Saturday, October 2, 2010

Planning your Retirement

Retirement can be a wonderful time of leisure and relaxation.  Or it can be a nightmare of poverty and worry.  How it plays out is up to you.

As baby boomers age, many are starting to think about retirement for the first time in their lives.  This is a shame, because it is something you should think about for most of your life.  The more you plan, the better off you will be.

Historically, retirement didn't much exist, prior to the mid-20th Century.  When Social Security was enacted during the depression, most folks didn't live to age 65 to collect benefits.  The modern idea of retirement as a time if leisure, golfing, boating, and travel, is a relatively new idea.

And for a brief period of time - during the last decades of the 20th Century, even hourly workers enjoyed leisurely retirements with defined pensions and full health care.

But all of that has changed, of course.  A new generation is expected to retire on their savings, not defined pension benefits.  And even those with pensions are getting rude awakenings as their companies go bankrupt and their pensions are slashed.

Planning for retirement is never easy.  But failing to plan can be disastrous. I live on a retirement island, so I see how it works out for some folks - and not for others.  I only wish others could see what I see and take action before it is too late.

Here are some common mistakes I see when people plan or fail to plan for retirement:

1.  "I'll just work until I'm 70" - you've heard this before, and perhaps you've even said it yourself.  If so, go to the bathroom, look yourself in the mirror, and slap yourself hard, once for every time you have said this stupid thing.  I'd do it myself, but the Internet doesn't yet allow me to reach through the screen and slap you.

This statement is so wrong on so many levels, it is hard to know where to begin.

First, it is a tacit admission by the speaker that they have failed to save much for retirement, and thus cannot "afford" to retire.  This is nothing to be proud of.

Second, the idea that they will LET you work until 70 is foolish.  Most companies will lay you off in your mid 50's these days.  Don't think it might happen - COUNT ON IT.  There is no profit in keeping on a worker from age 55 to 65, as their health care costs skyrocket.  So they will likely lay you off sometime in your mid to late 50's and you won't be able to "work until you are 70".

If this really is your retirement plan, then repeat after me:  "Welcome to Wal-Mart, how can I help you?"

Because greeter at Wal-Mart is the only job you'll find at that age.  I don't care if you are a brilliant neurosurgeon or a high-flying lawyer.  They can find someone half your age to work for 1/4 as much.

Retirement for many is not something that is planned, but something that is thrust upon them.


2.  Buying Luxury Goods "because I deserve it".  Like the college student who lives the high life on student loans - only to live like a serf after college paying them off, spending a lot of dough in your 30's and 40's on luxury cars and other showy status items is really foolish.  All you are doing is hurting the you of tomorrow.

And that is the problem right there.  Most people view the person they will be in 10 years as some sort of alien.  And frankly they hate him.  That elderly asshole who wants all their money - who will live the high life in retirement while they slave and suffer today.  Screw him, I'm buying a Lexus!

I can't help people who can't see that the person they will be in 10 years is the same person they are today.  If you can disassociate from yourself at that level, you will be poor all your life.

We don't need status items or new cars every three years.  But many people do just this, convinced it is a sound economic proposition or that they "deserve" it because they work so hard.  And these same folks wish they had all that money in the bank  - plus interest - when the retire.

Trust me when I say that you will never regret saving a dollar but will always regret squandering a nickle.


3.  Failing to Downsize:  Many folks don't downsize their lifestyle until forced to do so by retirement.  As a result, they squander a lot of money or worse yet - end up in debt.  Debt and retirement simply don't mix.  There is no "money down the road" to pay off debt.

Most of us, when working, end up in fairly expensive cities and towns, where jobs are plentiful.  Housing is expensive, as is the cost of living.  When we retire, one way to really save money is to move to a smaller home in an area with a reduced cost of living.

Some folks cling to their homes as they want to be with their "things" or they have fantasies of family reunions, with all the children returning home for a Norman Rockwell moment.  While this may occur in some families, for most of us, it is just an expensive fantasy.

* * *

Retirement can be a time of leisure, relaxation, and travel.  But to reach this goal, you have to plan now.  And planning now insures that if retirement is thrust upon you, you won't be unprepared.  Here are some steps you can take - and that I am taking - to hopefully make retirement more enjoyable.

1.  Cut Back on Spending:  If you have been reading this blog, you can see we've found a zillion ways to creatively spend less money - and have fun doing it.  We've cut back our monthly expenses by over a thousand dollars per month this way.

2.  Downsizing:  We had a pretty lush lifestyle.  But it was also an expensive one.  We've decided to spend less and do more - by owning fewer things (which are not an end in and of themselves) which will allow us to do more things by having more free time - and more free money!  We will save another $3000 a month this way as well, mostly by eliminating our mortgage.   That is not chump change!

3.  Eliminating Debt:  Having a plan to retire debt-free should be No. 1 on everyone's list.  If you are over the age of 40 and still taking out car loans or incurring credit card or other consumer debt, you need to have your head examined.  Debt should not and never be a lifelong condition.  You have to have a plan to eliminate ALL debt - even mortgage debt - if you want to retire comfortably.

4.  Saving More:  We've managed to save a lot of money over the years.  But I still hesitate to rest on my laurels.  We need to put aside more money if we don't want to live in want when we are older.  The average American has something like $70,000 in their IRA or 401(k) account.  I was chagrined to see on a "comparison" website that most of my compatriots in my demographic group had managed to save only $250,000 by age 50.  How can that possibly fund any sort of retirement, even if it is augmented by Social Security?

Note how the first three things lead to the fourth.  It is sad, but I meet retired people in their late 60's and even 70's who "had to have" a Cadilliac when they were 50 and now are struggling to make ends meet later on.  There really is no need for this, when a Chevy works just as well as a Caddy.  Squandering all your money trying to impress people you don't know is just idiotic.

And yea, many of these people were six-figure earners who thought they "could afford it" because there was enough money in their monthly pay to pay all the monthly payments.  But as we have discussed time and time again here, the salary slave mentality is not real wealth.  Real wealth is not what is parked in your driveway.

Handling large sums of money is something most people are not very good at.  Saving up money is something that most of us are HORRIBLE at (myself included!).  The theory behind the 401(k) or IRA is nice, in principle, but in practice, it falls down when people are trusted to save for their own retirement.

A friend of mine at the IRS once told me that withholding is one of the most powerful things the IRS invented.  "If we didn't withhold taxes," he told me, "most workers would never save enough money to pay their taxes at the end of the year - and they would revolt when presented with an annual bill all at once!"

And as a self-employed person, forced to "cough up" every quarter to the IRS, I can tell you it IS hard to put that money aside regularly, and it is all too easy to "fall behind" and end up in trouble and pay penalties (I have money automatically deducted through EFT now, to avoid this problem).

So the question remains - how will the majority of the 401(k) generation make out after being entrusted to save their own money for the last 20-30 years?  And should we feel sorry for someone who is old and broke because they spend $150 a month on cable TeeVee and put nothing in their IRA?

Regardless of the social and moral issues, the impetus is on YOU to plan NOW - it is never too early or late to think about retirement.  No one will bail your ass out if it all goes horribly wrong!

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