How Much Is Enough to Retire? Careful Now...

What is your magic number? A million dollars? Two million?

As people settle into their early 40s and begin to look out over the horizon of their lives, the closest and most obvious thing they see is their own parents, who typically are just starting their retirement years.

And so a middle-aged couple begins to wonder: How much is enough to retire?

CNBC recently covered the question of how much is enough to retire from an international perspective. The answer, expressed as income in U.S. dollars, ranged from $85,781 (Germany, which has a strong social safety net) to $276,150 (Dubai, which clearly does not) and every number between.

Among 13 countries, the average was $161,000, according to Skandia International’s Wealth Sentiment Monitor. It also hinged on an exceedingly loaded question, namely, “How much income to you need to be happy?” (Americans were not surveyed by Skandia.)

Let’s make an assumption: That all of these numbers are really equal.

After all, a lot depends on your cost of living. In a major metropolitan city in Europe, you might have access to significant collective resources that reduce your need for income, at least compared to a developing capital with limited healthcare and housing options. Food might be more or less expensive, or energy. It’s hard to say.

For now, let’s accept the international average as reasonable and apply that to our fictional American middle-age savers. To generate that kind of income, the “happiness assured” level, what might be a good target for your portfolio?

Try about $2.8 million.

There’s a bunch of assumptions behind this result. Our couple is about 45. They have saved some and are sitting on a starting balance in tax-deferred accounts of $250,000. Their target is to quit work at 65, assuming they aren’t downsized or fall ill.

Their rate of return is 7% before retirement on $35,000 in retirement contributions per year, and their saving level increases with inflation. It is presumed that they will spend 30 years in retirement.

So, they make it, right? Not really.

Inflation is the killer. Their nominal (dollar) income is $13,723 a month, but the spending power of that money gets zapped over two decades. It will be worth about half, just $7,598 a month. That comes to $91,176 per year in real dollars, far below the “happiness” target.

In a nutshell, inflation explains the Sunbelt. It’s not just about warmer climes and country living. Retirees often simply have to find cheaper places to live. States like Florida fill up with older folks in part because of good weather — but zero state income tax, real estate exemptions and other tax breaks are a big draw, too.

Redefining ‘happy’

People who otherwise diligently save for retirement often make the fundamental error of ignoring inflation. So what would it really take to get to $161,000 and be as happy, at least on paper, as our average citizen of the fictional land between Germany and Dubai?

One way, all else being equal, would be to kick your savings goals up to $75,000 a year, targeting $5.1 million. Another would be to earn a 10% return on your investments while saving $45,000 a year.

Yet another would be to kick off your savings spree at $500,000 earning 7% and put away at least $58,000 a year.

Or, frankly, redefine “happy” down to a number you can live with, which is exactly what people do.

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On ‘Madoff Day,’ Think About How to Avoid Becoming a Victim of Fraud

This is the time of year when most people think of gifts and holiday gatherings. I couldn’t help thinking of frauds past.

Three men accused of defrauding clients arriving at federal court. From left, Marc Dreier in Manhattan on May 11, 2009; Bernard Madoff in Manhattan on March 12, 2009; and R. Allen Stanford in Houston last Feb. 29

Four years ago this week, Marc S. Dreier, a high-flying lawyer, was arrested and later charged with defrauding his clients of $700 million. A few days later, Bernard L. Madoff’s fraud was uncovered. Totaling an estimated $65 billion, Mr. Madoff’s fraud was in a class by itself. And then, a short time afterward, some of the brokers who had been selling fraudulent certificates of deposit for R. Allen Stanford began to turn on him; he was arrested in February 2009 and later convicted of a $7 billion fraud.

These schemes collapsed with the economy in 2008. But on their anniversaries, it may be a good time to ask whether you have done all you can to lower your risk of being caught up in a similar fraud. Call it Madoff Day (celebrated on Dec. 11, the day of his arrest).

Protecting yourself against fraud, or simply bad advice, is easier said than done. The most common advice is to make sure your money is held by an independent custodian or firm whose job is to keep your money safe. That wasn’t the case with either the Madoff or Stanford fraud. But that is only one small step.

So what else can investors do to protect themselves, not only from unscrupulous advisers but also from rushing into an investment that is clearly too good to be true?

