Friday, 3 May 2013

Retiring comfortably, decade by decade

Because we hear the word “investment” tossed around so often, we frequently forget what exactly an investment is: financial, or otherwise, an investment is something that allows us to make (relatively) little effort now for a larger gain in the future. In other words, it's a type of insurance against future hardships. We teach this concept to our children all the time by encouraging them to do things like learning their multiplication table early on in order to complete their math homework with ease throughout high school. Given that investments are basically a clever way for us to reap more by doing less, shouldn't we be finding ways to use this strategy all of the time? Certainly! The difficulty lies in the fact that investments require planning, and they do require some sacrifice in the here and now. These challenges can make it difficult to execute an intention of investing now to save later.

This challenge is never more apparent than when it comes to planning for retirement. The reason for this is that investing in retirement is both ongoing and dynamic. It's something you need to be paying attention to continually, and it's something that requires tweaking in your planning as the years go by. Thus, even when people see the wisdom of starting early, they struggle to overcome these challenges. Below are some of the challenges you may face, as well as some of the strategies you should consider, depending on where you are along this journey.

Biggest challenge: actually coming to terms with the reality of being a retiree in need of adequate savings. When you are this young, it's hard to anticipate exactly how much you'll really need to retire comfortably, and just how many various obstacles are going to interfere with that goal between now and then.
Plan of action: This may actually be the easiest time for you to save. If you are still living at home, you are lucky enough to be eliminating housing expenses, which comprise a huge chunk of most household budgets. Before you buy a home and start a family, this is the time to put aside as much as you possibly can. The temptation will be to treat yourself to a higher standard of living, but if you can resist, this will be one of the best financial decisions you make in your life.

Biggest challenge: for most people this age, this is the time when you are taking on more debts and expenses: buying a home, having children, buying a bigger car so that you have mobility with those children, and so forth.
Plan of action: Since everything you are purchasing during this time will feel like a “need” item, saving for retirement might take a back seat if you aren't proactive about it. To combat this, when budgeting for the month, budget as though your income is really only 90% of what it is. Don't make that last 10% optional for inclusion—direct it immediately to retirement investments. If you can do this with an even greater amount than 10% of your budget, you should

Forties and Fifties
Biggest challenge: becoming debt free. Even if the end of your mortgage is in sight, you may be hit with the new debt source of paying for your children's education.
Plan of action: Eliminate the biggest chunks of debt first. If you can accelerate your mortgage payments, do. Also, at this point in the game, it's really important that you resist the urge to dip into your retirement funds early; you'll take huge losses if you do.


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