5 Secrets to Growing Your Retirement $$$

Want to Build the Biggest Possible Nest Egg? Beware the Financial Industry

     DESPITE THE DECLINE of the stock market over the past year—including its breathtaking fall and rebound during the recent credit crisis—investing in a diverse mix of stocks and bonds is still the best way to grow your retirement money, especially when you factor in the tax advantages of IRAs and 401(k) plans. But as always, the devil is in the details. With all the different investment vehicles out there, which ones should you park your savings in?

     To sort out the options, SmartManDaily spoke with Dan Solin, author of The Smartest 401(k) Book You’ll Ever Read. “Investing really isn’t complicated,” says Solin. “The financial industry just makes it seem complicated, because they make more money that way.” Here are his five secrets to retirement planning.

SECRET #1: Put your retirement money in index funds, rather than actively managed mutual funds.
     Managers of actively managed mutual funds continually adjust the mix of stocks in an attempt to beat the broader market, as represented by one of the broad-market indices, like the S&P 500, Russell 2000, or Wilshire 5000. But there’s a dirty little secret the mutual fund industry doesn’t want you to know: less than 5% of actively managed funds equal or beat their benchmark indexes over a ten year period.
     Making matters worse, actively managed funds charge a lot more than index funds, which are “passively managed” funds that simply mirror the holdings of one of the broad-market indices. A typical actively managed fund might have an expense ratio of 1.5 percent—meaning that it eats up 1.5 percent of your invested assets on an annual basis.
      Index funds can charge less because they cost less to manage--their stock choices are automatically governed by whatever index they’re mirroring. A typical index fund has an expense ratio of 0.25%—about one-sixth the cost of the typical actively managed fund. Since actively managed funds generally perform no better than index funds, these extra fees can end up draining your portfolio of hundreds of thousands of dollars. Fortunately, there are plenty of good, low-cost index funds to choose from.
     I generally recommend investing 70% of your stock portfolio in a domestic fund that mirrors the Wilshire 5000, and 30 percent in a broad international index like the MSCI EAFE Index. Once you’ve determined how much of your money to invest in bonds, invest these funds in a total bond-market index fund. For instance, if you were investing in Vanguard (a firm I admire but have no financial stake in), you could invest 70% of your stock funds in the Vanguard Total Stock Market Index Fund, the other 30% in the Vanguard Total International Index Fund, and your bond money into the Vanguard Total Bond Market Index Fund.
     Other investment companies that offer a wide selection of index funds are Dimensional Fund Advisers (DFA), Fidelity, T.Rowe Price, Charles Schwab, and Dreyfus.

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