Marc H. Simon, a lawyer who lost two years of bonuses, his job and months of unreimbursed expenses when Mr. Dreier’s law firm collapsed, said he has thought a lot about what he could have done differently.

Mr. Simon said that six or seven years before the fraud was uncovered, he knew of inconsistencies in the firm’s 401(k) plans. But the big red flag should have been that Mr. Dreier had sole control over every major decision at the law firm. Still, that had been Mr. Dreier’s pitch: work for him and don’t worry about the irksome details partners typically face.

“People like Drier and Madoff were highly intelligent individuals, they were very charismatic and they were giving people what they wanted,” Mr. Simon said. “It is harder to bring into question those who are providing you something you want.”

Randall A. Pulman, a lawyer in San Antonio who represents many victims of Mr. Stanford’s fraud, agreed that the will to believe was what ensnared people.

“For you and me, it’s too good to be true,” he said. “For the guy who has been working in the oil fields, how is he supposed to know?”

Of course, fraud and just plain bad advice are not limited to the poor or unsophisticated. Robert P. Rittereiser, the former chief financial officer of Merrill Lynch and former chief executive of E. F. Hutton, is working as the receiver for two funds suing J. Ezra Merkin, a former money manager who steered money to Mr. Madoff. Mr. Rittereiser did not think investors in Mr. Merkin’s funds knew that their money was simply being passed on to Mr. Madoff. But even if they did, they may not have seen anything to be concerned about.

“They were investing money and getting appropriate returns for the kind of fund it was,” Mr. Rittereiser said. “Most of them had a relationship of some kind and confidence with Merkin and the people he was dealing with.”

So how do you protect yourself? The first step would seem to be picking an honest adviser. The good news is that only about 7 percent of advisers have disciplinary records, said Nicholas W. Stuller, president and chief executive of AdviceIQ, a company that evaluates advisers. The bad news is that those violations appear only after someone has filed a complaint.

Mr. Stuller’s company, which has now approved some 2,400 advisers, rejects anyone with any type of infraction — from a securities fine to a misdemeanor for getting into a fight. He said this policy might keep some good advisers off the site, but his goal is to search the records of federal and state regulators to find advisers he knows are clean.

“There are advisers who have significant negative disciplinary history with one regulator but appear to be pristine with another regulator,” Mr. Stuller said. “There was a guy in Minnesota who was stealing insurance premiums. In his enforcement record, it says, ‘We’re going to alert Finra,’ but his Finra record is clean,” he said, referring to the Financial Industry Regulatory Authority. “That’s where the regulators don’t talk to each other.”

AdviceIQ’s main competitor, BrightScope, takes a different approach. It notes disciplinary actions taken against advisers but leaves it up to the consumer to go to regulators to determine what the violations were.

“We want the consumer to go to the source data, because there is a lot of liability in publishing that,” said Mike Alfred, co-founder and chief executive of BrightScope. “Many of these folks are good advisers, and they’ll take care of you. But what if they had one crazy client who put all his money in Internet stocks in 2000 and then sued?”

Both services have obvious downsides. With AdviceIQ, a crooked adviser could be rejected from the site and no one would know about it, while BrightScope’s listing could hurt an otherwise honest adviser who had a frivolous suit brought against him.

Mr. Stuller said his site’s main goal was to match advisers with clients of similar needs, like a doctor with someone whose clients are mostly doctors. Mr. Alfred said his site left it to the individual to do more due diligence, though he pointed to an adviser with 55 violations and said she would have trouble explaining those away. (Both sites charge featured advisers an annual fee.)

Ross Gerber, president and chief executive of Gerber Kawasaki, a wealth manager, said clients with sizable wealth should not trust it to any single adviser, no matter how good the adviser seems to be.

He said one of his clients, with about $25 million, has $5 million with him, $10 million with a private bank, and $10 million with a trust company. Each month, Mr. Gerber sends her statement to the private banker, who acts as the point person to make sure the various portfolios aren’t all invested in Apple.

“I’m not threatened by other investment managers who work with my client,” he said. “My clients with a lot of money have a lot of private banking relationships, or lending relationships, or things we don’t provide.”

