We often dream about retirement, the day when we can finally hang up our aprons, put the tools on the shelf, and turn off the lights on our way out. All we have to do now is press the retirement income button and we are all set. Unfortunately, as many of us are finding out, it's not that easy. As retirement draws near, many of us are discovering that we are just not ready. The closer retirement gets, the more expensive it looks. Without a corporate pension to help, it can look quite scary. How does something like this happen?
The three biggest mistakes people make when planning for retirement are:
1. We fail to appreciate the true cost of retirement which causes us to dedicate too little of our current wages towards retirement savings. For most of us, retirement will be the most expensive thing we ever buy. Most people fail to realize how expensive it is until they run the numbers. By the time we actually do run the numbers, in many cases, it's too late. We didn't save enough in the early years and now cannot afford to make up the difference by saving more in the later years. Remedy? We may have to work longer and/or spend less.
2. We make overly conservative investment choices early in life which provides returns that are too low to build sufficient wealth by retirement. Oftentimes, a 25 year old who is actually saving enough for retirement will, by default, choose the money market or stable value fund as his primary investment vehicle. The 25 year old is investing like a 65 year old. A 25 year old should seize the opportunity to invest in higher return, higher volatility asset classes like stocks.
3. We fail to start saving early enough. Therefore, time is not working for us as it should. By letting years go by without saving, we miss out on the ability of time to leverage our savings. I call it money making money. Time and money are a relentless force just like water flowing through the Grand Canyon. This relentless force can pay for the bulk of your retirement if you start saving and investing early enough. For example, suppose a 25 year old will need $1 million at retirement. If she saves $3,574 per year until age 65 and gets an average return of 8% along the way, she will likely have $1 million. However, she only contributed $143,000 of her own money. The other $857,000 came from compounding which is, money making money over time. That's how wealth is built.
Failure to adequately understand and manage the process of building wealth for retirement is a crisis in the making. In order to build the wealth you will need for retirement you must, run the numbers, save accordingly, invest appropriately for your age, and most important, get started today.
I specialize in both the art and science of building wealth for retirement. As with any journey, building wealth for retirement begins with a workable plan and then, disciplined execution over time.
Keith Donnell is a Certified Financial Planner Professional with 30 years of experience helping people effectively build wealth for retirement.