joe can retire rich

Quote:
Originally Posted by Robert the Red
An only child.* Some cousins, but in Poland.* (I didn't mention my wife is an immigrant, did I?* 25 years ago she came to go to grad school, ... , what a long strange trips it's been -- but good.)
I wonder if the "shop 'till you drop" lifestyle of many US women (and some men) can be unlearned? I have been married to three different women and they all had some "retail therapy" issues. Wife #2 was a shop-a-holic but had the decency to look for sales. #1 was a "hider" where she bought stuff and hid it and the bills so I would not know about the purchases (until the CC bills came ) #3 is a shopper of clothes only so far. She hs not felt the urge to triple our inventory of dishes like #2 but she has begun to occupy a closet in the guest bedroom.

Maybe there is a malignant gene in the US population that accounts for excess spending and the need to fill every available closet in the house. Maybe we need to import more women.
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Re: Average Joe can retire rich
Old 12-23-2005, 03:34 PM   #11
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Re: Average Joe can retire rich

Quote:
Originally Posted by SteveR
Maybe there is a malignant gene in the US population that accounts for excess spending and the need to fill every available closet in the house.* Maybe we need to import more women.* *
Maybe you just need to find the right women to date.

Ann, born & bred in the US, saving 62% of my take-home pay. And spoken for.
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Re: Average Joe can retire rich
Old 12-23-2005, 03:42 PM   #12
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Re: Average Joe can retire rich

Quote:
Originally Posted by annqueue
Maybe you just need to find the right women to date.*

Ann, born & bred in the US, saving 62% of my take-home pay.* And spoken for.
Congratulations on your savings rate. It is truly exceptional. From my experience your savings rate is very rare. I am sure your SO is very pleased.



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Re: Average Joe can retire rich
Old 12-23-2005, 05:38 PM   #13
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Re: Average Joe can retire rich

Quote:
Originally Posted by annqueue
Maybe you just need to find the right women to date.*

Ann, born & bred in the US, saving 62% of my take-home pay.* And spoken for.
Hello Ann. If your SO ever says SO long, PM me ASAP and I'll
respond PDQ.

JG
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Re: Average Joe can retire rich
Old 12-23-2005, 05:49 PM   #14
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Re: Average Joe can retire rich

Quote:
Originally Posted by annqueue
Maybe you just need to find the right women to date.*

Ann, born & bred in the US, saving 62% of my take-home pay.* And spoken for.
Tease... :P
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Re: Average Joe can retire rich
Old 12-23-2005, 08:24 PM   #15
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Re: Average Joe can retire rich

Quote:
Originally Posted by azanon
Yeah, but does she have more energy for... well... other things.* *:* Mine is high energy on both*
Hey man, that is cheap at any price. I'd rather have my brains f**ked out than be rich any day.

Ha
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Re: Average Joe can retire rich
Old 12-23-2005, 08:31 PM   #16
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Re: Average Joe can retire rich

Quote:
Originally Posted by HaHa
I'd rather have my brains f**ked out than be rich any day.
Ha, I hope you take this in the spirit in which it is intended...

Based on your posts on this forum, it appears you've already met the first criteria in your above quote.

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Re: Average Joe can retire rich
Old 12-23-2005, 09:43 PM   #17
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Re: Average Joe can retire rich

And the second, buen amigo mio.*

Ha
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Re: Average Joe can retire rich
Old 12-24-2005, 09:09 AM   #18
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Re: Average Joe can retire rich

Quote:
Originally Posted by SteveR
Maybe there is a malignant gene in the US population that accounts for excess spending and the need to fill every available closet in the house.
Boredom? Entertainment?

In our house if you buy it then you have to take care of it & keep it clean. That's held off a lot of purchases.

Quote:
Originally Posted by SteveR
Maybe we need to import more women.
I'm almost sure there's a logic flaw here somewhere but I can't find it. I'll have to ask my spouse when she returns from shopping...
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Re: Average Joe can retire rich
Old 12-24-2005, 10:08 AM   #19
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Re: Average Joe can retire rich

We have a rule in this house (actually my dh's rule) If you bring some thing in some thing has to go out. That was meant for my clothes and shoe collection... came back to bite him when he wanted to buy the 52 Ford Pickup His toys are bigger than mine.

Oh and my dad has a rule which he can't seem to get his wife to live by. "Never buy anything that eats".
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Re: Average Joe can retire rich
Old 12-24-2005, 10:38 AM   #20
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Re: Average Joe can retire rich

Quote:
Originally Posted by Robert the Red
I agree with the strategy (at least, it's more-or-less what I've done), but I disagree with the "rich" part.* At age 55, Joe will have maybe $500,0000 (in current dollars), at age 65 maybe $1,000,000.* Not rich, but certainly not shabby.* To make it to $2 mil, Joe's got to have something extra: put away a bigger fraction, get bigger returns, earn more, (or best) a wife who saves like him.* The latter technique is the one I recommend the most -- it worked for me!* I used to think I was frugal, until I met my wife.* She likes to shop until she drops -- about 30 minutes max, once a month.
My ex. liked to shop until the store ran out of inventory

DW is a thoughtful shopper/bargain hunter. Normally when she splurges
it's on me. Nice of her. Wish she didn't do it.

JG
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