Mr. Gerber added that he would steer clear of advisers who didn’t want to share with other advisers what they had done for clients. “If Starbucks goes from $50 to $80, it’s easy to show them why it did well,” he said. “When you’re investing in these scams, they’re funds. You don’t see what’s in them. People don’t necessarily ask a lot of questions or they don’t care.”

In some cases, investors do not even know the questions to ask. Marc Odo, director of applied research at Zephyr Associates, a financial software firm, said he had been asked by a client whether a return could be so high or consistent for so long that it might signal a fraud.

Not knowing the answer, he applied sophisticated financial models to compare Mr. Madoff’s record, using a fund that fed money to Mr. Madoff, Fairfield Sentry, against the returns of Hedge Fund Research’s Equity Hedge index from 1990 to 2008.

He plotted the returns on a graph that measured the frequency of losses and the amount of time returns were positive. All but five equity hedge funds were grouped together at the left side of the graph, and four of those outliers were still close to the pack. The Madoff returns floated in the top right corner, like a distant planet.

“This is a more mathematical way to quantify the ‘too good to be true,’ ” Mr. Odo said. “This helps pick apart the numbers. It helps you understand the risks out there.”

He said this analysis was particularly important with investments in hedge funds or other vehicles that do not disclose their holdings: testing how believable the returns are over a long period of time may be the only way to know if they are achieved legitimately.

Still, Daylian Cain, an assistant professor of organizational behavior at the Yale School of Management whose research has looked into how advisers who disclose their conflicts can give people a false sense of comfort, said anyone, no matter how smart, could be duped if the situation were appealing enough.

He said the best advice would be for investors to ask themselves at the moment they are about to invest: What would happen if the investment is not what I think it is?

“Asking, ‘Could I be wrong?’ is psychologically completely different to the brain than, ‘Could I be right?’ ” he said. “It’s not ‘Could this be true,’ but ‘How could this investment be a bad idea?’ ”

The very act of asking that question, he said, might prompt a potentially positive response: procrastination. “If the opportunity is gone tomorrow,” he said, “it may mean that your money and your adviser is gone tomorrow, too.”

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Democrats Hint at Entitlement Program Cuts in U.S. Budget

As Democrats demand tax concessions from Republicans to avert a collision over the federal budget, Senate Democratic leaders are signaling that they may be willing to trade an entitlement spending overhaul to secure a deficit- reduction deal.

Seniors pick up information about various state organizations that can help answer questions about Medicare, senior center programs, and other retirement concerns.

Dick Durbin of Illinois, the second-ranking Senate Democrat, said he might reluctantly be open to expanding means- testing for Medicare eligibility - charging more to higher- income seniors. New York Senator Chuck Schumer said he wouldn’t rule out changing entitlements, challenging Republicans to come up with specific proposals.

Republicans “want something to put up on the wall and say, ‘OK, we gave on taxes, they gave on’” entitlements, Durbin said in an interview late yesterday. “We may end up facing it as the only way out of this.”

House Speaker John Boehner scheduled an 11 a.m. news conference today in Washington.

The newfound flexibility could be a sign that both parties are edging toward a compromise to avert what has been labeled a fiscal cliff - a Jan. 1 surge of more than $600 billion in automatic tax increases and spending cuts that could propel the nation into recession.

Not everyone is convinced.

With President Barack Obama and Boehner - the chief Republican negotiator - not disclosing any progress in their private talks, Jon Kyl of Arizona, the Senate’s second-ranking Republican, said: “It doesn’t appear to me that they’re going anywhere. And that’s too bad.”

Senate Sparring

In the Senate yesterday, Majority Leader Harry Reid, a Nevada Democrat, and Minority Leader Mitch McConnell, a Kentucky Republican, sparred over Obama’s proposal to give himself authority to raise the federal debt ceiling without approval by Congress. McConnell sought a vote on the proposal, though he retreated by threatening a filibuster after Democrats determined that they had the 51 votes necessary to pass the bill.

McConnell “hasn’t learned that this is not 2010 anymore. There’s no hay to be made by playing politics with the debt limit,” said Schumer.

Reid, McConnell and Representative Nancy Pelosi of California, the House Democratic leader, have been excluded from the negotiations, leaving it to Boehner and Obama alone to find a deal, said a Republican aide who requested anonymity when discussing the negotiations. According to another Republican aide, having the more partisan minority leaders from both chambers as participants in similar talks last year wasn’t constructive.

