“Planning for Retirement: 101”
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Do you remember that course in school?
Yeah, neither do I.
There are many things you learn in school, but learning how to plan for retirement isn’t usually one of them. With that in mind, below are five helpful things everybody ought to know about planning for retirement…
1. You’re never too young (or too old!) to start planning for retirement
It doesn’t matter if you’re a 22-year-old new graduate just starting your first full-time job or a 62-year-old business owner getting ready to sell your business and live off the proceeds.
It’s never too early or too late to start planning for retirement.
Obviously, planning for retirement will look vastly different depending on your age or stage of life, but the result is the same: if you fail to plan, you can plan to fail.
So start planning!
2. But the earlier you start planning for retirement, the easier it is to save
Let’s use two fictitious individuals as an example to illustrate this point:
A. Fast Freddy started saving $500/month at age 25 and didn’t save another penny from age 35 to age 65..
B. Slow Sam didn’t start saving until age 35, BUT he saved $1,000/month each and every month from age 35 to age 65.
Assuming they both earn 8% on their investments (after fees, compounded monthly) and assuming they are saving in a tax-deferred account like a 401(k), who do you think ended up with more money at age 65?
If you guessed Fast Freddy, then you understand the power of compound interest!
You see, even though Fast Freddy saved less overall ($60,000) compared to Slow Sam ($300,000), Fast Freddy’s money had more time to work for him and he ended up with just over a cool $1 million at age 65 compared to just over $950,000 that Slow Sam ended up with.
His savings earned interest, which earned interest, which earned interest…and so on.
Albert Einstein once said the power of compound interest is the eighth wonder of the world and now I’m sure you understand why!
3. Pay off debt BEFORE saving for retirement
Do you have a credit card, auto loan, student loan, or other form of high interest debt that you’re paying 5%, 10%, or more in interest?
If you answered, “yes,” then you’re probably wasting your time saving for retirement until you pay off that debt.
Why?
Well, if you’re earning 5% per year in interest from your retirement savings and you’re paying 15% interest on a credit card, I’m no rocket scientist, but 5% minus 15% is a NEGATIVE 10%.
Still don’t get it?
Imagine you’re on a sinking boat that’s taking on 200 gallons of water every minute. Should you abandon ship or should you take your little 5 gallon bucket and try to keep the water out?
I say call the Coast Guard, get your life jacket, and get outta there!
In this case, abandoning ship means paying off that high interest debt as quickly as possible before trying to “save the boat” (i.e. save for retirement).
The only exception to this rule is when your employer matches the amount you save in your retirement plan.
For example, let’s say your employer matches the amount of money you put into your 401(k), dollar for dollar, up to 3% of your annual pay. In that case, contribute 3% of your salary to get the match, then take any extra money you have each month and use it to pay off your debt.
It really is that simple.
4. Everyone’s out to get you (almost)
According to the U.S. Bureau of Labor and Statistics, there were 206,800 “Personal Financial Advisors” in the United States in 2010. Unfortunately, however, a large percentage of these so-called “financial advisors” are really just product salespeople in disguise.
So what’s someone who is planning for retirement supposed to do when they need advice?
Contact an independent, fee-only financial advisor, like myself, who pledges to act as a fiduciary (pronounced “fi-doo-shee-air-eee”) at all times.
A fiduciary is someone who acts on your behalf and does what is in your best interests.
This type of financial advisor pledges to do what’s best for you, the client, regardless of how it affects them or their compensation.
In addition, if they are paid on a “fee-only” basis, their compensation structure helps keep conflicts of interest to a minimum so you can rest easier knowing you’re getting the best advice for your situation, regardless of what product or service is recommended!
5. Traditional retirement is overrated
“Traditional retirement” in America typically means working a job you hate for 30-40 years, then calling it quits and playing golf or fishing each day for the last 20-30 years of your life.
I’m not saying those activities are bad in and of themselves, but whether you realize it or not, you were created to be productive!
Now, for most people, being productive at age 80 looks a lot different than being productive at age 40. At age 40, being productive usually means working full-time in a career you’re uniquely gifted or skilled at doing.
At age 80, however, being productive might mean volunteering at your church or a local non-profit, babysitting your grandchildren, or any number of other productive activities. I like to call this idea “re-hirement” instead of the traditional “retirement.”
Whatever you call it though, please don’t waste your life on trivial things after you “call it quits” at the office.
Life’s too short to spend the last 20-30 years of it chasing a little white ball around 4-5 hours every day.
Planning for Retirement Conclusion
Well, there you have it, five basics everybody ought to know about planning for retirement.
How about you? Are you in or nearing retirement and wondering if there’s anything else you need to know?
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