Retirement-a nebulous concept that requires serious thought
For the ‘baby-boom’ generation, retirement is no longer a vague concept but a pressing reality. For generation Xer’s, retirement is a consideration, but not among the top-five items on their to-do list. If gen X knew what the baby-boomers are learning, retirement would very well top their list.
Retirement can and should be the most enjoyable time of life. Just think, you can do what you really want to do. You can travel and see all those places you always wanted too. You can take your hobby to an art form. You can sleep in and stay up late or get up early and watch the sun rise while all the working stiffs sit in traffic. It can be a period of freedom and enjoyment. All this can be the result of planning and strategy.
When I was a retirement plan specialist and advised my clients on their retirement planning, I put the realities of retirement in stark terms. I told my clients that the reality of retirement is that there will be two classes of people; the haves and have-nots. It sounds depressing and even cruel to characterize it in such terms, but let’s look at the facts.
Most financial advisors agree that a retired person will need about 70% of their pre-retirement income to cover living expenses in retirement. It is not beyond the pale that a new retiree will need income for 30 or more years. Life expectancies have increased over the years and retirement planning has had to adjust for that fact. Employer retirement plans and IRA’s make saving for retirement easier, offering tax deferral during the accumulation years or tax-free income during the payout phase. This depends on what course you choose.
While inflation has been kept in check in recent years, there is no guarantee that it will continue that way in perpetuity. For this reason, a person projecting their retirement needs should factor in inflation as a potential reality in the future. Likewise, tax rates are a real consideration. While tax rates have been reduced considerably since the seventies, the reality is that tax rates could rise once again in the future. Both inflation and taxation have the ability to reduce a retirement nest egg considerably.
Let’s step back for a moment before we become immersed in the accounting and economics of retirement planning. Yes, retirement planning is all about the numbers. There is just no way around that fact, and if scratching a bunch of numbers out on paper makes you woozy, then you have to consider a few facts. Remember I mentioned that there will be people who will be the have-nots when they retire? There is only one primary difference between them and the folks who are the ‘haves.’ It’s all about planning.
I have a good friend who just recently turned 40. Dan is on track to retire early. His wife, who is a year younger than him, is already retired. They are not rich people, but very middle class. Dan lost both of his parents when he was still fairly young and grew up lower-middle class. At some point in his life, he learned to set goals and plan and stick to the plan with intense purpose. He believed in some basic principles; save money like your life depended on it, invest wisely with long-term goals, minimize current expenditures and pay off your mortgage early if you are a home-owner.
Watching my friend over the years has been a real pleasure. When I attended his 40th birthday, his wife and he proudly told me that they had paid off their house and his wife had already retired. They have two young daughters, so the kids get to enjoy some quality time with their mom. My friend informed me that the new sectional sofa and entertainment center in the living room were a result of overtime. A portion of his regular pay continued to go towards savings and investments as it always had.
Most likely, my friend Dan will be in the ‘have’ group when he retires at fifty-five. Chances are that he will have investments and savings in the seven figure range and will pursue his dreams of a Harley, putting the kids through college and travel when he hits retirement. His wife and he both followed the strategy that they had set for themselves many years ago. As two middle-class people with middle-class salaries, they knew that planning and adherence to planning would be the only way they could achieve their dreams and goals.
A plan is useless if there is no action. That is something that people like Dan understand and practice. A plan is only a plan unless the plan is put into action. It is the action phase that results in goal acheivement and dreams coming true. The plan is only the roadmap. Someone once said that ‘the genius in goal setting is in the starting.’ Like that old Chinese saying about ‘a journey of a thousand miles begins with one step,’ goals are only met when you begin working the plan. The sooner you begin working your retirement plan, the more likely you will be to see happy days in your future.
Now, let’s get back to some of the basics. Retirement planning is all about setting goals and deciding how to achieve them. It is possible to do this on your own, but like most important choices in life, professional guidance is in the cards. If you have a complex plumbing problem or your car stops running, you contact a plumber or auto technician. Retirement planning is no exception. It can be a complex puzzle and you need someone who knows where the pieces go.
Most of what my friend Dan learned on his own apply to most people as a general starting point. If you have never been a good saver, now is the time to start. That money spent at the department store on one more blouse or one more shirt or one more pair of shoes could be put towards your happiness in the future. Does that sound silly? Actually, that is the principle that separates many of the haves from the have-nots in retirement. It sounds like a no-brainer, but why do so many people push it off until tomorrow? Tomorrow never comes. Disciplined saving is the basis for accumulating wealth. It requires setting aside a certain amount of income every month with part of that money going towards investments and part going into savings.
Investing is what will allow my friend Dan to retire early and it is investing that allows his wife to spend time with their daughters. Investing is not gambling and it is not speculation. Investing is finding mutual funds or stocks or bonds to hold for the long term. It is all about taking a cautious, methodical approach towards keeping risk in check while maximizing returns. When the economy takes a turn for the worse, smart investing seeks to reduce losses. Over the long haul, this approach is instrumental in allowing regular people to meet their retirement goals. It’s not magic; it’s about using a host of strategies that are used every day. Again, this is where a professional comes in handy.
Financial advisors take into consideration many factors when building a retirement plan roadmap. They try to ascertain how much risk you can tolerate. They don’t want you jumping off a bridge if the market goes into a sharp downturn, so they take time to gauge your risk tolerance. They often use a method called asset allocation to create a portfolio of investments that will participate in the financial markets over time, while keeping in mind your ability to handle change. This is all done with the help of computers, financial theory and a historical perspective.
If you remember back to the first paragraph, I said that Gen-xer’s needed to set retirement goals as a higher priority on their goal list. My friend Dan, ironically, is a gen-exer himself. How did he achieve what has eluded so many of his peers and even thousands of baby-boomers? He has a few advantages for sure. He has worked in financial services for many years and when he finished his service with the Navy, he took advantage of the GI bill and earned an MBA. He has learned a few things during his college and working years that have been of great benefit. Instead of putting his studies aside, he has applied them to his and his family’s lives for the good. He is the exception rather than the rule, and planning and action have resulted in a relaxed demeanor for Dan; he knows that his action plan is succeeding.
As you may realize now, retirement planning and retirement success are not a result of happenstance. Sitting down with a pro and figuring out what steps to take are unavoidable. You just can’t find retirement happiness without a roadmap and guide.
Your next step is taking action; without it, nothing else matters. Remember, there will be those who are the haves and those who will be the have-nots during retirement. Don’t put it off another day, it’s your future and you hold the strings in your hand today.
It is the author’s intention to provide general information only. For specific tax, legal or investment information about achieving retirement goals, visit your CPA, attorney or financial advisor. Investments carry with them varying degrees of risk, so read a prospectus before investing. Remember that past results are no guarantee of future results.
Copyright 2007 K Richard Douglas