Tax Rates

Obama has stressed that no deal is possible without letting income tax rates rise for the top 2 percent of earners. All rates will increase without a deal as tax cuts first enacted under President George W. Bush expire in 2013. Both sides say they don’t want that to occur for 98 percent of taxpayers.

In a Bloomberg Television interview this week, Obama signaled he’s ready to make concessions on entitlements, saying “I don’t expect Republicans to agree to any plan where they’re just betting on the come that entitlement reform will happen.”

Yesterday’s Democratic comments coincide with signs that the once-unified opposition among Republicans on the tax-rate issue is splintering.

‘All Options’

A few dozen Republican lawmakers have signed a bipartisan letter calling for “all options” to be considered on taxes and entitlement programs in the deficit-reduction talks, even as Boehner has insisted that his party won’t agree to higher tax rates for anyone.

A Republican leader of the petition to consider all revenue options, Representative Mike Simpson of Idaho, said he could accept higher tax rates for married couples earning more than $500,000 a year in exchange for an overhaul of entitlement programs.

Obama wants to let tax rates increase for individuals with incomes above $200,000 annually and for married couples with incomes exceeding $250,000.

Durbin expressed openness to Simpson’s suggestion to raise the income threshold for higher tax rates.

“If you’ve been around here long enough, you know there’s going to be some give on both sides,” Durbin said. “As the president said, and I’ll just leave it in his words, ‘I’m open to good ideas.’”

Market Reaction

Stocks rose. The Standard & Poor’s 500 Index (SPX) rose 0.3 percent to 1,417.90 at 9:38 a.m. New York time. The Dow Jones Industrial Average gained 52.09 points, or 0.4 percent, to 13,126.13. Treasuries fell for the first time in four days. Ten- year note yields rose three basis points, or 0.03 percentage point, to 1.62 percent at 9:09 a.m. New York time, according to Bloomberg Bond Trader data.

Boehner, in a $2.2 trillion deficit-cutting plan he offered this week, proposed using a new inflation yardstick -- the so- called chained consumer price index -- that would reduce cost- of-living increases in Social Security, as well as raising the Medicare eligibility age. Other Republicans have also advocated means-testing.

Democrats have long regarded their party as the champions of preserving safety-net programs for the poor and elderly, and Reid has repeatedly said that Social Security is off the table in debt-deal talks.

Failed Talks

Still, raising the Medicare eligibility age and using a different Social Security inflation yardstick were on the table during failed budget talks between Obama and Boehner in 2011.

Simpson cited either of those options as a way to win Republican votes for a tax rate increase on top earners.

Schumer, when asked about the ways to trim entitlement costs, said, “Let them give it to us officially as an idea,” without ruling them out.

Since Obama’s re-election last month, much of the public debate on a possible deal has focused on taxes. Obama yesterday visited a middle-class couple in Falls Church, Virginia, a suburb of Washington, to emphasize the need for an agreement to keep their taxes from rising.

Entitlement programs are the biggest driver of the long- term debt. With the oldest of the baby-boom generation reaching retirement age, the number of people age 65 and older is projected to increase by about one-third in the next decade, according to the Congressional Budget Office.

Means Tests

Durbin said it would be “difficult” to change the calculation of Social Security cost-of-living increases, and raising the Medicare eligibility age could hurt impoverished seniors who retire early with health problems.

Medicare is already a means-tested program, with beneficiaries earning more than $85,000 a year paying more for some of its benefits.

“The question is what other means tests should apply,” Durbin said. “I think that is reasonable, and certainly consistent with the Democratic message that those who are better off in our country should be willing to pay a little more.”

Republicans have “got to come through with specifics on that,” he said.

Many of the options for curbing entitlements have met with fierce opposition from powerful groups including the AARP seniors’ lobby, which wrote to Congress and the president last month expressing its concerns about such proposals.

The group fanned out across Capitol Hill this week to lobby against two elements in Boehner’s plan: raising the Medicare eligibility age and using the chained CPI for Social Security. Medicare’s eligibility age, 65, hasn’t been increased since the program began in 1966.

