Sometimes people who avoid thinking about things that make them feel uncertain, uncomfortable or afraid, do so to their detriment. One common concern that makes far too many people uneasy is the need to plan for retirement. They already feel the pressure of numerous financial commitments, and like as not, live on a tight budget. They can be forgiven for disliking the thought of taking money needed today, and saving it for an imagined retirement 40-50 years in the future. Nevertheless, planning for retirement is an absolute necessity. The true purpose of saving for retirement is to eventually achieve financial independence, thus rendering the need to work optional. Once a person grasps this concept, they usually have no trouble getting on board with an investment plan, and tend to watch their savings grow with enthusiasm. Be aware that numerous myths abound regarding saving for retirement, some of which are often disseminated as fact. Fall victim to any one of them, and it will likely cost you dearly! Some of the more prevalent of these myths are as follows:
Myth # 1 – You don’t need to save for retirement yet.
The very last thing you want to do when you get out of college is to think about saving money. It’s understandable. After all, you are hopefully employed in your first real job, and are officially in recovery from living most of the last decade on Ramen noodles! You have what you believe to be far more pressing financial considerations, such as making payments on your student loans, buying a decent car, possibly getting married, having children (who astonishingly, have come with their own set of financial needs), and buying your first home. All of these “up close and personal” needs seem more important right now than does the potential retirement you’ve scheduled to take place half a century hence. You’re young, and you have years to go before you need to think of retirement, right? Wrong! The younger you are when you begin to save and invest for retirement income, the more time your investments have to grow. The more time your money has in which to grow, then the more time compound interest has to work it’s cumulative magic. A mere $2K, invested today in a fund that provides an 8% return, is likely to have become more than $100K by your 70th birthday. Beginning to save for your eventual retirement early is without question, the wisest financial decision that you will ever make. What seems like a painful sacrifice in the beginning pays off in the end. It not only helps build constructive financial habits, but it also provides peace of mind, and will potentially provide you with complete financial independence later in life.
Myth #2 – It is already too late to start saving.
There’s no question that he who saves first gains most. However, it would be a grave mistake to assume that simply because you’ve not already begun planning for your retirement that it is now too late. It is never too late. Furthermore, if you are late starting, you are not alone. When the time was ideal for Generation X and Y to begin retirement saving, they were often busy jockeying for career rank within their given corporate structures, and establishing themselves as independent adults. They were getting married, having children, buying houses, carpooling, coaching Little League, and serving on the PTA and were so rushed that they hardly had time to brush their teeth, let alone sit down and contemplate establishing a retirement savings plan for their future. Have no worries! Instead, recognize that in order to compensate, you may now wish to take a more aggressive approach towards saving. You are likely entering your best years as an earner, and therefore have the option of increased savings. As your income grows, try and resist the urge to adopt a more expensive lifestyle. Put your increased earnings into savings, instead. Be aware that if you’re over 50, the IRS now permits you to contribute as much as $5,500 each year to your 401 (k) – take advantage of this opportunity!
Myth #3 – You can always just keep on working.
It isn’t wise to commit today’s physical resources – your health, energy and mental clarity – to an unknown period of time decades into the future. No one knows what the future holds. Will you be able to keep working? Statistically, it’s possible. However, the vast majority of people eventually reach a point beyond which they are no longer able to work. It is impossible to predict the state of your health thirty or forty years from now. You could be injured in a car accident, find your thinking clouded by dementia, or have developed a debilitating disease. Hopefully, none of these will actually occur, but it is wise to plan as if they were expected. Then, if they don’t, you’ll be in the enviable position of perhaps having more than you need. You also should not assume that by the time you are of retirement age that your company will not have made retirement mandatory, or that you won’t have been replaced by a younger person. Will this be the case? Hopefully not. Yet again, it would be much wiser to err on the side of caution. Plan for the worst while hoping for the best.
Myth # 4 – In retirement, you’ll need 80 percent of your present income.
This particular “rule of thumb” has been endlessly bandied about, and is hotly debated among financial planners. While it is no doubt true that some people will require this amount of retirement income, not everyone will. A comfortable and secure retirement is possible on a great deal less. A great deal depends upon the individual retiree, the retirement lifestyle he wishes to adopt, the amount of debt, if any, he is carrying, how much money he has saved, whether or not he has a long-term care policy, etc. A retiree who has no long term care policy, who is still paying for his home, who wishes to travel extensively, and whose wife is already partially disabled is likely to need more money than an individual who is willing to downsize, who has no debt, who lives frugally, and whose chief delights are no more expensive than his grandchildren next door, and the local fishing hole.
Myth # 5 – You will never work again once you retire.
While there are exceptions, this is certainly not the case for the vast majority of people after they retire. In fact, studies repeatedly show that people, particularly men, who go from a busy and productive career to an aimless retirement often die prematurely! While your opportunities might have changed, you are still the same person. If your life to date has been fruitful, constructive and rewarding, you are unlikely to enjoy a sudden downshift in activity that involves little more than television and the occasional round of golf. People with complete financial security upon retirement frequently choose to volunteer with organizations that support social causes they favor, sometimes to the extent of carving out for themselves an effective second career. Others, with less in the bank, might opt to work a part time job, or perhaps to engage in a lucrative hobby, such as quilting, or custom furniture making. Therefore, when you find yourself looking ahead today toward your “golden” years, do not imagine that they will be either idle or aimless, for they are quite unlikely to be either.
In conclusion, no two people’s retirements, financially or otherwise, will ever be exactly the same. There is no “one size fits all” retirement or retirement plan. Whereas one person will kick off their retirement by taking the first of many annual trips to Europe, another will buy a second hand camper trailer and hit the open road, planning to camp their way across America. The ingredients to calculating a good retirement for yourself include taking stock of your expectations, your social security and employment pensions, savings, investments, and the amount of debt (hopefully all of it) that you’ve been able to either avoid incurring, or else pay off. It is essential you have a clear picture of how you expect to spend your retirement in order to calculate what it will cost to achieve your goals. In your attempts to determine your future in this manner, always assume it will take more money than you imagine it will. Remember that, barring a miracle, prices will go up. Have an emergency fund for the disaster you hope never occurs, even if it is one as innocuous as having to purchase a new hot water heater. It is better to overestimate your expenses than to underestimate them – one tact leaves you with extra in the bank while the other causes you to fall short. For people far-sighted enough to realize they one day will be old, and that they’re better off depending upon themselves than they are anyone else, including the government, and who save and plan accordingly, the future is indeed bright, and eventual financial freedom is within grasp.
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