Commentary: Educated Investor - Spectator or player?

It has always bemused me when I watched a college basketball or football game and witnessed all the students in the stands holding up their index fingers and proclaiming they are No. 1.

Some even go as far as to purchase an oversized sponge-like hand that has an extended finger reaching 18 inches in the air to magnify their proclamation of being No. 1.

But in reality, isn't it the members of the basketball or football team that are the true champions? Aren't these the individuals that have worked so hard day in and day out to achieve their No. 1 status? Aren't these the ones that sacrificed in order to obtain this recognition?

Of course they are! They are the players while the students are only the spectators.

Recently I was conducting a 401(k) educational seminar when one of the employees asked me the following question. How much of my gross pay should I contribute to my 401(k) plan?

I replied that if an individual saves 10 percent of their gross income they should be independently wealthy by the time they reach age 65 which has been the typical retirement age used in the past.

When I used the term independently wealthy, I meant a person is able to maintain the lifestyle they were accustomed to prior to attaining age 65.

You will be able to remain in your same neighborhood if you so desire, and at the same time you will be able to afford your normal expenditures without financial burden. So you should be able to maintain your lifestyle, if you save 10 percent of your gross income during your working years.

But you really do need to tweak the 10 percent retirement-savings formula if you envision your retirement as an active one.

With daily advancements in medicine, which will most likely give rise to a better quality of like, you will most likely spend more money during your golden years just because you will be able to do more physical activities than past generations.

In addition, our longevity is increasing all the time.

When you add an improved quality of life with longer life spans together it will most likely give rise to needing more monies during your retirement in order to maximize your happiness.

Simply put, you need to decide whether you will be like the fans in the stands at a college ballgame and be a spectator or will you be on the field and be a player. Being a player in retirement will cost more then being a spectator on the sidelines.

How do you decide which lifestyle will fit you best?

Look at your current life behavior. Are you a couch potato or do you like to get involved? It is a whole lot cheaper watching a golf tournament than paying $75 to play a round at your local course.

Do you cook at home or do you dine out two times a week?

Once again, meatloaf and potatoes at home is less expensive than lobster and steak out on the town.

Do you watch the National Geographic specials on television or do you travel to Africa to see the country first hand? These are the types of questions you need to ask yourself in order to properly plan for retirement.

If you decide you are a player then your need to save more money for your retirement years than a spectator.

Unfortunately you've got to pay to play. No free lunches during your twilight years, except for your 10 percent discount at the fast- food outlets.

One way to increase your retirement nest egg is to invest a little more aggressively during your working years. One suggestion is to investigate small cap value mutual funds.

Over the years small cap value tends to outperform other sectors such as large cap growth. The problem with small cap value is that these mutual funds tend to be more volatile.

In other words, the lows tend to be lower than the other sectors yet the highs tend to be higher. If you invest early in age you should have enough time to ride out these deviations. So the younger you are the more aggressive you should be, as time will heal.

If you are married and only one spouse is working, depending on your stage in life, perhaps the non-working spouse could gain part- or full-time employment and save their income. If you are lucky and the spouse's job offers a 401(k) plan, you could invest up to $13,000 in the plan per year.

If you are older than 50 you can even take advantage of a catch- up provision and have another $3,000 withheld from your pay. Do this for several years and let compounding interest do its thing and your retirement years will be better than you ever imagined.

If you are 50 years of age and you place the maximum $16,000 into a 401(k) plan for five years and then earn 10 percent for the next 10 years or age 65, your plan would be worth more than $200,000. I believe that amount can help everyone become a player.

So the key is to determine if you want to be a spectator or player during your retirement years. If you want to be a player, start planning now. Decide what you need to do in order to have an active retirement.

If you need more money at retirement than you are currently on track to achieve, make some changes. Be more aggressive in your investing if you are in your younger years.

If you are in your later working years perhaps you need to increase your revenue stream by perhaps a non-working spouse entering the work force or the working spouse taking on a part-time job.

Sound harsh?

Not really. If you want to play you need to pay.

Do you think the college athletes that got to be No. 1 got there easily?

Absolutely not! They have been playing and studying the sport since they were kids. They also went to school at the same time. They paid a price for success.

The same goes for retirement. If you want to be a player you need to pay a price. And being a player will help keep you young.

David R. Clogg, ChFC is an account executive at Chapin, Davis. He can be reached at 410-435-3200 or visit his Web site at www.theeducatedinvestor.info.

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