Medicare Savings

The Medicare change could save the federal government more than $100 billion while increasing health-care costs to senior citizens, states and employers. People age 65 and older could pay an extra $2,000 for health insurance if they are excluded from Medicare, according to the nonpartisan Kaiser Family Foundation.

The chained CPI inflation method to determine annual cost- of-living adjustments for millions of Americans was a central feature of both the plan presented by the co-leaders of Obama’s 2010 debt commission and a blueprint by the Bipartisan Policy Center’s Debt Reduction Task Force.

Social Security and other government benefits, along with much of the tax code, are automatically adjusted to reflect inflation. Yet economists say that exaggerates how quickly prices increase, meaning the government pays too much for annual cost-of-living gains while collecting too little tax revenue.

Projected Spending

Over 10 years, using the chained CPI pushed by Boehner would reduce projected Social Security spending by 1.2 percent, according to the CBO.

“Every bipartisan group that has reached a conclusion has said those are the elements you have to have,” said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, referring to the proposed changes to entitlement programs.

“It’s just as clear as it can be,” he said on Dec. 4 when asked about the need for his party to compromise. “Both sides have to move off their fixed positions in order to reach an agreement.”

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33% say they would buy a mortgage from Wal-Mart

One in three U.S. consumers would consider a mortgage from retailer Wal-Mart and almost half would consider one from online payment provider PayPal, according to a financial services study to be released on Monday.

The results should be especially disconcerting for banks because the two companies don't even offer mortgages.

The study shows consumers are willing to try alternative lenders as borrowers focus on price, customer service and trust in their provider when selecting a mortgage, said Doug Hautop, lending practice lead at the Carlisle & Gallagher Consulting Group, which conducted the survey.

"There is a real threat from new entrants," Hautop said.

The study's results were based on online responses from 618 U.S. consumers in September.

Non-bank mortgage companies such as Quicken Loans and Nationstar Mortgage Holdings Inc have been gaining market share as some large banks such as Bank of America Corp pull back in a business that burned them during the financial crisis.

Carlisle & Gallagher, based in Charlotte, North Carolina, provides consulting services to five of the top eight U.S. mortgage originators, Hautop said.

A Wal-Mart Stores Inc spokeswoman declined to comment on the survey. The retailer provides small business loans at its Sam's Club stores, but doesn't offer mortgages.

A spokesman for PayPal Inc, a subsidiary of online auction site eBay Inc, said it offers credit lines for customer purchases, but hasn't announced any plans to move into the mortgage business.

Basic banking back in style

It's not unheard of, though, for retailers to enter the mortgage business. In late 2011, warehouse retailer Costco Wholesale Corp began offering home loans online through select lenders. The company doesn't disclose loan volume, but the service has gone well, said Jay Smith, Costco's director of financial services.

"We have tried to make it a service where members see significant value on rates and fees," Smith said.

While the Carlisle & Gallagher survey found that 80 percent of U.S. consumers would consider a mortgage from a non-bank, there was a bright spot for traditional banks. Seventy percent of respondents said they would prefer to have their mortgage with one of their main banks, although only 39 percent currently do so.

Two-thirds of respondents said the high cost of getting a loan was the most painful aspect of the mortgage application process, followed by slow execution (56 percent) and poor communication with the lender (32 percent).

"Banks have a captive audience, and have folks who are willing and wanting to do business with them," Hautop said. "It means it's time to go back to the basics for our banks."

In the past year, banks, including Wells Fargo & Co and JPMorgan Chase & Co, have benefited from surging consumer demand to refinance their mortgages at low interest rates. But in the coming year, refinancings are forecast to decline, so banks will need to focus more on serving customers taking out loans to purchase homes, Hautop said.

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Earning, Spending, and Saving: The Building Blocks of Personal Finance

A couple of weeks ago, Robert Brokamp explained how living below your means is like saving for retirement twice. On the surface, his advice was pretty conventional: The more you save today, the more you'll have tomorrow. This is similar to a point I've been repeating for the past five years.

Smart personal finance can be reduced to one simple equation:
[WEALTH] = [WHAT YOU EARN] - [WHAT YOU SPEND]

If you spend more than you earn, you have a negative cash flow. You're losing wealth and in danger of going into debt. (Or, if you're already in debt, you're digging the hole deeper.) If you spend less than you earn, you have a positive cash flow, which will let you climb out of debt and build wealth.

