In traffic on Monday morning, or in the middle of a long, pointless meeting, many an American has thought, “I can’t wait to retire.”
Nearly everyone looks forward to retirement. So what are we all waiting for? Why aren’t we all retired?
One word: money.
Before we can retire, we must save up enough money to live comfortably for decades. It’s a challenging task, and many people struggle to save enough.
When saving for retirement, we face eight common roadblocks. By understanding these roadblocks, you can better overcome them and ensure you don’t wait longer than needed to retire.
#1: Taxes
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Taxes are unavoidable and necessary. They can also be difficult to understand, making them a major roadblock.
You need to pay your fair share of taxes, but you don’t want to overpay. When it comes to retirement, the primary decision you must make is whether you want to defer your taxes until retirement, or pay as you go.
As a general rule of thumb, if you expect to have a lower tax rate later in life, you should defer your taxes. If you expect your tax rate to be greater, then you should pay now.
#2: Not Saving Enough, Spending Too Much
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Parkinson’s Law states, “Work expands to fill the time available for its completion.” The financial translation: one’s expenses expand to consume all available income.
To save enough for retirement, you must break this law and drive a wedge between income and expenses.
In your working years, set a goal to save 10 to 20 percent of your income. You can start low and increase the percentage every year at annual salary increase time.
The earlier you start saving, the faster it will become a habit. Think of retirement savings as an expense, and automate these investments as much as possible.
#3: The Corrosive Effects of Inflation
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Even at modest rates, inflation destroys the purchasing power of the dollar over long periods of time.
Do you know anyone who paid more for their last car than their first house? That’s inflation.
Inflation is a problem because, in retirement, a portion of your income is often fixed—like income from pensions, bonds, or CDs. With inflation, this income essentially decreases over time.
For example, in a thirty-year retirement, if inflation runs at the recent five-year trendline of 1.86 percent, $1 the day you retire will be worth only $0.58 your last year of retirement.
#4: Taking Too Much Investment Risk
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Like it or not, modern American economic life makes investors out of most of us. If you want to save for retirement, you almost always need to invest, but if you have limited investing knowledge, it’s easy to accidentally take on too much risk.
People make three common mistakes: (1) speculating instead of investing, (2) failing to allocate investments over many asset classes (bonds, stocks, etc.), and (3) failing to diversify investments within asset classes (multiple stocks).
To avoid taking on too much risk, don’t chase get-rich-quick-schemes, and be sure to diversify, choosing different investments among multiple asset classes.
#5: Not Taking Enough Investment Risk
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You don’t want to take on too much investment risk, but taking on too little is also a mistake. If you don’t take on some investment risk, you won’t earn a high enough return to beat inflation.
Playing it too safe guarantees one thing: you’ll lose money safely. If people define safety as something that can’t lose value, they limit their investment options to government bonds, CDs, money markets, and fixed annuities.
These play important roles in most financial plans, but when they play the dominant role, the actual risk is that real, after-tax returns will lag behind inflation.
#6: The Three D’s: Disability, Death, and Divorce
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Life brings both unexpected sorrows as well as its share of joys. If you plan only for the best-case scenario, you will be unprepared when sorrows hit.
As revealed at the 2003 Fifth Annual Joint Conference on Retirement Research Consortium, one in six Americans in the final stretch of work, those ages 51 to 61, saw their retirement plans disrupted by a disability, divorce, or death of a spouse.
Obviously, we hope these things don’t happen, but we need to have plans in place for how we or our loved ones will live if faced with disability, divorce, or death.
#7: Procrastination and Delay
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The sooner you start investing, the better.
Consider this example. At 22, Sally starts investing $200 a month into her 401(k), earning an average of 10 percent annually, which she reinvests. She invests for ten years (total of $24,000). At retirement, she has $1.2 million.
Sue starts investing at 32, also $200 a month, compounding at 10 percent annually. She invests until 67 (total of $88,000), but she has only $685,000 at retirement!
The best time for you to get started might have been a decade back. But the next best time is today.
#8: Failing to Plan
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The biggest roadblock is simply a failure to plan.
According to the 2003 Employee Benefit Research Institute Retirement Confidence Survey, Americans spend more time planning for vacations than planning for retirement!
Don’t rely on rules of thumb, such as, “You need $1 million in your 401(k),” “You will need only 70 percent of your income in retirement,” “You won’t need life insurance after you retire.” You are unique. Your situation is unique. The price of failure is too high.
You need to determine what your ideal retirement is, and then create a plan to get there.
This article was adapted from the book, Keep It Simple, Make It Big, written by Michael Lynch.
Michael Lynch is a CERTIFIED FINANCIAL PLANNERTM professional with nearly twenty years of experience working with American families to craft plans that fund their dreams, educate their children, and finance their retirement.
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC. Member SIPC. 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000.
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Michael Lynch is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202210-272637