Retirement in an aging population

Retirement planning is an important topic in personal finance. The purpose of retirement planning is to ensure a person have sufficient living incomes after leaving the work force. Recent reports in the Economist showed that the world's population is getting older. This is going to complicate retirement planning for the individuals and the governments.

Key facts reported in the articles are as the follows. First, people will live longer in coming decades. The average life expectancy for people in the developed world is 78. This number is expected to rise. Second, in both developed and developing countries, we're seeing a trend of birth rate decrease (i.e., less babies are born into new families). Third, an aging population (more old folks and less young kids) will cause problems for the existing pension systems (e.g., the Social Security system in the US). There will be less young workers to pay taxes to support an increasing number of retirees.

So as an individual what can we do to ensure that we will have sufficient incomes to retire? I think there are only two reasonable answers: (1) prepare to stay in the work force longer, and (2) maintain a sound retirement investment portfolio for living into an older age (say 85-90).

• Ageing in the rich world
• A shortage of babies
• Living longer
• Selling to older people
• Targeting pensions
• Work till you drop
• China’s ageing predicament
• Coping with global greying

On the Basics of Retirment Investment

Why should we invest? For example, why is it such a good idea to buy a house, or put away money for retirement savings? The simple answer is that in order to secure our financial future, we must learn how to make money from money. For example, use the money that we've saved from paychecks to make more money. This is the basic of investment.

Life Without 401(k)

Not all companies offer 401(k) plan. So how should you save for retirement if your company doesn't offer 401(k)? Here is some tips from Marc Hogan at Business Week.

1. Open an individual IRA account


2. Explore other saving options (e.g., one-person 401(k) or pension plan)


3. Make saving and investment automatic


4. Invest index funds


5. Save at least 10% of your income

Some of my thinkings are as the follows.

My Retirement Investment Strategy

Plan for retirement is a complex task. During the weekend, I was chatting with friends about retirement planning and investment. In the discussion, I was reminded again about some fundamental questions that are related to retirement investment strategy.

Let me try to summarize my current strategy.

Save as much as I can in 401K and IRA accounts.

Build a portfolio that uses an S&P 500 index fund as the core. Without talking about anything else, the basic objective is to beat the market (i.e., S&P 500). The simplest strategy is to invest in an index fund that tracks the movement of the broad market. Because the market tends goes north in a long term, buying into an index fund pretty much guarantees a positive outcome. In addition, historically majority of the mutual funds can't beat a fund that simply tracks the market index (e.g., Vanguard 500 Index Fund). Therefore, it's wise to put money in an index fund in case my other investment selections go bad.

Exploit diversification and asset allocation in the rest of the portfolio. Diversification can be achieved by investing in mutual funds. When comes to asset allocation, I make sure that my assets are not invested in a narrow group of mutual funds. Currently I own a mix bag of large-cap, mid-cap, foreign stocks and specialties (metals and health care). While the underlying funds of these categorizes may change, but the asset allocation of the portfolio probably won't change much.

I track world economy news and developments. Some basic economic knowledge can be helpful in building my portfolio.