• Philip Stratton

LESSON 9: Is Retirement Preparation A Top Priority For You?

What are your thoughts and plans regarding the funds that will be needed to sustain you throughout your retirement years? Is saving/investing for your retirement one of your top priorities? Do you find yourself replying with comments like:

  • I plan to never retire, I'll keep working until I die.

  • I can't afford to put money towards retirement right now, but I will when I am earning more.

  • I have plenty of time before I have to worry about retirement. That's a future problem, not a today problem. YOLO!!

  • I wish to be viewed as a saint and am willing to sacrifice my future happiness in order to spend money on things my kids/grandkids want. Their [cars/college/cellphones/wedding/fashion/etc.] costs are more than they can afford and I want to show them how much I love them by providing these for them.

I PLAN TO NEVER RETIRE

This is a growing sentiment amongst today's working class. Many people feel so far behind financially that they don't believe it will ever be possible to retire. However health, family, and economic factors can derail our plans. Having a retirement fund can insure you against unforeseen obstacles. If you are fortunate enough to continue working as long as you wish, these extra funds can be used for vacations, luxury purchases, or passed along as gifts to your loved ones.

I CAN'T AFFORD TO PUT MONEY TOWARDS RETIREMENT

In reality, you can't afford NOT to put money towards retirement. Build the habit now to contribute something, even if it is only 1% of your income. Slowly increase the amount as you receive pay increases and promotions. Evaluate how much you are contributing every 6 months. The ultimate retirement contribution goal is 10-15% of your income.


If your employer offers a 401(k) or 403(b) retirement plan with a matching option, taking advantage of the matching offer should be considered at a minimum. What exactly is a matching option? The amounts differs by employer, but it is an incentive received when you to invest part of your salary into your 401(k)/403(b) retirement account and your employer, in turn, also contributes based on your investment. It might be dollar-for-dollar up to a certain maximum. In this situation an employer might offer a 5% match, meaning if you contribute at least 5% of your pay into your retirement, the employer will match the contribution up to the 5% maximum. So, let's assume you make $60k per year. If you contribute $3,000 for the year (or $115.38 per 2-week pay period), your employer will also contribute $3,000 into your retirement account, meaning your employment compensation is actually $63k for the year. If you only contribute $2,000 for the year, your employer will only contribute $2,000. If you contribute $10,000 (or 16.7%) for the year, your employer will only contribute up to the $3,000 (5%) maximum. Deciding to not contribute up to the match threshold means you are declining a portion of your salary.


It might also be something different than dollar-for-dollar. It might look something like dollar-for-dollar match on 3%, and then 50% match on the next 4%. In this example, the employer is hoping the incentivize the employee to contribute more than 5%. If the employee contributes 7% (3% + 4%), the employer will contribute 5% (3% + 2%, which is half of 4%). Same logic applies. Deciding to not contribute up to the match threshold means you are declining a portion of your salary.


If you are able to contribute more than the matching option, or there is no match option, or your employer is among the 50% of businesses that do not sponsor a retirement plan, you might benefit more from contributing into a Roth IRA, a traditional IRA, or a Self Employed Pension (SEP) IRA. 401(k) and 403(b) plans typically have higher fees than IRA accounts managed though low fee providers like Vanguard, Fidelity, and Charles Schwab. There are contribution caps (see IRS website for current caps), so a retirement investment strategy often looks like:

  1. Contribute up to 401(k)/403(b) employer match amount, if more can be contributed then

  2. Contribute to a low fee IRA up to IRS cap (factors are age, income level), if more can contributed then

  3. Contribute to 401(k)/403(b) up to IRS cap, if more can be contributed then

  4. Contribute into a taxable investment account or consider real estate purchase

It is difficult to exit the hedonic treadmill as your income rises. New demands for your money are always surfacing. Build the habit of saying "Yes, but I can only do a little and will re-evaluate in a few months" rather than "No I can't do anything right now, but I will re-evaluate someday". Someday often never comes.

I HAVE PLENTY OF TIME

There's an old saying that goes, "The best time to plant a tree was 20 years ago. The second best time is NOW."


If one were to invest 10-15% of their salary over the span of their entire working years, it is almost guaranteed they would have enough to maintain their lifestyle throughout their retirement years. However, the longer one waits the greater the percentage of their income that is needed for investing towards retirement. This is why some who enter the later portion of their working years feel the retirement savings mountain is too tall to overcome. But starting your retirement investment strategy NOW puts you on the climbing path rather than continuing to stand at the base gazing up towards a summit that appears to be growing taller and taller. There is no need to sacrifice the present for the sake of the future, but because the future will catch up to the present sooner than we expect, we must make small sacrifices in the present to ensure we haven't sacrificed the present once the future arrives.

I SACRIFICE MYSELF FOR MY LOVED ONES

This is another common sentiment and it often leads to unintended consequences. Some parents (and grandparents) view investing money for the purpose of their own retirement while their children (or grandchildren) have unmet wants and desires as a selfish act. They feel the self-sacrificing action of paying for these wants and desire INSTEAD of funding their own retirement will be viewed as an act of unconditional love. Because we are very reluctant to discuss personal finances with our loved ones, the children/grandchildren have no reason to doubt the wants and desires are being paid for IN ADDITION TO retirement accounts being funded. Reality hits once retirement age comes and basic needs cannot be met. Today's children preparing for the future will have enough of a challenge securing their own means and financial stability without the additional pressure of assuming the expenses of unprepared parents. Like the flight attendant suggests, securely don your own oxygen mask before helping others with theirs.


"But college is expensive!"

Yes, and getting more expensive each year. But as Benjamin Sullivan, a certified financial planner with Palisades Hudson Financial Group in Austin, Texas, states "College costs can be defrayed by securing need-based or merit-based scholarships or selecting a less expensive school. However, there are no scholarships for retirement, regardless of how much need or merit a retiree demonstrates." (published in the blog post 'Should Saving for Education or Retirement Come First?' by Dave Copeland)


Your retirement investment strategy DOES need to be one of your top priorities. There is nothing wrong with providing for the wants and desires of your loved ones, as long as it doesn't cost you your retirement and future safety.


Recommended video: Is Retirement Even POSSIBLE?

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