The rules have changed
Every single week it seems that I come across another article about how the baby boomer generation isn’t prepared for retirement. There have been some fairly alarming statistics coming to light recently:
- 46% of Americans have less than $100k saved for retirement.
- 29% of All American workers have less than $1,000 saved for retirement.
- 40% of Baby Boomers plan to work until they drop.
- 36% of Americans do not contribute to retirement accounts.
- 46% of adults say they are extremely or very concerned about having money for a comfortable retirement.
I don’t know about you but this scares the crap out of me! We all know the retirement pitch….
“The stock market has returned approximately 10% a year on average between 1926 and the present. If you contribute $250 a month to your retirement account in 40 years your account balance can be worth close to $1.6 million!!”
Don’t get me wrong, I absolutely agree that investing your money now in order to have a sizable nest egg later is paramount, but times have changed and these numbers are no longer accurate. Individuals who were 13 years away from retirement in 2000 and adopted a buy and hold strategy are just now breaking even on their original investments. I know there are some underlying factors with this statement and my intent isn’t to get into a debate about investment strategies but to show you how the future is unpredictable.
Additionally how many people actually start investing as soon as they start working? Chances are you don’t start taking your future seriously until you get married, have kids, or turn 30.
Not to mention the silent financial killer… Inflation!
I hate to be the one to give it to you straight but the chance of the average American couple having retirement accounts in excess of $1 million by the time they retire are pretty slim. Secondly if a couple is disciplined enough to have an account in excess of a million dollars 30-40 years from now, given our history of inflation the purchasing power of that money will drop significantly.
So what can we do now in order to take the burden off our shoulders of needing a sizable nest egg when we retire?
Pay Off Debts
This is one of the simplest things you can do to ensure your wealth and purchasing power. Stop signing over your future earnings to banks, credit card companies, etc. In order to retire successfully you have to eliminate all of your debts and refuse to incur any future debts. This means no more:
- Car loans
- Credit Cards (except for earning rewards)
- Home Equity Loans
- Personal Loans
- Student Loans
I know this may seem like a mountainous task for some and require 3-5 years of sacrifice and dedication but I can ensure you it is worth every minute. After you have all your debts paid off and take a look back it will seem like the time flew by. Additionally if you have any chance of being a successful investor you need to eliminate debt.
Paid off house
The biggest expense the majority of households have is in relation to their homes. Rent or mortgage payments are a huge chunk of a family’s budget. Here is what I advise and it is quite simple, purchase a home and pay off your mortgage before you retire! I don’t believe that is too high a goal to set your sights. If possible you should preferably pay off your mortgage 5 years before you retire, 10 years would be even better. Having no mortgage with 5 – 10 years of active income will allow you to eliminate liabilities, build assets and fine tune your retirement plan.
Living in a home that you own free and clear significantly lowers your burden for income as you grow older. The only expense in relation to housing that you will have to account for are the taxes on your home.
The location of retirement home? – You should start brainstorming where you want to retire. Some individuals may want to stay exactly where they are while some people may work and live in an area where they do not want to retire. For individuals in this circumstance I would suggest they save the entire sum of money needed to purchase a home where they plan to retire.
The size of your retirement home? – Make practical common sense decisions. By the time you retire all the kids will be out of the house and starting their own families and careers. Chances are it will be just you and your spouse or additional family members. Is a 5000 sq ft home really ideal for a senior citizen? It might be for some couples, but keep in mind the property has to be maintained and cleaned. Additionally you may want to purchase a home with a particular layout. My mother in law has already had knee surgery yet lives in a home with 2 flights of stairs. A home with one level would be ideal for her in retirement.
Support network with retirement? – I don’t know about you but our family and friends mean the world to us. We have heard horror stories from friends and family about their transition to a completely different area. Some people thrive on having a strong support network. You have to ask what type of person/couple you are in regards to how you value your relationships with people. Are you willing to start over and make new friends?
Estimate Costs – It’s time to roll up your sleeves and get dirty. It is imperative that you conduct thorough research into what your average costs will be during retirement. Ensure that your analysis accounts for inflation and to be on the safe side add 10% to your analysis.
Medical Plan – The earlier you look into medical care the better you can plan and possibly save. Will you rely on Medicare, COBRA, or an individual insurance policy? What about long term health care? These are all questions that need to be addressed and factored into your plan way before you move into retirement.
Learn how to invest/manage investments
As always I’m going to be honest with you, basic investments and strategies are not hard to understand. All too often I find that people and their self-doubt are their own worst enemy. The hard truth is there are plenty of people who are willing to take your money if you don’t understand what they are doing with it. Additionally nobody is going to care more about your money than you!
Take the time to learn how to invest and manage your money. If you need a starting point take a look at the following articles:
- How To Value Stocks
- How To Sell A Put
- How I Manage My 401K
- How I Invest in Municipal Bonds
- Selling Options – How to Start Your Own Casino
“By failing to prepare, you are preparing to fail”
– Benjamin Franklin