Don’t let the market sway you off course

Saving adequately for your retirement is one of the most important things you will attempt to do in your working life. And it is one of the things few of us will get right. There is a lot stacked against us. It’s easy to postpone the decision to start saving. It’s difficult to stick to the right investment choices. And even if we start early and invest appropriately, it’s still not easy.

David Crosoer, a senior analyst at PPS Investments offers a few tips to take away and think about for 2009.

First, the math. Most of us won’t work for more than 40 years in our lifetime, but will be retired for at least 20. So every year you work you need to fund at least six months spending in retirement. That’s a tough ask.

It clearly helps if you start saving early. Any savings plan is a good start, but putting your savings under the mattress won’t fund your retirement, no matter how early you start. Instead, you are going to need to invest in assets whose growth will compound over time.

This is harder to do than you might at first think. We’d all like to hold assets whose prices don’t fluctuate wildly from month to month. But such assets generally do a pretty poor job at growing their earnings, and won’t be that helpful in funding our retirement. Assets with good earnings potential tend to have prices that fluctuate considerably on a monthly basis, and psychologically can be much more difficult to hold. But these tend to be the assets you should be buying in for your retirement.

Remember, you’re in this for the long haul.You’re holding these assets over a very long-term horizon, and you value them because of their anticipated earnings over your lifetime. You shouldn’t be too worried about the value the market places on your retirement assets, because the market value can fluctuate wildly from month to month, and is often driven by sentiment and the market’s short-term expectation of the earnings of these assets.

People should take advantage of the tax advantages that a retirement annuity structure offers in order to have a fighting chance to retire safely. Your salary will go further if you can make contributions with pre-tax income. There are also tax benefits within the product, and on retirement.

A lot has changed in the retirement annuity space in recent years to the advantage of investors. New generation retirement annuities combine the tax advantages of traditional annuities with investment flexibility and a competitively priced structure.For example, investors in the PPS Investments Personal Pension, a new generation retirement annuity, can stop or start contributions when it suits them, and use their profit share to offset the fees levied in the product.

The past year has been a volatile one in financial markets. This has generally given you an opportunity to purchase growth assets at more attractive prices. But try not to be too concerned about the market value of the assets you purchase. Since you’re making regular purchases of these assets over your working life you’ll sometimes buy them cheap and sometimes dear. Over time this should even itself out.

You also need not be too worried about the price of these assets as you near retirement if you plan to transfer these assets into a living annuity on retirement. Your living annuity portfolio should also be focused on growth assets, and in all likelihood will be quite similar to your pre-retirement portfolio.