There is an urgency to planning for your retirement. Some choices can be postponed, while others will severely impact your financial freedom later in life.
I love math, especially story problems. One of my favorite goes like this: Tom is driving to a city that is 120 miles away. For the first 60 miles Tom averages 30 miles per hour. How fast must Tom drive the last 60 miles in order to average 60 miles per hour for the entire trip?
The answer is not 90 miles an hour. The answer is that it is impossible for Tom to average 60 miles per hour. Tom has used up two hours driving the first 60 miles and in order to average 60 miles an hour Tom must complete the remaining 60 miles instantly.
There are situations when you have fallen behind that it is too late to make up for lost time. Meeting your retirement goal is all about setting the right pace and taking the right road.
Retirement does not seem urgent. It is not a goal that will be solved today, this week, or even this month. But there is an urgency to long term planning.
Every six years you delay funding your retirement you cut in half your standard of living during retirement. Money makes money, and most of the assets you use to fund your retirement will come from compounded growth – not contributions.
If you fail to put your investments in the best investment vehicles, you could cut in half your standard of living during retirement. Select investments that are publicly traded with no hooks or penalties for selling. Avoid paying commissions and high expense ratios. They could ruin an otherwise adequate investment plan. Old 401(k)s from previous employers should be transferred into an IRA Rollover for more investment choices with fewer expenses. A, B, or C share mutual funds should be avoided.
Your current standard of living should be kept under control in order to provide automatic savings for your retirement fund. You should follow conservative assumptions in order to have a gradually rising standard of living during retirement. You should not keep too much money in cash, but invest for growth. You should invest much of your raises and most of any windfalls.
You should be smart about insurance and insure against catastrophic losses for which you cannot plan. You should be aware of the tax implications of financial decisions. You should understand the difference between “good” debt and “bad” debt. Therefore, you should use a mortgage appropriately.
You should guard your assets against inflation or the dropping value of the dollar. You should include stocks of the “value” and “small-cap” variety. You should limit your exposure to technology stocks. Be sure to include the healthcare sector. You should also invest in the world outside the US. You should balance bonds with hard asset inflation hedge stocks. And don’t tie up all your assets in real estate.
There will always be bubbles that are rippling through our economy such as technology stocks, fixed income securities, real estate, the US dollar and credit. While one category may do well this year, you should use all six-asset categories (short term money, US bonds, foreign bonds, US stocks, foreign stocks, and hard asset stocks). You will always need some growth, but you should reduce your risk gradually with age. You should avoid short-term timing of the markets in favor of diversifying for safety, and rebalancing your portfolio annually.
These prescriptions are urgent only because they should be accomplished in the next six months. Make sure that you take the time to get your family’s finances in order before it is too late or your retirement standard of living will suffer.
The original version of this article was published December 13, 2004 under the title “Retirement Wisdom Part 7 – Start Early.” Photo by Mantas Hesthaven on Unsplash