Saving for and living in retirement

Tips for a new investor and a new retiree.

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Rebecca Katz: We have a great question from Ryan who’s in Provo, Utah. Ryan, thank you for this question. He says, “I’m just someone starting my investing journey. I have a small paycheck. What tips do you have for me? And I’m trying to save about 20% of my salary.” I was nothing like Ryan when I first started out, so what tips do we have for him? Sounds like he’s doing a great job.

Tim Buckley: Yes, first congratulations to Ryan for the 20%. That’s a great number to start with. I’d say, Ryan, first take advantage of anything the government gives you. They give you tax-deferred vehicles; max them out. IRAs, 401(k)s, max out those tax-deferred vehicles. You don’t always often get a break from the government, so take advantage of it.

The second thing, I think Greg, you’d agree with, is keep it simple. If you’re starting out investing, there are turnkey portfolios, balance funds. You could start looking at target retirement funds, and they tend to be more aggressive when you’re younger; and they get more conservative when you’re older. It’s kind of a one stop, put the money in, it’s diversified—diversified globally, diversified from bond stocks, everything we talked about.

Then let me give you a third piece that you may not expect, and it’s advice that was given to me by our former Chairman and CEO, Jack Brennan. And he told me when I was younger “to pay myself first.” And what he meant by that was anytime that I received a raise, rather than go out and spend it and have it end up in some retailer’s account, put it in my account first.

Rebecca Katz: Right.

Tim Buckley: And put it away first. If you’re happy with where your life already was, then put it away. You know, if you didn’t get into debt, you can put it away; and you will never regret that. So that’s the third piece of advice I’d give.

Rebecca Katz: Okay, great. Well, congratulations again. That’s really, 20% is wonderful. You’ll be well on your way.

Let’s shift to the other spectrum. So for you, Greg, Chris in Hartland, Wisconsin, says, “Are there specific risks for a new retiree in 2018?” I mean that must be hard, thinking “Will the market decline? I just went into retirement.” What should Chris think about?

Greg Davis: Yes, for Chris I would say, again, focus on the balance and diversification. And given this environment that we’ve been in, with such a low yield for such a long period of time, a lot of investors have moved from short-dated bond funds, more high-quality bond funds into high-yield or high dividend-paying stocks, REITs, as another example to try to stretch for additional yield.

I would just be very cautious to make sure that Chris is taking a real hard look at his asset allocation and that he hasn’t moved too much over to investments that are trying to produce a higher yield because that could basically cause your portfolio to be off balance and not give you the type of diversification that you would normally have with a good stock and equity mix.

But, again, you know, in this type of environment where we’re expecting, again, global equities, U.S. equities, and even bonds to have lower returns than they have historically, you know, it’s going to be somewhat of a challenging environment.

Rebecca Katz: And I guess with someone newer, they can save more. With a retiree. They just have to look at spending as well and maybe spend less.

Greg Davis: Yes, that’s exactly it.

Important information

All investing is subject to risk, including possible loss of principal.

Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.  High-yield bonds generally have medium- and lower-range credit quality ratings and are therefore subject to a higher level of credit risk than bonds with higher credit quality ratings.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target date funds is not guaranteed at any time, including on or after the target date.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

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