Wow! I feel smart today! Every once in a while life hands you a great big “everything is awesome” piece of news. That happened for me this morning while reading in Morningstar. Currently there is some buzz between the two camps in retirement planning. The big question: “is there a crisis in retirement planning?” The good news, for me anyway, is that in my corner I have a Nobel prize winner. We both agree that there is a retirement planning crisis.
Misunderstanding- It used to be that we as American’s would work for the same company for the bulk of our career, put in our contributions toward a pension, and we’d know what our income would be at retirement. Pensions are dead, as we all know, and now most of us deal with the 401k offering. Because we are, for the most part, uneducated investors, part-timers at best in the investment world, we aren’t prepared and qualified to manage our own accounts. In Merton’s words “putting relatively complex investment decisions in the hands of individuals with little or no financial expertise is problematic… the seeds of an investment crisis have been sown.” With pensions, we were able to expect a portion of our salary for life. That made sense. Now we’re hoping to amass a large sum of money and when we’re on track to retire with $600,000 in a retirement account we feel accomplished. In reality, however, that $600,000 IRA will only provide income of $18,000 a year for a couple in good health. $18,000 per year in retirement isn’t the dream retirement most of us would expect from an account worth more than a half million dollars. But, once we figure in longer life spans(thanks modern medicine), market volatility, and inflation, we can start to see how the nice IRA could be less than adequate for our needs. Instead, we should plan based on an anticipated income need/desire and eliminate as much risk as we can since we are relatively unprepared to navigate said risk.
Laziness- We live in an “at arm’s reach” society where we have anything we could ever want right at our fingertips. We have restaurants to eat whatever we want, we have phones where the 4th most important thing they do is make a phone call, we can watch any sort of entertainment anywhere, anytime, and all in HD. Because of this, our ability to wait and plan has great diminished. We are vastly more susceptible to the enticements of those shiny things in life than we are to the dull, boring time tested principles that have been proven to work. We have become a fairly lazy society and this applies to our finances as well. Our personal savings rate is near all-time lows and our debt is as high as it has ever been. We’ve become undisciplined and lazy with our personal finances and have instead traded in time tested principles for boats, mortgages and flat screen high-def 60 inch tv’s.
Procrastination- If, by chance we’re one of the few who hasn’t been bitten by the lazy bug, we still tend to argue with ourselves, saying “I’ll start saving next year” or “I just need to finish paying off this car” or “I can’t afford to save right now”. The truth is still the sooner you start saving for a retirement, the less you’ll have to put away. Interest earned over time compounds your effort and discipline, but so many of us put it off for one excuse or another. If we don’t understand and utilize the compounding interest concept, we are creating our own retirement crisis.
The best way to overcome your own personal retirement crisis is to start today, be disciplined enough to regularly save, and contribute to a plan that has minimal risk, is built around building a specific retirement income, and that works on autopilot. This is seldom found within the 401k.
About this Author: Ed Kinsey has been in the financial services industry since 2003. He has experience in Real Estate, Mortgages, Commercial Finance, Annuities, and Life and Health Insurance. His goal is to benefit the lives of one million people. He want companies to start providing better benefits at lower costs through our services. He wants to enlighten people to the retirement benefits available through life insurance, the only tax free retirement option. We have secure solutions. Ed is also a world ranked powerlifter and fitness enthusiast.
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