But as I was editing Brokamp's article, I had a flash of insight. What Brokamp was trying to say -- and what my little equation tries to quantify - is that basic personal finance comprises three essential skills:

• Earning - your ability to bring in money.
• Spending - your ability to live frugally and spend wisely.
• Saving - your ability to produce a surplus and to make that surplus grow.

Some folks are good at one skill, but not the others. (Maybe you're good at keeping your costs low, for instance, but struggle to earn money.) Other people are good at two of the skills, but fall down on a third. (You might have a good income and keep your costs low, but have a small nest egg because you lack skill in saving.) And still others are passable at all three skills -- not really excelling, but not failing either.

To be truly successful at personal finance, you have to maximize your performance in all three areas.


Mastering the Art of Earning

The first skill in this framework is your ability to make money. For most folks, this means managing a career effectively: finding the right job, learning how to ask for a raise, and so on. Others can up their incomes by selling stuff they already own, pursuing money-making hobbies, or starting their own businesses.

Here are some steps that lead to increased earning:

• Become better educated. In general, the better your education, the better your income.
• If possible, choose a career that you love -- and that pays well. This isn't always possible, of course. But if you can get paid well to do what you love, it can almost be like you don't have a job at all!
• Maximize your salary. This is probably your primary source of income, so make the most of it. Learn how to negotiate your salary. Make the most of your benefits.
• Make money from your hobbies. Find ways to earn a little cash from the things you do in your spare time.
• Turn your clutter into cash. When I was getting out of debt, I sold tons of stuff previously bought on credit. I didn't get back what I paid for it, but that's okay. I got out of debt, which was even better.

Though some people don't like to hear it, high income is also associated with hard work. The folks who make the most money are often those who work the longest hours. Hard work doesn't guarantee a high income, of course -- there are plenty of hard workers stuck in low-wage jobs -- but it's tough to master the art of earning without hard work.

And here's another reason to enhance your earning power: As vital as it is to cut your spending, there's only so much you can trim from your budget. Your income, on the other hand, is theoretically unlimited.

If life were a game, your earning score would be easy to calculate: It'd simply be a measure of your annual income. The more you made, the higher your score. (Note: For more on this subject, see my colossal post about how to make money. It's a huge list of ways to boost your income.)

Developing Discipline in Spending

While some people find it tough to boost their incomes, others find it tough to keep costs down. There are even those who believe that thrift is overrated, that it's somehow akin to deprivation. But those who dismiss frugality to focus solely on earning are missing a key piece of the puzzle. Your goal should be to create as big a gap as possible between earning and spending.

How do you do that?

• Embrace frugality. A lot of folks are afraid to pinch pennies -- they don't want to appear cheap -- but frugality is an important part of personal finance. Learn to clip coupons, shop at sales, and make do with less.
• Practice conscious spending. You can't always get what you want, so decide what's important to you, and make those things a priority. Cut corners on the things that don't matter.
• Avoid paying interest. The power of compound interest can help you build wealth when it's on your side. But it can suck you dry if it's working against you. To cut your interest payments, Get out of debt and stay out of debt. Make it a goal to pay as little interest as possible.
• Reduce recurring expenses. One-time costs can be painful, but ongoing expenses -- like magazine subscriptions, cable television and cell-phone bills, etc. -- can act like an anchor on your finances.
• Focus on the big wins. Daily frugality is a valuable skill. It helps you save a little bit all the time. But if you really want to cut your spending, spend less on the big things, like housing and transportation.

If personal finance were a game, your spending score would come from how low you could go. The less you spent, the higher your score.

Remember: Your earning power might bring you wealth; frugality and thrift will help you keep it. By cutting your spending while you increase your income, you'll develop a cash surplus -- a surplus that can be used for saving. (Note: For some reason, financial writers often fixate on spending. There's no question that it's important, but it's not the only piece of personal finance. It's one of three basic building blocks. If you embrace frugality but ignore your income and investments, you can't expect to build wealth. Each skill is essential.)

