Retirement Planning, Near and Far as published in InsideNova.com
Question #1: How near or far are you from achieving your retirement savings goals?
Question #2: Where are you going on your next vacation?
If you’re like many Americans, you’ve probably spent more time planning the date, destination, travel arrangements and costs for your next brief getaway than charting out your retirement saving plans.
Why the disconnect? We know how important it is to spend time preparing for retirement, but somehow most of us fall short on the assignment.
Much of the challenge is explained by behavioral psychology. We humans simply aren’t programmed to convince our current selves to make significant sacrifices for our future selves. As Harvard Professor and “Stumbling on Happiness” author Daniel Gilbert explains: “Whereas the near future is finely detailed, the far future is blurry and smooth.” [Page 116]
Still, we live in a free country. With that freedom comes a higher level of responsibility for advancing our personal interests. If you work, you and your employer chip into Social Security (government pension) and Medicare (government healthcare), but neither are typically enough to cover all of your costs for either. We must come up with the rest on our own.
Fortunately, our capital markets offer many opportunities to do just that, especially if you start early and contribute regularly. Say, for example, you want to have $1 million saved by age 65. Assuming a 7% average annual investment return in a tax-sheltered account, you’ll need to set aside $380/month if you start at age 25. Wait until you’re 45 to begin, and you’ll have to set aside almost $2,000/month to achieve the same goal.
Don’t get too bogged down in these numbers, though. The best way to get where you want to go is to start planning for it with the same level of energy you apply to your summer vacations. Over my next few articles I will cover the main disciplines of financial planning … starting with retirement planning.