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Warren Buffett's 5 Lessons for Retirees

Tom Sightings

Last week Warren Buffett chaired the annual meeting for Berkshire Hathaway, a famously successful conglomerate of businesses and corporate interests based in Omaha, Neb. Buffett is a legendary investor who over the years has made billions of dollars for himself and his fellow investors. But even he is not perfect.

For example, he admitted that he drinks five Cokes a day. He owns a lot of shares of Coca-Cola, and so he is buying from himself, But the average health expert would be aghast if you told her you drink five Cokes a day. Yet there's nothing average about Warren Buffett. He's 83 years old and still going strong, despite the overdose of high fructose corn syrup he guzzles every day.

You may not want to take health advice from the Oracle of Omaha. But you know he's doing something right, certainly in business and probably in life as well. Here are a five lessons you might learn from Warren Buffett that are focused not on your health, but on your retirement savings:

1. Stay in the stock market. Buffett does not believe in investing in cash, currencies, gold or other commodities. He keeps enough cash on hand to meet his upcoming needs (in his case, something north of $10 billion!), but otherwise he recommends investing in productive assets like businesses and real estate. A business that can produce goods and services that people want, in an efficient manner, will continue to increase in value over time. So while today's dollar is worth barely 30 cents more compared to when we were kids, the Dow Jones average trades at over 20 times what it did in 1970.

2. Invest in low-cost index mutual funds. Buffett is famous for buying large amounts of stock in a few successful companies. He's a stock picker. So it might seem strange to draw this lesson from him. But Buffett emphasizes that selecting the right companies to invest in takes a lot of work and a lot of know-how. He has a knack for allocating capital, but most people don't. So instead of being an amateur in a professional's game, you should just be in the game with a mutual fund that does not whittle away your investment with high management fees and a lot of trading costs. This generally means a low-cost index mutual fund.

3. Check your emotions at the door. Buffett reminds us that the stock market jumps around as people get more or less excited. But regardless, the value of goods and services produced by American companies inexorably rises over time, so the value of those companies gradually increases. Don't get scared out of the market when things look bad, or jump in when things look rosy. We should not try to time the market, or worry about week to week fluctuations. Instead, Buffett advises us to be fearful when others are greedy and greedy when others are fearful.

4. Don't get your hopes up. On the other hand, don't ever expect the stock market to bail you out of short-term financial trouble. Over the long term the value of the stock market will go up, but there will be unpredictable fluctuations along the way. People trade stocks back and forth, sometimes with little regard for the actual value of a business. Some people will win at that game; others will lose. But in the end what investors get out of their investments corresponds to what the businesses earn in real profits that are either paid out in dividends or retained by the company to power future growth.

5. Leave some to your children and the rest to charity. Buffett has famously pledged most of his fortune to charity, the majority going to the Bill & Melinda Gates Foundation, which is focused on health and education. Buffett feels that while he has certain talents and has done a lot of hard work, much of the credit for his success goes to his good fortune in live in modern-day America with its thriving democracy and energetic capitalism. Besides, he avers, children don't necessarily deserve to gain from the fruits of their parents' labor, and it doesn't do them any good anyway. Or as he puts it, "The perfect amount to leave children is enough money so they would feel they could do anything, but not so much that they could do nothing."

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.