Discovering the Secret of Saving

Often when I write about saving, I'm just talking about the difference between what you earn and what you spend. This surplus is important, no question -- it forms the foundation of your ability to save -- but skill at at saving comes mainly from what you do with your surplus.

If you hide your money under a rock, for instance, your skill at saving isn't particularly good. Anyone can do that. And though you might think you're protecting what you've saved, you're actually losing money to inflation, the silent killer of wealth. (If you use your extra money to play the lottery, I'd argue that your savings skills are especially poor!)

What sorts of things go into becoming a successful saver? This is where a knowledge of investing pays dividends. The secret of saving is to learn everything you can about making your wealth grow. Successful savers:

• Understand the importance of creating a plan -- and sticking to it. (This is where asset allocation and re-balancing come into play. I'll write about these more later in the month.)
• Make logical decisions instead of succumbing to emotion. Successful savers don't make decisions based on breathless media pundits.
• Avoid fads. They don't buy real estate just because everyone else is. They don't buy tech stocks just because they're riding high. And they're wary of gold when it's at record highs. They buy low and sell high.
• Embrace diversification as a way to improve returns while reducing risk.
• Constantly contribute their surplus income to grow their savings. They pay themselves first.

If there were a scorecard for life, your points for saving would be determined by how much you make your surplus grow, and by how well you protect the money you save. (Note: I used to do a poor job with all three of these skills. Over the past few years, I've become adept at earning, and I'm learning to be a better saver. My spending skill is improving, but remains the weakest part of my personal-finance package.)

The Fundamentals of Personal Finance

None of this is earth-shattering; these notions form the core of smart personal finance. What is new -- for me, anyhow -- is thinking of earning, spending, and saving as discrete skills, building blocks that can be put together to form a greater whole. It's this framework that's new.

Mastering money means mastering each of these three skills. If you can teach yourself all about earning, spending, and saving -- and put what you learn into into practice -- you'll achieve your financial aims with surprising speed. But so long as one of these skills lags, you'll struggle to meet your goals.

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Want to Retire Early? Follow These 5 Steps

Many of us want to retire early. That early retirement age might be 35, 40, or 50, but the idea is to retire sometime before the age of 65 and start enjoying life — before age and infirmity catch up with you.

The reality, though, is that the dream of early retirement will remain a dream unless you take action. Here are 5 steps you can follow to help you reach your goals of early retirement:

1. Make Early Retirement a Priority

You say you want to retire early, but have you made the necessary commitment? Look at the way you use your financial resources. What do your actions say about your financial priorities? If you really want to retire early, you have to make it a priority — and you might have to make tradeoffs. That means that you have to give up less important things in the present in order to achieve your long-term priority of early retirement.

2. Be Realistic in Your Expectations

Next, you need to look at your financial situation realistically. If you’re 35, have no savings plan, and $10,000 in your retirement account, you are going to have to make some very big changes in order to retire by age 50. Look at realistic investment returns (not the 10% predictions that many tout for stocks), and plan for conservative returns. Be realistic about what it will take to meet your early retirement goal. Any plan you make must be based in reality.

3. Create a Plan

Armed with the willingness to commit and realistic expectations, it’s time to create a plan. Your early retirement plan should help you save enough money each month to reach your retirement goals. This means that you have to consider cutting your expenses, and changing what you do with your money in order to meet the requirements of your plan. And don’t forget about having an investment strategy as well. Investing is the only way to build up enough wealth to retire early and comfortably.

4. Make Your Plan Work

You need to put effort into making your plan work. This might mean cutting unnecessary expenses from your budget. It might mean spending less, hoarding your money until you reach your goals. It’s true, trying to retire early can mean sacrifice now.

Another way to make your plan work is to increase the amount of money you make. If you know you won’t make your goal of early retirement in 20 years and you just can’t cut anymore, try to earn more money. Improve your marketability so that you qualify for a pay raise. Start a side hustle. Look for ways to increase your income so that you can put more money toward making your early retirement plan work.

5. Don’t Forget Diversity

Don’t forget diversity as you invest and adhere to your plan. You need the right asset allocation to see retirement portfolio success. It can also help to build diverse sources of income that can help you weather various storms before and during the retirement years. With the right income sources and asset allocation, you can get through setbacks without putting your early retirement goal at risk.

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