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I am amazed by the number of retired people who have little or no net worth other than the equity in their homes. Recently I spoke with a gentleman who just retired from the corporate world. He took advantage of an attractive “early-out” ' provision of his company’s pension plan, which provided him with a lump sum distribution of nearly $500,000. While working he had a six-figure salary. His wife still worked, but her income alone was insufficient for them to live in the manner to which they had become accustomed. They had put three children through college, but still had another child to support. Unless he pursued an active and successful second career, the pension would be the sole source of income for the rest of his (and his wife’s) life. The equity in his home provided the only other ready asset for funds. He and his wife had not invested one dollar from their salaries for the future!
That same day I talked to a recently retired senior naval officer who, when describing his net worth, said it could be summed up in one word: “disaster.” After a distinguished naval career of more than 30 years, he reached retirement with little more than the equity in his home and a few thousand dollars in savings. His wife had not worked while he was on active duty, but they managed to put their children through college. Fortunately, his retirement benefits met their basic requirements for current income, especially now that they had returned to the home they had acquired when he last had duty in the Washington, D.C., area. But they still could not afford to do all the things they had looked forward to in retirement.
How had these two highly successful professionals reached retirement without planning for their financial futures? Both admitted they always believed that they
Many retired people find themselves with little or no net worth, other than the equity in their homes.
could not afford to save for the future until later in their careers. For them, later never came. These people made serious miscalculations. Get an early start in planning for a successful financial future! I even advise midshipmen at the Naval Academy to recognize the importance of investing early.
In last month’s “Money Matters,” I began a discussion of such investments for income and long-term growth. Mutual funds can be a good alternative to individual stocks and bonds, and, in fact, may be the appropriate type of investment for the first-time investor.
Mutual funds provide certain advan tages over individual stocks and bonds- First, a mutual fund provides safety through diversity, for it includes a diver sified portfolio of stocks or bonds (or per haps a balanced portfolio of stocks an bonds). The investor is not dependent on the performance of a single investmen for success. Second, a mutual fund 15 managed by professionals who deci when to buy and sell securities or move assets from one type of investment to another. Third, a mutual fund, by its very nature, is a long-term investment an does not require the investor’s day-to-day attention.
The most important factor to consider when selecting a mutual fund is the Per formance of the fund over time (usual y five or ten years). Performance in bad as well as good times is of particular imp°r tance. Check, as well, the accessibility 0 the fund when you want to redeen1 shares. The market crash of October \9° brought out many horror stories of inves tors who wanted to sell their mutual fun shares but couldn’t do so because they were unable to get through by telephone- A third factor to consider is whether t fund is a part of a family of funds. This provides the investor with the option 0 exchanging one fund for another with1 the same family of funds on a dollar-for dollar basis, which may be important » fundholder’s investment objective5 change. Exchange privileges for fun with the same sponsor are detailed in tn fund’s prospectus.
Mutual funds are well-suited to inves^ tors who are looking for long-te1111 growth and/or income but who do n have the time or opportunity to close y follow their investments. Next mont • we’ll continue our examination of tn investment triangle, as we explore specu lative and high-risk investments.
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Proceedings / August