Successful retirement planning fails for simple reasons. People are time and risk incompetent. People do not understand the dimensions of the problem soon enough and they do not address it soon enough or in concert with their other obligations.
“The trouble is you think you have time”
There are two aspects to that.
Time passes more quickly than we expect. “I knew I would get old but I didn’t think it would be so soon.” From a planning standpoint the solution is rational instead of emotional. People do not deal so well with rational. People must work at learning some relationships among capital required in the future, yield, time and principle amounts saved. None are intuitive.
Suppose I decide to save $500 per month for 30 years at 7% and that meets my retirement need. About $550,000. But, what if I only get 5%? Live on $400,000 or save for five more years. Saving a share of income instead of a fixed amount is computationally more difficult but more realistic.
People must balance their future, their past and their present. Is paying off debt (the past) better than saving for the future? An unqualified maybe.
Should lifestyle (the present) be the remainder or the first requirement?
The second aspect of time is how much time will you have. Risk part. Risk of death is a reality. I suppose it is theoretically possible that you are immortal, but that is not the way to bet. Again a rational assessment. You have choices. Keep the financial risk of not having enough time, or pay an insurance company to take the risk away. Could go either way, so get some help with the calculations.
Time is a serious issue with finances because it is an important variable in compound growth. We don’t get it by using intuition. Learn to work with it until you are a little fluent. The rule of 72 helps. The years it takes to double money is 72 divided by the interest rate. It works pretty well for rates you are apt to actually get.
Try to discover the meaning of what you are doing well into the future. As a guide not as reality. Use a spreadsheet or a helper to do some calculations for you. You may find the task is not as onerous as you thought and the outcomes are useful.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.
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I fully concur with you Mr Shaughnessy it is always a difficult task to communicate this fact to young professionals.We need to constantly engage,educate and share information like this to ensure that we get the point across.Ours is double difficult because any form of advice or anything associated with the insurance industry is still viewed with suspicion due to the past experiences and our history.We are however thankful and appreciative to you and other senior industry specialist who continually assist us with your informative posts and seminars comments and other communications,it really help in getting the necessary skill and expertise to educate.
I have made a collection of your post that I use in my discussions with my clients and as educational material.Thank you very much keep up the good work you are really making an impact not only to us advisers but clients as well.Your selflessness in this regard is highly appreciared