retirement

8 rules of thumb on saving and retirement

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The rule: Over time, a diversified domestic stock portfolio will return an average of 10 percent per year.

Why it works: Some investors have a tendency to unload all their stocks when investing gets tough. Knowing that the returns of the stock market even out over time can help people stay in the market long enough to recover some of their losses rather than selling at the point of maximum discomfort, Finke says.

Grain of salt: To start with, there's the famous disclaimer you hear often in advertising for investment houses: "Past performance is no indication of future returns."

Given that 10 percent figure appears to be based on the Ibbotson Associates analysis of historical returns since 1926, when sustained economic growth reached levels rarely seen in human history, investors should take it with a grain of salt, says Finke.

The danger in the 10 percent assumption is that it could lead people to undershoot how much they'll actually need for retirement, says Finke. He says a better assumption might be stock market gains will be 3 percent above the rate of inflation, rising up and down as inflation increases and decreases.


 

 

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