Retirement Planning: the Greatest Challenge is Getting Started (2024)

We all procrastinate—some of us more than others. I understand that at twenty-something, even at thirty-something, saving for retirement is viewed as somethingso distant, a sense of urgency is difficult to muster … big mistake!

Here’s Why

Can you save 50% of your income? Of course not! But, that is basically what you would need to do to have a comfortable retirement. You see,savingmoney doesn’t get you very far in the retirement game and, the reason it doesn’t, is that the interest earned on a garden variety savings account is laughable. No—investingis the key to achieving a comfortable retirement because the rates of return on investments in stock, a 401k, mutual funds, IRAs and other investment vehicles are significantly higher than a simple savings acount. As a result, you can commit less of your income, while at the same time, achieve superior results.

But …

Investments, such as stock, mutual funds, ETFs and REITs, involve greater risk than a run of the mill savings account. However, we all understand that the greater risks produce larger rewards. The best approach to countering this increased risk is by beginning your retirement plan early. By starting early, you have the element of time on your side, so if you make a misstep, there is ample time to compensate. Unfortunately, if you do not start early, you must invest much more conservatively and this reduces your opportunity to realize the large gains you can achieve through higher risk investments.

I Don’t Have Enough Money

Just another excuse! The amount of money you have available to invest is not as important as beginning the process. Starting early, even with small contributions, gets you in the habit of investing … a habit that needs to be cultivated and practiced throughout your working life. You can get the ball rolling with aninitial investment of $500. This is all you need to open an online account with E*Trade.

Seek Every Advantage

No one knows all there is to know about investing and investment. Expand your knowledge by reading everything you can read on the subject. Knowledge is power, especially in the investing arena. While you are learning, confine yourself to investments you understand. This is another advantage of starting early … your knowledge can grow along with your retirement portfolio. If your company offers a 401k with an employer match, be sure to contribute, at least to the extent of the match. Anything less would be leaving money on the table.

Income taxes are an important consideration in retirement planning. Understanding the tax consequences of your investments is essential to a successful outcome. Use IRAs, for example, to defer income taxes until retirement. You will be earning less and the taxman’s bite will be smaller as a consequence of your lower tax bracket. While it is prudent to consider tax consequences, don’t be so focused on mitigating taxes that you pass on good investment opportunities. It is important to recognize that today’s tax code may differ greatly from tomorrow’s tax code.

Risk

Learn to balance risk and reward. It is important that you accept the fact that not all your investments are going to perform as you would wish them to. Consider the downside risk in any investment decision and determine whether or not you are financially comfortable with the associated risk.

Evaluating returns/gains can be cumbersome for those of us who are arithmetically challenged. If you don’t have a head for figures, therule of 72is something anyone can use to good effect.

Therule of 72allows you to estimate how long it will take your investment to double. The only piece of information required for this calculation is the annual rate of return or yield. Even if your investment doesn’t have a fixed rate of return, you can use the average estimated yield to get a good approximation. For example, if you are considering an investment that offers an annual yield of 6%, you will double your investment in 72 ÷ 6 = 12years. This is a simple calculation that can be performed in your head and it will be a great aid in your decision making process.

To summarize, start early even if you start small. Learn as you go, because knowledge is power. Invest in what you understand. Accept that you will have some losses and risk no more than you can afford to lose. Be cautious, but not timid. Time is your friend and procrastination is your enemy!

—

H. D. Carver is an American who currently resides in Cagayan de Oro City, Philippines. He has years of experience in the financial services sector and has served as a manager for Fidelity, as the vice president of a large regional bank, as the president of a financial services company, and as the Manager of Administrative Services and Support for the Aon Corporation. He has worked as a freelance writer for 4 years. Currently, he writes forYour Finances Simplified.