June 5, 2008

Saving for retirement: One investor's success story

At age 59, José is living a retirement beyond his expectations.

His lifestyle isn't lavish, but his time is his own. He'll have paid off his home mortgage in a few years. And with savings in excess of $650,000, he feels secure financially. "I wake up in the morning and have to kick myself to see if it's me," the New Mexico native said.

How did he do it? Largely through diligent saving and disciplined investing in his 401(k) account.

A modest beginning and a desire to learn

José (not his real name) began saving through his employer's retirement plan when he was in his mid-30s. "Back then, I didn't really know what a 401(k) was," he said. He learned the basics from an on-site presentation by Vanguard, which administered the plan.

He started small, contributing 1% of his salary. "$15 every two weeks," he recalled. "Then every time I got a raise or bonus, I added it." With additional income coming from two separate pensions as a result of military service, the computer systems specialist was ultimately able to sock away nearly 20% of his salary each year. Employer contributions to his account added even more.

José began with just one stock fund, a riskier option than other single-fund alternatives, such as balanced funds. But he felt comfortable with his choice, given his lengthy time horizon and understanding of risk—a perspective that was quickly tested on Monday, October 19, 1987, when the stock market plummeted 23%.

"I thought, 'Holy smokes, I'm dead,'" he recalled. But he stayed the course and in two years saw his savings surpass their pre-"Black Monday" levels. "That showed me the importance of investing for the long run," he said.

He continued to educate himself about investing, through books and Vanguard.com. As his assets grew, he diversified his portfolio with bond funds and added broad-market index funds. He kept a 70%/30% stock/bond allocation into his early 50s.

"Soul-searching and number-crunching"

Then, the unexpected happened: José was laid off. "I was 54 and not thinking about retiring," he said. "I did a lot of soul-searching and number-crunching."

With his modest lifestyle, military pension income, and the cushion of his sizable retirement savings, José realized that he could, in fact, retire. He recently ran his plan by Vanguard® Financial Planning Services to make sure he was on solid footing and to get advice on paring back his portfolio risk.

"We helped José get to a 60%/40% stock/bond mix that he was more comfortable with and simplified the portfolio to four funds, which lowered its overall expense ratio and made it easier for him to manage," said Michele Mazzerle, a CFP® professional at Vanguard. "Given his income, living expenses, and savings, he's in good shape."

José could begin tapping his 401(k) this year, but he doesn't plan to. He is extremely satisfied with how his savings have added up. "I thought it was going to be a great big deal to save, but it really wasn't," he said. "To be where I am today is really something."

Notes

• Mutual funds are subject to market risk. Investments in bond funds are subject to interest rate, credit, and inflation risk.
• Diversification does not ensure a profit or protect against a loss in a declining market.
• When taking withdrawals from a 401(k) before age 59½, you may have to pay ordinary income tax plus a 10% federal penalty tax.
• Vanguard Financial Planning Services are provided by Vanguard Advisers, Inc., a registered investment advisor.