It's A New Year - Plan Your Own Path

The beginning of every year seems to be a popular time for reporters to write about retirement planning, and all the steps you should be taking to get yourself into a better financial position. The problem is that all the advice they are offering is exactly the same generic advice they were offering last year. And the year before, and all the years before that. While it may be true that the basic principles of financial planning do not change in any significant way from one year to the next (aside from tax laws and retirement account contribution limits), telling people how much to have saved at a given age, or what percent of their salary they will need to replace in retirement, or to create a financial plan (without telling them just how to do that), or suggesting any other generic benchmark, does not actually help them. Everyone's needs and circumstances are unique, and their financial goals need to be tailored to those needs. If you make $150,000/year, but only have $36,000/year in expenses (first of all, good for you!), you don't need to replace 80% of your salary in retirement (a common recommendation). You also don't need to withdraw only 4% from savings each year (even inflation adjusted) to have your money last through retirement (I talked about this in a blog post from April, 2018).

A better use of your time would be to figure out how much you are able to save on a regular basis, how much that will add up to by the time you retire, and then compare that to how much you may actually need (yes, this is exactly what The Complete Retirement Planner was designed for!). This could also be done in reverse order, but the point is to compare what you may realistically need to what you may realistically have. Then you will be in a position to make informed decisions about what it will take to accomplish your specific goals. Ideally, this process should be started at the earliest age possible to gain the greatest benefit from compounding interest.

Here's an example you've probably seen many times before, but it's worth repeating:
Start saving $300/month ($3,600/year) at age 30, earning 5%/year (reasonable), and you will have ~$360,000 at age 65 (with compound interest accounting for $230,000 of that total). Start saving the same amount starting at age 40, and you will end up with ~$190,000. Roughly 1/2 as much even though you're saving for 2/3 as long. Start at age 50, and you'll only have ~$88,000 (with compound interest accounting for almost $30,000 of that total). The impact of starting late(r), and utilizing the benefit of compound interest in particular, is clear.

The moral of the story - tailor your approach to retirement planning to what you need, and what you are capable of accomplishing, and pay no attention to what people who don’t know anything about you are suggesting that you do. Planning for retirement is a personal, fluid adventure with plenty of unknowns, but having a Plan A, and a Plan B, that are designed to meet your particular needs and goals should help you to safely navigate through decades of variables. Plan early, plan well.

Older Post Newer Post