The Number One Rule Of Retirement Planning

Retirement planning can certainly be overwhelming. With articles written daily offering suggestions about how much to save, how much to withdraw annually from retirement accounts, how to choose when to claim Social Security, diversifying investments, whether or not to pay off a mortgage before retiring, etc., it can be tough to know where to start. Since you are reading this, you're headed in the right direction. However, while gathering information is important, the real goal is to take concrete steps towards being financially secure. You can delay retirement itself, delay claiming Social Security, and delay re-balancing your portfolio, but don't delay the actual planning that is needed to guide you through the next several decades. While there's always more to learn, at some point you need to use the knowledge you've gained to formulate a tangible plan. You can always adjust a plan as life changes, but to do that you must have a starting point. Remember that indecision is a decision, and it can be costly. The longer you wait, the longer you lack specific information and insights that can help you to become financially secure, and the less time you have to implement the necessary steps to reach your goals.

It's important to note that a 2019 Annual Retirement Confidence Survey reported that 42% of households have never tried to calculate how much money they will need during retirement, yet, 80% believe that they will have enough. None of the 80% had a financial plan. In addition, 40% of retirees ended up having to retire earlier than expected due to company changes or health concerns. This lack of preparation, combined with the possibility of needing to retire before being ready to do so, brings us to the number one rule of retirement planning - actually doing something to ensure that you have a comprehensive and realistic plan! Take specific action, now, to make sure that you will be as financially prepared as possible for whenever retirement may come.

This may not be a task that's at the top of your  to-do list, but it should be. Yes, it can be complex and confusing. Yes, it can be tedious to gather all of the information you need to do it correctly (in reasonable detail). Yes, you will need to try to predict the future (an exercise in frustration). And, no, trying to take the quick way out by using apps and calculators will not provide anywhere near the individualized or accurate answers you need. It may sound exhausting to create a financial plan that you can count on, but an hour or two of your time now could save you from years of serious struggle later on.

Every moment you're guessing, hoping, and procrastinating is adding risk to coming up with a successful plan and reaching your goals. You may be able to afford a little risk at a young age (25 - 35), but as you get closer to retirement (closer being 10-15 years away) the risk increases exponentially because saving money and having invested amounts earn interest/dividends/capital gains takes time. Most people can only afford to save a fixed amount each month/year, and can't make up for lost time by deciding to all of a sudden start saving twice as much. At a young age, time is your friend. Over ~ age 40, time starts becoming your enemy. The earlier you start planning/saving, the less pressure there is on how much you need to save because you have time, and compound interest, on your side.

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, and you will have ~$360,000 at age 65. Save the same amount starting at age 40, and you will end up with ~$190,000, or 47% less with only 10 fewer years of saving. Start at age 50, and you'll only have ~$87,000, or 76% less. The impact of starting late(r) is clear.

A more positive strategy - start saving $300/month at age 30, and double that amount every 10 years as your salary grows ($600/month at age 40, and $1,200/month at age 50). You would end up with ~$745,000 at age 65. It would be even more if you gradually grew the amount saved over those time frames rather than taking big jumps at ages 40 and 50. You get the point - start saving whatever you can as soon as possible, do it consistently, and add to it when possible.

No matter what your age, salary, or amount of savings is, you owe it to yourself to have a written financial/retirement plan to guide you. It can, and will, change as you go along, but it will help you to establish realistic goals and to understand what it will take to achieve them. You wouldn't climb a mountain, hike into a forest, or drive cross country without having a specific destination in mind - or at least exploring a map of possible routes to take. A retirement plan is your financial roadmap, with your ability to retire being a far more serious journey. You only get one chance to get it right, so not having a well thought out plan is risky and not likely to end well. Just like traveling, planning for retirement is an adventure with plenty of unknowns, but having a Plan A, and a Plan B, will help you to safely navigate through decades of variables.

In the words of Ben Franklin, "If you fail to plan, you are planning to fail”. If you haven't already, take action soon to create an individualized and detailed financial plan (generic benchmarks and assumptions can be misleading) to make sure that you're on the right track to get where you want to go.

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