It seems that before we start working for a living, all we can think about is getting a good job and earning lots of money. I am pretty sure that the vast majority of us think exactly like that when we get to a certain age and that’s probably by the time we near the end of high school or college. After all, we know we are going to be out on our own soon and we need a job. But then a funny thing happens.
Almost as soon as we start that “first great job”, some papers are shoved in front of our faces and one of them is all about benefits and retirement plans. Retirement planning? I mean, holy crap, I just started working and now I have to think and decide about retirement planning?
Yes, that’s all true and do you want to know why? It’s because retirement is coming…just like the grim reaper is coming one day. And…retirement can be scarier than Halloween if you don’t utilize retirement planning basics!
From the Beginning, You Are Looking Forward to Retirement
It is really weird when you stop and think about it. You bust your hump to find a great job and you are all hyped up about landing it and becoming a huge success and earning big bucks. Even if you didn’t land in the exact spot you always dreamed of, you aren’t going to just stay put, are you? You’re going to keep pushing and looking to move up or out to a better job whenever you can. That’s the American way and dream, isn’t it?
But isn’t it also true that you daydream about not having to work so hard or even at all, someday? Yes, admit it. You started way back when thinking that you may love all the money, power, and prestige that a good job brings, but you’d rather be sitting under a palm tree someplace warm and sipping a cool drink, wouldn’t you?
And I’m not talking just a vacation either. I’m talking freedom and free time to just chill, relax, and “retire”, like never having to fight the clock, the traffic, and the B.S. that a job entails. We yearn for what we hope are the days when we can do anything we want! That’s what we think retirement is really about and boy oh boy we may be in for a real shock-a-roo here.
Did You Plan Well, or Even Plan At All?
I wish I had a nickel for every time I have told someone that the time to make your fundamental plans about retirement begins on day one of your first job. Truth is, I’d have probably almost paid for my own retirement if I had, but so many people just ignore that really good piece of advice. Why is that you might ask? Well, it’s almost so obvious you might even just overlook it.
The reason is that retirement is so far off in the future that it feels like it may never actually arrive! When you are twentysomething and you say the word retirement, you immediately think about your grandfather and that’s not you, so you will think about that “tommorow”, sort of the way Scarlett O’Hara talks about life in the great novel “Gone with the Wind”.
There are some exceptions to this, of course, and those who want to retire early (the F.I.R.E. devotees) are definitely not the Scarlett types and they do make some sort of a plan and think about it. It may not be your grandfathers’ “retirement”, but it’s a departure from the 20th century view of 50 years of work and then the gold watch and off you go, isn’t it?
But even they may be making plans that are flawed and will lead them into scary territory ahead. One of the real frightening thoughts about early retirement and not getting a regular paycheck is quite simple: you will live quite possibly a very long time in “retirement mode” without the regular stream of dependable income. If you actually do retire at say, age 50 rather than 65 or 67, you’re tacking on another 15 to 30 years of retirement time and brother, you better have planned pretty well for it or you’re in for a visit from Freddy Krueger or Michael Myers!
6 Retirement Planning Basics That Can Help Your Financial Future
1. Social Security alone isn’t going to do it for you
And you won’t even see it until you’re at least age 62! Unless you are disabled, you can’t get Social Security benefits at early retirement so even more important than any other time, early retirement means you must have alternate streams of income from investments, savings, side hustles, and/or any other legal way to get money. Mo’ Money isn’t just the name of an old movie, it’s what you need to concern yourself about especially when you are staring at 30-50 years of retirement!
2. Your “wealth” is not a dollar amount
Look at your wealth in terms of time. Your money has to be translated into “years” in order to determine your wealth, not the other way around. If you have saved a million bucks for retirement (a number often thrown around that seems to be a real security blanket goal for many), that million buys a certain number of years of retirement. But that number of years depends on what you spend and will spend down the line every year!
Putting it simply, if you spend $50,000 a year, a million bucks may get you 20 years in retirement. That doesn’t take into consideration things like inflation and a few other variables like say, health concerns and costs that almost every person can count on if they live long enough. I spend almost $15,000 a year for my wife and me on health related costs right now. Imagine what that number might be 30 years from now. You will be dealing with it almost 100% for sure if you are over 40 now.
3. Cutting expenses extends your retirement time and wealth big time
That million dollar savings nest egg where you spend $50,000 a year plans for 20 years when it could buy you 25, 30, 35 even 40 or 50 years! How? Simply by cutting your expenses from 50 to 45, 40 or even $25,000 a year. It’s not a radical concept. It’s called downsizing and if you retire, it’s highly recommended for almost everyone. If your name is Bill Gates, I’ll give you a hall pass on this one.
Warning: if you retire “early” you may not be able to spend the same way you did when you worked at your job, so you better have alternate streams of income to even consider it!
4. Forget this Ben Franklin “code”: A penny saved is NOT a penny earned
When you earn money, any money, it will get partially eaten up by some little mice along the way. Things like taxes and inflation are two of the biggies. So if you earn an extra $10,000 dollars you can bet that 10-20% of it you may never see. Conversely, that’s not true when you “save” money by cutting your expenses. You actually get to keep that extra money and are able to use it later on for spending. That $10,000 saved compared to $10,000 earned is not the same. Saved money is more valuable than earned money and is NOT the same as a penny earned. It’s better! It translates into more years of wealth.
5. Waiting is the hardest part, but it is generally better
In order to maximize your Social Security benefits, you need to wait. Take benefits at 62 and you will be getting a lot less every year for the rest of your life than if you had waited even a little bit. If you take it at 66 rather than waiting until age 70 (after that it doesn’t make it better for you to wait), you can increase your monthly check by 32%! More good news, waiting for your Social Security is like the perfect form of an annuity. It’s adjusted for inflation every year (COLA), it has a beneficiary provision, and it is guaranteed by the U.S. government!
6. Four percent or not four percent…that is the question
The best known approach to using your retirement funds wisely has been the old 4% rule. That rule says to take 4% of the funds you have saved and use it each year as part of your mix of income to supplement your retirement costs and you’ll be just fine. Four percent will make your funds last about 25 years.
That’s a good guideline, but it really depends on what your “guaranteed” income actually is (like Social Security or pensions and annuities) and what your discretionary spending will be (after you downsize). When your income is dependent on stocks and bonds and other investments, the economy can and will affect your income and if you spend too much, you will burn through your retirement savings faster than your plan. So, the 4% rule comes with a warning label to use good judgement before you make a mistake. Maybe 3% or 0% some years will be your best decision?
Retirement planning basics are actually hard work. It’s the last part of your financial planning, but it’s probably the most important part since your ability to earn and change your results are limited by health, time, and opportunity if you ignore it early on and wait until the end to think about it. Scarlett O’Hara may have been a real beauty, but she wasn’t very good at retirement planning, was she?
Are you thinking about retirement planning basics? Are you doing it way in advance so you don’t have to be afraid of the scary stuff that can happen? How are you planning it and what are you doing to adjust to it as you go along? Are you a F.I.R.E. devotee or are you waiting and have a plan to do retirement the traditional way?