Sometimes freaking out about something can be a good thing if it sparks us to take action on something we need to give attention to. Take retirement planning, for instance. Some people just coast along, perhaps saving money in an employer’s retirement plan and perhaps not, because retirement is years and years away. It may even be decades away.
So what’s to freak out about?
Well I’m here to suggest that we all freak out just a little bit about our retirement planning. Let’s have a sort of controlled freak out, at least until you’re finished reading this post.
Stop the complacency people! Retirement is coming. At some point we will all retire even if it is as a result of death. I think most of us would prefer to retire at some point before death, and in that case we need to plan even more.
As I’ve written about before, retirement planning involves two ideas that are seemingly opposed but must work together perfectly to ensure a financially stable retirement: wealth accumulation followed by asset drawdown.
With a topic as complicated as this, there could be many things to freak out about and certainly there are mistakes to be made when it comes to saving for retirement. I’m going to focus on four to get this started. Feel free to have your own freak out about other items that concern you!
- Am I saving enough for retirement? Certainly if you hope to have something to live off of in retirement you should be saving now. Actually, you should have started saving yesterday. But don’t just save blindly! Use a retirement calculator to get an idea of what your savings will accumulate to by the time you plan on retiring. Don’t like the results? You may want to try to save more. Maybe you can increase your savings annually to coincide with a raise or maybe you can simpliduce some other aspect of your life to find more savings.
- What am I investing in anyway? When it comes to retirement planning, some people are confused or overwhelmed when it comes to choosing how to invest their contribution. Don’t let this hold you back from saving for retirement. There’s lots of information online to help with the basics of investing for retirement. Vanguard has some basic information or check out the literature from your employer’s plan sponsor. If they offer consultation services with a financial advisor take advantage of that (just remember to take their advice with a grain of salt – they could be receiving compensation for the funds they recommend). A popular choice these days are Target Date Funds. These “fund of funds” are actively managed and consist of a variety of mutual funds that are re-balanced automatically over time so that your allocation to riskier assets (like stocks) decreases as you approach your target retirement date. These can be a good choice for some who would like a more hands off approach to asset allocation. However, there is some debate as to whether these funds provide the added value for the higher expense ratios that they charge. And again, this is not an excuse to invest blindly. Always read a fund’s prospectus to know what investments it holds and especially for Target Date Funds, how these investment allocations will change over time.
- I’m paying how much in fees? You absolutely must be aware of what the fees are for the funds you are invested in. As I pointed out recently in my post about investment fees, over the course of years and decades spent saving for retirement you can easily pay tens of thousands of dollars in fees. It is up to you to do your homework on this and make sure you are keeping more of your own money. Some people use 1% as a rule of thumb for a maximum expense ratio, but you can do better than that with Vanguard index funds. It’s funny how people will shop around to save money on cell phone service or even pizza delivery and all the while they have no idea how much they are paying in fees in their retirement account. If you are not freaking out about this, you really should be.
- How do I know what my budget will look like in retirement? Especially for those of us with many years until retirement, we may throw our hands in the air and wonder this question aloud. The best way to get a handle on what your retirement budget might look like is to keep track of your spending now. I am an advocate of taking several months (better to do a full year) to track all the money that is flowing into and out of your household as described in the book Your Money or Your Life. The only way to truly know what you are spending is to actually keep track of what you are spending. Sounds pretty obvious, but most people don’t do this. As part of taking a look at your entire financial picture, you can get an idea of what you would be spending in retirement. Expenses for clothing and commuting costs will likely decline when you are no longer working. Also consider that you may downsize your home which should reduce expenses for property taxes and utilities.
Sometimes it can be helpful to freak out about something if it helps to get us motivated to take action. With too many workers not saving enough for retirement I tend to think more of us can benefit from a little controlled freak out on this topic. If you are someone who has put off saving for retirement and now feel like you can’t catch up, just remember this wise proverb:
“The best time to plant a tree is 20 years ago. The second best time is now.”
So get going.
OK, you can stop freaking out now.
What do you freak out about the most when it comes to retirement planning?
Photo courtesy of Stuart Miles/ Freedigitalphotos.net