“If you fail to plan, you are planning to fail.” –Benjamin Franklin
Last week, we talked about Cash Flow and the importance of spending less than you earn. Often, we find ourselves living paycheck to paycheck because we have never practiced the skill of delayed gratification. Retirement is very similar. Planning for retirement often gets put on the back burner. It is way too far off in the future. We tell ourselves, “Oh that is 40 years off into the future, I can wait until next year to start contributing to my 401k at work. Then next year rolls around, and we do the very same thing. Fast forward 25 years, and you are kicking yourself for all those lost years of compounded interest and tax deferral.
I will be the first to tell you: the failure to plan for retirement is not something to be taken lightly. Each day you wait, the worse it gets. Corporate pensions are a thing of the past and social security will definitely not look the same in 10-20 years. Thus, most of the responsibility to save will be put directly on your shoulders. So let’s dive in. How does one adequately plan for retirement?
Step 3 – Retirement
In a nutshell, retirement planning involves 3 items to address. We will keep it fairly high level for the purposes of this post.
First, how much should I save annually? It’s what many people want to know and struggle to find out. Since we cannot predict the future (ie investment returns, longevity, inflation, etc.), it’s difficult to precisely provide an exact % of income you must save. Most will say, “save 10%.” We encourage you to save more than that. 15% is a good starting point. But every situation is different. If you find yourself saving 15% and still have plenty of discretionary cash flow, you may want to save even more for retirement. This will only accelerate your nest egg accumulation and possibly give you the opportunity to retire even earlier. Plus, contributions made early in life get the added benefit of increased tax deferral.
Second, what accounts should I use? We always encourage our clients to have a healthy mix of retirement monies spread across pre-tax, post-tax (Roth), and taxable buckets. All three buckets have different tax characteristics. And since we do not know what tax rates will be in the future, a healthy mix of retirement money in all three buckets will provide a bunch of tax flexibility in retirement.
Third, what investments should I choose? We will not get into specific investments here because it is beyond the scope of this post, but a globally diversified portfolio with low fees will handsomely reward you over the long term. Focus on the things you can control with your investments, including low fees, low turnover, minimize taxes, diversify, and stay disciplined. Also, the allocation between stocks and bonds will largely drive the long term risk/return characteristics of your portfolio. So it’s important to line up your allocation to your particular situation.
Remember, Retirement is not something you can afford to put on the back burner. The longer you wait, the steeper your climb will be in the future. Start saving now. You will thank me later.
Next week: Insurance