Gone are the days when employers took care of our retirement simply by enrolling us in a pension plan. Now the notion almost seems quaint. Today, we are on our own. And it can be a scary thought.
We may have what looks like a big balance in our IRA plan, or a large lump sum paid out when we leave work. But what do we do with this money? Can we generate income and make it last the rest of our lives?
Whatever your retirement goals, at least some of that money should be invested in the stock market. Despite its treacherous potholes, and despite all the hype about what's wrong with the system, over the last century, the stock market has been one of the few time-tested routes to financial security.
But as you go about picking stocks or researching mutual funds, or discussing a financial plan with your money advisor, remember to heed these five warnings.
1. Don't get scared ... out of investing because you think the stock market is rigged. Contrary to what many people believe, the equity markets have been democratized by discount brokers like Fidelity and Schwab, and by the explosion of financial information available in the press, on TV and the Internet. The stock market is relatively open and transparent, particularly when compared to debt markets which do not enjoy the same level of public scrutiny. It's not so easy to discover the price of a bond you might want to buy. But anyone can go to Yahoo or Google and instantly find out where a stock is selling.
2. Wall Street insiders ... purposely complicate financial products, even labeling them with misleading names to confuse the public as well as other financial professionals. Remember the credit default swap? It wasn't really a swap at all. It was an insurance policy. Insiders end up making a lot of money when customers don't understand what they are buying. So follow the advice of legendary investor Warren Buffett, who says you should only invest in companies when you know what they do and how they make money. If an investment story is too complicated, it's probably too complicated to be true.
3. If you think you can beat the market ... well, good luck with that! You're not the smartest person on Wall Street, and neither is your broker or financial advisor. Top players in the investment world work for big institutions and deal in hundreds of millions of dollars. The people who work for you are the ones who couldn't get a job where the real money is made. You can't outsmart the market – and neither can your stock broker -- so just be in the market, with a low-cost index mutual fund or exchange-traded fund.
4. People on Wall Street are not ... looking out for your best interests, they're looking out for their own best interests. (If it's any consolation, self-interest and sheer hubris are not exclusive to Wall Street. The politicians and bankers in Europe – or Detroit -- are just as self-interested and short-sighted as any shark on Wall Street.) This is another reason to stick with a low-cost mutual fund instead of taking a flier on a hot stock that someone richer than you may be trying to unload.
5. Investment experts rely on ... sophisticated statistical methods and financial models, and they have access to top leaders in the business world. But even they don't always know what's going on. If you're not old enough to recall the crash of 1987, surely you remember the flash crash of May 2010. Wall Street wizards enjoy all kinds of advantages that you don't have – but even they don't get it right all the time, because things in the real world don't always work out the way the analysts say it will.
As you go about investing your retirement savings, keep in mind that the stock market doesn't go up all the time. And it is always ready to take money from those bold and brash traders who, in the end, turn out to be suckers. But over time, the stock market does go up between 5 and 10 percent annually, year after year. So most of the time, it gives most of us a chance to produce some income for our retirement, and helps us keep up with inflation even after we no longer earn a paycheck.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.