Handling Finances

Retirement is a huge deal in our culture. Not only do we look forward to shedding the 9-5 workday, we invest heavily toward that day when our only income will be minor monthly payments from the government. The government encourages retirement saving by giving tax benefits through 401(k), IRA and other retirement saving accounts. Google.com brings up over 330,000 pages with the search, “retirement savings.” Without retirement savings, we’re forced to either work or try to survive on insufficient government medical insurance and monthly social security checks. An outsider might conclude that we’re slaves to giant corporations until we scrape enough together to finally be free (for some of us that might even be true!)

Unfortunately, for some people retirement is the only goal. They live month-to-month saving away some percentage of their income in the company 401(k) and spending the rest. If something costs more than they have left over in a month, it goes on the credit card and uses up part of next month’s income too.

Fortunately, retirement is not the only or even the ultimate goal out there. Purchasing a huge LCD TV, traveling the world, owning a second home, raising children, breeding horses… literally anything can be a goal. Investing toward being able to afford these goals as well as the nearly universal retirement allows us to reach more of our goals in less time than simply financing impulsive expenses with more debt. It also allows more freedom as changing goals is as simple as prioritizing the next expenditure rather than being locked into paying for expenses for months or even years.

That last point is huge — unless you have one and only one goal, investing toward each goal will allow you to achieve more financial goals faster than if you used credit to finance each goal as soon a s possible. Every single interest payment on the last purchase will put you just that much further from being able to make the next purchase. Yes, the first couple of purchases you make in your entire life will come sooner, but you’ll only fall further behind as time goes on.

If you have more than one goal, it’s not that difficult to make a spreadsheet to separate the money in your savings account into different categories. If that seems too complicated, you can always open a high-yield saving account at ING and create subaccounts for each of your saving goals. Either way, you’ll reach your goals faster and be much better off in the long run!

What is retirement?  Is it golfing on sunny days and watching TV when it rains?  Is it a long-awaited chance to give back to the community?  Is it finally some time to spend with the family?  Retirement is many different things to many different people, but what it is not is simply a vacation extending from age 65 to death.  Without concrete retirement goals, you’re taking a huge risk as you won’t know until after retiring how much you’ll need to live on or whether your current saving plan will allow you to do what you want with your retirement.

I entered the “real world” of 40-hour workweeks in September, and I’ve been amazed by how often people talk about retirement. Of course, at 24, I am the youngest technical employee I’ve met so most of my coworkers are much nearer to the magical retirement date than I. At the same time, when I ask people about their retirement goals, I get the feeling that quitting work is the goal. As much as I might agree that spending day after day reading books, watching movies and golfing might make a great vacation, simply shedding the daily commute seems like a poor reason to be saving hundreds of thousands of dollars!

Let me clarify that I certainly think being able to live off your savings is a great goal, but very few people I’ve met have a clearly defined monetary goal. Instead of determining how much money they’ll need to be able to live off their savings, they’ve generally decided to simply save some money in their company 401(k) and then live off of whatever amount they’ve accumulated when they reach 65. In most cases, I suspect they are going to be very disappointed in their retirement. After the novelty of no more work commitments wears off and they look at how much it takes to live off of savings, they’re going to be in for a bit of a shock.

To avoid running out of money in retirement or simply running out of interesting and affordable things to do, it’s vital to start planning for retirement now. I’m four decades away and I’m sure my final plan will differ significantly from what I come up with now, but without the ongoing plan, I would be simply leaving my later years to chance — and when it comes to my life, I’d like to at least know what to expect!

The first step is to make retirement goals beyond “I want to retire.” These can include travel, purchasing a cabin, winter home or RV, writing a book… Literally anything you enjoy doing now is a reasonable goal for retirement — even working or volunteering in the same job! The key is to figure out what you might want to do.

Secondly, you have to determine how much you need to have saved in order to meet your goal. Financial advisers sometimes say you need to be able to replace 85% of your current salary, others claim that 100% is more realistic but these are just guidelines. If you want to travel the world in 5-star hotels, you’ll probably need quite a bit more, if you’d prefer to volunteer all your time at a local homeless shelter, you might need less. If you’re currently saving 15% of your income, you won’t need that 15% if you choose to live with similar expenses, but medical bills will probably increase and playing golf isn’t cheap either. Start with your current yearly income, sit down with a calculator and see if your earning today is enough to pay for your desired goals. Once you’ve figured out how much you’ll need in retirement, go to this retirement calculator at Bloomberg.com and plug in your numbers like current salary, current age, retirement age etc… and get a quick idea of how much you’ll have to save to meet your retirement goals. This calculator will tell you if you’re saving enough or if you need to save more to reach your goal. You can change your contribution percentage or retirement age to see what will happen if you save a bit more or retire a bit earlier or later.

Don’t be afraid to talk to people who have retired and who have interests that are similar to yours. Forums like the Early Retirement Forums (registration required) can provide an easy way to get in touch with people who are retired or planning to retire soon. A quick Google search of your goals like “travel in retirement” can also get you in touch with others who have written about their retirement experiences.

The bottom line is that simply quitting work at the age of 65 is not a well-defined goal. Just “not working” is something very few people will find fulfilling beyond a month or two of vacation time. Figure out exactly what you want to do with your retirement, keeping in mind that your plans will probably change, and make sure your saving is in line with your goals.