Would you steal from yourself? Most people would answer no. But when you take money earmarked for retirement and use it now, that’s essentially what you’re doing. I believe you should only be guilty of a crime if you’re doing it knowingly… so I put together this quick explainer. Here’s how failing to prepare for retirement means you’re stealing from your future self, plus some tips on retirement readiness.
Do you know your number?
Many people don’t know how much money they need in their retirement account in order to retire. (A financial planner can help with this, as can a web calculator in a pinch.)
Even if you have a goal in mind, you might not know what that means in terms of monthly savings. You may have heard you should at least save enough to get the match on your company 401(k) or 403(b) plan. But is that actually enough?
And are the investments in your retirement account designed to get you a target return at an appropriate level of risk? If you haven’t selected your investments, you may be invested in a qualified default investment alternative (QDIA) where your investments are based on your projected retirement date. I find these accounts often miss the mark in terms of meeting client needs, since they only take age into account. QDIAs don’t think about how much you need to save. Plus, all investment professionals don’t agree on the risk level you should be taking to retirement. Ask your financial planner not just how much you need to have in order to retire with your desired income, but also how much you need to save each month to get there.
What goals do you have ahead of your retirement readiness?
Most people have financial goals they want to achieve well before retirement, such as buying a house or paying for college. So you may be more focused on saving for, or spending on, those more immediate goals. If so, that’s fine, but are you still planning for retirement at the same time? Or do you figure that you’ll just catch up on retirement readiness at some future date?
The problem with playing catchup is simple: time is money when it comes to retirement planning. When you start late, you lose the power of compounding interest. When you invest early, the returns you generate start to generate returns of their own and your money compounds. (A $10,000 investment that returns 7 percent gains $700. The next year, if the investment — now $10,700 — once again returns 7 percent, this time the returns total $749.)
Put another way: if you start saving early, you don’t have to put aside as much money since time is in your favor. That is the beauty of starting early and systematically investing in your 401(k) or 403(b). And while there are likely to be down years for your investments, a long time horizon means there’s time to make up for any volatility.
Retirement readiness and lifestyle spending
You can likely see now why it’s important to prioritize retirement even when you’re planning for other, more immediate goals. But knowing it’s important doesn’t mean it’s easy to find the money each month. Think about any lifestyle spending that you might be able to cut back on. Do you have expenses that you wouldn’t miss?
In my case, it was a two latte a day habit. I was single and enjoyed the trips to my favorite coffee shop. I enjoyed hearing them announcing my drink to the barista. Then I started noticing that I did not have as much money as I thought I should have in my checking account. I then started using one of those affinity cards were you load it up with cash. I chose the $50 denomination. It made me more aware of my spending, because I started to notice how frequently I had to reload. When I thought about it, I found that what I enjoyed more than the lattes was the experience of going to the coffee shop. So I stuck with my coffee habit but switched to a regular coffee in a smaller size.
Are you stealing from your retirement readiness?
Daniel Goldstein gave a Ted Talk where he discussed the struggle of saving money. It’s a classic battle between enjoying yourself now and enjoying yourself later. Most people don’t naturally want to save, they want to enjoy themselves. But future you is counting on present you to save. The problem is most of us don’t think about our future selves very often. So Goldstein and his collaborator, Al Herschefield, used software to age people, showing them what they’ll look like at 60, 70, and 80 years old.
This behavioral time machine went a step further and showed people their anticipated emotional reactions to different levels of retirement wealth. In one example, younger you gets happier and happier by consuming more today. But the older you becomes increasingly miserable due to lack of savings. Then the simulator slowly increases present-day savings to a moderate rate. And then it’s a high savings rate. The younger you is getting unhappy. But the older face is quite pleased with the decision.
Think about how you behave now, and what you might see in the face of older you in a simulator. Do you think you need to change your behavior?
Assessing your retirement readiness sooner rather than later
In order to know how truly happy or unhappy “future you” would be, it’s helpful to know what kind of income future you is expecting. Which takes us back to he first points we started with: how much money do you need in your account at retirement? A financial planner can help you come up with a target amount. Once you have that, it’s much easier to create a plan to hit that goal, making it easier for you to create a plan for present-day you that allows you to enjoy your life now while still planning for the future.
To learn more about how that works, contact us for a free consultation.