If you were me, how would you be planning for retirement?
photo: shutter stock
Loaded question, right? I recently asked my Dad this, and here’s the advice he wrote back:
I was waiting for you to ask! For you and any other young person thinking about their financial future, this is from my heart and based in large part on what I did, and would have done differently, when I was your age.
Let’s start with this question, for everyone: What “talks” did your parents have with you?
- “Son/Daughter, let me tell you about the birds and the bees.”
- “Son/Daughter, get up and get a job!…Any job!”
- “Son/Daughter, let me tell you about planning for your retirement.”
Did your parents give all three talks? Hmmm…mine neither.
To be truthful, I’m not convinced that when I was 30 I would have been in a position to act on a talk about retirement, but I sure wish I’d had that talk.
So, let’s talk now.
I know what you mean when you use the word “retirement”, but I’d rather talk about financial independence, which ought to be your real goal.
Think about how much things have changed. For my Dad, who was born in 1911, retirement had a very specific meaning. At age 66 (in 1977) he closed his business and played golf every day. My Dad and Mom could live the rest of their lives not needing to work to pay their bills. How? By then, when counting their Social Security income and interest on savings they could live comfortably “in retirement”. They had the means to live a long time without their money running out, doing whatever they wanted. They had achieved their financial independence.
Coincidentally, the other day I turned 66. My goal has always been to reach financial independence, then decide on a separate schedule when, or if, I’ll actually stop “working” and retire.
Your Grandparents had simple pleasures so they could afford whatever they wanted. The richest person in the world will need quite a sum to claim that financial independence has been achieved. Everyone has his or her own definition of what financial independence is, expressed in dollars.
At 66 I have a pretty good idea how much I’ll need.
- Did I know this when I was 30? Heck no. If you GOOGLE it, you’ll see that experts suggest you’ll need 85% of your pre-retirement income.
- Did I know at 30 what 85% of my pre-retirement income would be at 66? Heck no.
- Could I have estimated it? Not a chance.
- Did my Dad and Mom know when they were 30 how much they needed to save? No.
Although you can do your best to estimate it, you’ll tie yourself in knots trying to determine a number that is unknowable. Inflation won’t allow you to know the price of what you are buying until then; furthermore, you won’t know your tax rates, your expenses, or your income. You won’t know what you’ll be doing then. And most importantly, you won’t know what you’ll want to be doing.
What I do know is that you should you save everything you possibly can in your “Financial Independence Piggy Bank”.
Close your eyes and remember as a youngster you saved your allowance for something you really wanted. You set aside a little bit over time, sliding each coin or dollar into a piggy bank, until you had accumulated enough. Quite satisfying, right?
You can use the same approach to save for your retirement.
The best advice is when you are 30 start saving. If you haven’t started, start. At some point you’ll have enough savings to begin to explore whether the money should be invested and what the word “invest” means. You’ll want to understand the difference between stocks and bonds, how IRA’s and 401k plans fit into your plans, and issues like tax deferral, the time/value of money, and compound interest.
One day you’ll crack open that Piggy Bank and start using up what you placed there years before. What goes in your Piggy Bank? Income generating assets:
||Interest payments from your savings account
|IRA accounts/401K plans
||Distributions from your IRA account, including the amounts from retirement plans rolled over to an IRA.
|Small (or large) businesses
||Income from self-owned business
||Dividend payments from stocks
||Interest payments from Bonds
||Interest and principal returns from annuities
Whoa! Wait a minute…your house…where’s the house? You thought it was an asset. It is, but not for this purpose. Your house simply provides a place to live, it does not provide you a source of income. When you sell it and invest the proceeds, that’s another story. But then where will you live?
What’s the moral of this story? Plan to accumulate assets over your life. Lots of them, and in many different categories. But, you ask, what about eating? I can eat or put money in my Piggy Bank, right? I can buy a car or put money in my Piggy Bank, right? I can get a better phone or put money in my Piggy Bank, right? Reasonable concerns, but you have to make choices to either have what you want now or what you want later in life. Choices.
These are lessons many people either never learn or learn too late in life.
I’m glad we talked!
So now I have another question for my Dad: What’s the difference between investing in the market with an IRA vs investing in the market with a regular account?